Saturday Morning Essay: Mr. Krugman's Science of Black Box Economics

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Among our Plantation Liberal Economists, I only pick on Paul Krugman because he is the most visible.  It's also fun because he's (a) extremely arrogant and (b) fundamentally silly.  While he sees himself as an indefatigable champion of progressive causes, he is actually a kind of gift to the Republicans in a way that Rush Limbaugh is Christmas everyday to the Democrats.  That is to say, a purveyor of ideas so palpably out-of-date and nonsensical as to be easily caricatured.

One such theme in Mr. Krugman's scientific essays is the Black Box concept of macroeconomics. As previously noted, Mr. Krugman pays very little attention to the particular composition of the American economy, what you or I might call "facts."   His reference always is to "advanced industrial economies" or to historical records of the American economy, often dating back a hundred years or more.  I think of Dr. K's analyses as a kind of "hydraulic" systems analysis.  The variables of central bank interest rates or money supply are tweaked, and the variables of unemployment and GDP respond. If the results are not satisfactory after these dials are turned, the "fiscal policy" valve in the form of deficit spending by Congress is opened to achieve the right ambient pressure.

This pure, abstract approach allows Mr. Krugman to avoid the moiling, cacophonous debate among other analysts who talk about job offshoring and globalization, the effect of automation on the work force (of which Mr. Krugman was unaware, by his own admission, until a point within the last year), and the quality of jobs which are now produced by the American economy (that is, the McCrap jobs of baristas, burger-flippers, Wal-Mart aisle monitors, bartenders and food servers, almost all of which pay minimum wage). 

Other analysts are not so lucky.  For example, Herman Daly of the University of Maryland insists that economics is simply a subsystem of the ecological world (e.g., Reality) and not the other way around. Gail Tverberg (who has another fine essay just posted) believes in the fundamental importance of energy cost, on the tenable theory that nothing happens in the physical world without energy. The chart up above is of West Texas Intermediate oil prices; the recent decline in barrel prices, as we frack, squeeze tar sands, and dig for every drop we can find, probably explains the recent improvement in the McCrap Jobs market - Americans have a little more money to drive to McDonald's or to Wal-Mart to spend their food stamps.  Jerry Mander and others note that capitalism seems to have run its course, has finished its work of destroying the natural world, and that survival depends on a different relationship between Homo sapiens and Mother Earth.  Those in Shanghai, where the smog is now as thick inside buildings as outside during the worst days of pre-catalytic-converter Los Angeles, would probably tend to agree.

Such thoughts do not disturb the sense of serene mastery of the economic situation enjoyed by Mr. Krugman, Brad DeLong and the other Black Box economists.  Certainly we must pay attention to the destruction of the natural world as a regrettable externality that should be remedied to the extent consistent with optimal GDP growth (the economy is performing "below potential!").  If we listen to their advice on the right Black Box settings, the economy will come around.  It is only the pig-headed resistance of those who insist on looking at the world as a whole who stand in the way.

Mr. Krugman's Science As Not Even Wrong

The phrase "not even wrong" bears a peculiar relevance to the work (which takes the form of disseminated confusion) of Paul Krugman, Ace Economics Columnist for a Great Metropolitan Newspaper.  "Not even wrong" is usually attributed to the physicist Wolfgang Pauli, that brilliant, acerbic nuclear researcher noted for his marked inability to suffer fools gladly.

The phrase apparently originates with physicist Wolfgang Pauli, who used the phrase (in the form "Das ist nicht nur nicht richtig, es ist nicht einmal falsch!" — "That is not only not right, it is not even wrong!") to describe an unclear research paper. Pauli was known for his detestation of sloppy writing and arguments, and for his somewhat "colourful" objections to such things.

"Not even wrong" might be further defined to refer to work that is so far off the mark, or so conceptually unfounded, that it does not even eliminate a possible direction for further research or analysis.

In the case of Mr. Krugman's Science, the field of macroeconomics (a category in the more general field of economics to which Mr. Krugman came lately, when it was obvious that only The Big Picture concerning the American malaise was going to hold the public's attention), I have generally felt that the effort to summarize, or diagnose, the problems with all modern economies within a framework of diagrams, sketches and occasional forays into pretentious mathematics (all heavily jargon-laden though they may be) is somewhat less than useless. This is particularly true of Mr. Krugman's brand of New Keynesian balderdash.

Sometimes Mr. Krugman will write this kind of thing on his blog, "The Conscience of a Liberal:"

The case of the euro is a bit different: I was very pessimistic about the strategy of austerity and internal devaluation, which I thought would have a terrible cost — and I was completely right about that. I also guessed that this cost would prove politically unsustainable, leading to a crisis for the euro itself; so far, at least, I have been wrong.

My economic model worked fine, my implicit political model didn’t; OK, so it goes.
Now, learning from your mistakes can cause trouble, especially on TV, where people use “In 1996 you said A, and now in 2013 you say B. Gotcha!” as a substitute for substantive discussion. But it’s what you’re supposed to do.

So, have any of the signatories to that 2010 letter admitted being wrong and explained why they were wrong? I mean *any* of them. Not as far as I know.
And at that point this becomes more than an intellectual issue. It becomes a test of character.

Mr. Krugman does this sort of thing a lot.  He seems to suffer from a clinical case of self-righteousness. Usually self-righteousness, the arrant tendency to brag about one's character or integrity, is a sign of underlying pathological deviousness. As the kids might say, "Who does that?"  The funny part of the euro volte-face which Mr. Krugman describes above is that it only came about after Niall Ferguson, in his three-part takedown of the Great One, pointed out the error of Mr. Krugman's arguments about the imminent demise of the euro.  This is really something to behold as far as Mr. Krugman's uneasy relationship with honesty is concerned.  He is now bragging about his candor and forthrightness in admitting an error which he only admitted because he was called out on it.

Who does that?

Well, I admit that Mr. Krugman plays the role of Dr. Moriarty to my Sherlock Holmes at times, and in his favor, I concede that if I were to choose between the Two Great Ichthyological Schools in the Great Economics Schism (Freshwater [Univ. of Chicago, primarily]) and Saltwater (Ivy League, Berkeley), I would side with Mr. Krugman and his fellow Keynesian disciples.  At least they're sort of realistic, unlike the "efficient market" maniacs of the Freshwater crowd, who posit all sorts of nonsense about the rationality of people, and perfect information, and the rest of it.

Although as Nasim Taleb, the Black Swan fellow, has noted, it is macroeconomics in general which is the big problem.  Macroeconomics has no more scientific validity than sociology or fourth-grade social studies, but it has been elevated to a guiding discipline in the conduct of national affairs, with disastrous results, because these people really have no idea what they're doing, and the values they champion, almost to a person, are the values of the Chazzer Economy - the unsustainable growth paradigm from 50 years ago. It is more of a cult than a science, and the academics who rant and rave at each other about who's right and who's wrong are engaging in a polemical food fight with non-rigorous arguments which have about as much chance of producing a clear winner as a faculty lounge debate about whether Hemingway or Faulkner was the better writer.

To give you an idea of the vaporous nature of Mr. Krugman's positions, for example, consider now his most recent column on Monday, November 18, where Mr. Krugman, dazzled by a presentation by Larry Summers at the IMF conference, opines that the current slump may be "permanent."  Very interesting. Yet Mr. Krugman just wrote a book, which he hustled all over the country, called "End This Depression Now." I don't think it made much of an impression, and anyway it's just a compilation of the daily drivel from the blog and columns, but it raises an interesting question: if Mr. Krugman has had the answer all along to the stagnation of Western world economies (which he often brags that he does), then how can this slump be "permanent?"

Mr. Krugman's case is especially egregious, because the prominence of his position and influence, and his self-proclaimed "liberalism" (which consists primarily of being a staunch supporter of the big entitlement programs, just like AARP) probably does allow him to influence national policy, even if not to the extent of his own fevered imagination.  And where Mr. Krugman wants the country to go is in the direction of Big Time Consumerism once again, to pump up "demand" so that everyone is employed doing something or other and spending lots of money on this and that.  Anyone who complains about this mindless approach and its disregard of such minor details as the possibility of near term extinction of human life from climate change, or overpopulation, or overuse of arable soils, or running out of freshwater (and not the academic kind) is rebuked by Mr. Krugman as indulging in an analysis of the economy "as a morality play," one of his most frequent (and boring and trite) ripostes.  Money for Social Security, for Detroit bail-outs, for Wall Street banks, for Predator drones or new aircraft carriers, for new highways, it doesn't matter.  The spending is the thing because we've got to get this (stagnant) economy moving again.

In this way Mr. Krugman is the perfect mouthpiece for the status quo and for the Summers/Clinton/Rubin style of Democratic "liberalism."  He's an Insider, who is careful never to tarnish his credentials as a DLC-style moderate.  He might praise Occupy Wall Street, but you won't find him down there on the street itself, the way that Steve Keen (an Australian economist) has done.  Maybe it's true, as demonstrated by numerous careful analyses, that Quantitative Easing is simply a wealth transfer mechanism to banks already bulging with liquidity force-fed to them by their main enabler, the Federal Reserve.  Nevertheless, Mr. Krugman remains an ardent champion of QE, even if it has no ameliorative effect on unemployment, even if it does nothing for the American commoner.  (I've often thought that Mr. Krugman should disclose his stock portfolio; with that, and preexisting knowledge of his three houses, we might draw a finer bead on some of his undisclosed motivations about bubble-blowing).

So I've been looking for ways to bring about a more thorough-going criticism of Mr. Krugman's Science, and in reading Lee Smolin's excellent Time Re-Born, I thought I might have found an analytical lens.  Mr. Smolin is a physicist at the University of Toronto, an egaging writer, who has set himself the task of proving that Time is real, and not an "illusion" or hypothesized dimension.  And in his description of "physics in a box," I thought I saw a way through to a broadside against the unscientific.  Which I will get to.

Mr. Krugman's Science: Ace Economist Discovers America

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If I were Paul Krugman, I would immediately offer a profuse apology for the hiatus in blogging.  So luxurious is Mr. Krugman's sense of self that he warns his vast herd of gullible lemmings when he knows that his busy schedule will compel him to be away.  He advises us to "be patient."  We will all have to stagger around in a confused state until he returns to his Conscientious Liberal post, slaps up a couple of graphs, and makes everything clear again.

Although yesterday...yesterday, Mr. Krugman did something rather strange. In commenting at length on a presentation Larry Summers made to the International Monetary Fund, that organ of imperialistic Neoliberalism which used to be very successful in transferring the material resources of the Third World to Wall Street and other Western capitals, Krugman let slip that the American economy is permanently fried.  As in:

"So how can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures? Summers’s answer is that we may be an economy that needs bubbles just to achieve something near full employment – that in the absence of bubbles the economy has a negative natural rate of interest. And this hasn’t just been true since the 2008 financial crisis; it has arguably been true, although perhaps with increasing severity, since the 1980s."

For Mr. Krugman, Ace Economic Reporter for a Great Metropolitan Newspaper, this insight is stunning.  He needed Larry Summers, a genuine Big Thinker, to point it all out for him, and then Krugman, of course, had to muddle the picture with his usual jargon and obfuscation - the stuff about "negative interest rates" and, elsewhere in his fumbling analysis of the Summers take, his usual "liquidity trap" ....claptrap.   Mr. Krugman lives in constant terror that his readers are going to see just how obvious it is that the American economy is stuck in what Summers calls a permanent "secular stagnation."  If people begin to see that, then Mr. Krugman's shamanistic incantations about "Keynesian stimulus" and deficit spending and the rest are going to be seen for the futile, dangerous acts of lunacy which they are.  If the American economy isn't going to recover to its robust, humming 1964 essence (which is Mr. Krugman's apparent vision), then Mr. Krugman and the other mainstays on the New York Times Op-Ed pages (the Council of Morons consisting of David Brooks, Bill Keller, Tom Friedman and Mr. Krugman himself) have become completely irrelevant. Worse than irrelevant, because the "globalization" cheerleading of guys like Mr. Krugman and Mr. Friedman have assured America that it now has nothing left to fall back on.  Without the housing bubble, for example, the Planning (parties & weddings) & Tanning (one's own skin, not cowhide) Economy cannot reemerge, because the discretionary income to propel it is all gone.  American Commoners are just scraping by, saving their money to pay for relentlessly high gasoline and food prices, with only 62% of the working age population actually employed in some kind of job.

You have to work at places like the New York Times and Princeton to miss all of that. If you're an unemployed auto worker living in Detroit, you figured it all out a long time ago, and the wonders of the Flat Earth have been lost on you throughout this "secular stagnation."  Indeed, my reaction to Mr. Krugman's epiphany is identical to the young Alvey Singer's to the perennially-worng Ivan Ackerman. Forehead slap!

It is gratifying to see that others are coming around to the truth about Mr. Krugman.  For example, in a long piece on Counterpunch, Paul Craig Roberts muses about the possibility that Mr. Krugman might be a "voodoo economist." 

"Krugman has a social conscience for which I respect him. I am confident that he would agree with me that economists who lack a social conscience do more harm than good.  In my opinion, for what it is worth, Krugman does not understand or realize the way in which jobs offshoring has changed the US economy, the position of US workers and employees, and the efficacy of economic policy.

As I have often explained, when US corporations pursue higher profits at the expense of US labor by offshoring the jobs that produce the goods and services that they sell to Americans, they separate the US labor force from the incomes associated with the production of the goods and services that they consume.  Eventually, this destroys the consumer market.  According to the Census Bureau, American median family income is 9% less than a dozen years ago. This means that what once was spending power of American consumers is now the paper wealth of the mega-rich.

Keynesian stimulus policy works when the jobs from which people have been laid off still exist. By boosting aggregate demand for goods and services, the stimulus puts people back to work.  But if the jobs have been moved offshore and the factories closed, the jobs no longer exist.  No stimulus policy can put the unemployed into jobs that no longer exist.

Krugman has not come to terms with this basic fact.  Nor have the majority of economists. Economists assumed that new and better jobs would take the place of the offshored ones. However, as I am forever pointing out, there is no sign of these jobs in the employment data.

Most economists believe that jobs offshoring is free trade and that free trade is beneficial, which simply demonstrates their confusion.  Jobs offshoring is based on the pursuit of absolute advantage, the antithesis of comparative advantage that is the basis of free trade."

Well, Paul Craig Roberts is maybe new at this game, and there is a tendency at the outset to pull one's punches when dealing with Mr. Krugman, who, after all, is a Liberal and must therefore be a force for good.  In time Mr. Roberts will get over this misconception and will not bother with the obeisance and flattery.  He will see that the American Commoner is the very least of Mr. Krugman's concerns, and in time Mr. Roberts may even begin to appreciate the effect of the finite nature of Planet Earth's resources, and the unsustainable ecological path we are on, and how this "factor" precludes the "recovery" of any Western economy, now and forever. 

One cannot hope for everything at once.

Saturday Morning Essay: Mr. Krugman's Science; or, You Wanna Get Nuts? Let's Get Nuts!

 

Megalomania is an occupational hazard in blogging, and I have witnessed any number of prominent blogmeisters succumb to the siren song of intellectual grandiosity.  Karl Denninger at Market Watch is a prime example.  He has gotten completely carried away with his Nostradamus Complex and with his "mathematical" certainties about the economic future.  Plus, he now knows everything, as indeed everyone does in this age of Wikipedia.  Karl was among the first to downplay the dangers of Fukushima, a call he made early in the ongoing disaster at the Daiichi plant.  He simply would not countenance the "hyperbole" surrounding what little real reporting there has been about radiation from the site, even as 300 tons of radioactive water began flowing from Daiichi into the Pacific Ocean, even as reports filtered in that all large fish caught in the Pacific these days contain traces of Fukushima radiation.  Even as we have learned that three of the nuclear reactor cores "have gone missing."  Yes, that's right; TEPCO, the hapless operator of the plant, cannot tell us where the molten remains of the melted-down reactor cores of Reactors 1, 2 & 3 are right now.  Somewhere down there, they're pretty sure, maybe under the concrete floor of the reactor buildings. Maybe they're in the groundwater, maybe they've already reached the Pacific Ocean.  Maybe they're in China.  They'll turn up.

TEPCO is now about to undertake the most dangerous engineering project in the history of human civilization.  It's going to remove the 1,500 fuel rods from the spent fuel pool in Reactor Building 4. This building was badly damaged in a hydrogen explosion that occurred early in the disaster in March, 2011.  The spent fuel pool is leaking, listing, it has no roof, and the computer-controlled apparatus designed to remove the fuel rods doesn't work anymore and cannot be repaired.  Mr. Denninger, who favors nuclear power (of the thorium breeder-reactor type) remains serene.  He even warns his readers, mostly of the libertarian persuasion like Mr. Denninger himself, that any "alarmist" commenting on his site about Fukushima will be deleted and the commenter will be banned.

Kind of touchy, I think.  Mr. Krugman, Ace Economic Scientist for a Great Metropolitan Newspaper, is similarly touchy.  The care and feeding of his own enormous ego is essentially Mr. Krugman's entire shtick.  He deliberately provokes controversy by attacking those who disagree with him in the most ad hominem terms possible, then retreating behind a facade of decorous propriety and civility.  Mr. Krugman was recently the subject of a three-part broadside by Niall Ferguson, the Scottish writer and historian at Harvard and Stanford's Hoover Institution.  Ferguson pointed out errors that Krugman has made, despite Krugman's oft-repeated assertion that he's right about everything.  Ferguson's attack was followed up by a long piece in Forbes that piled on with more anti-Krugman diatribes (h/t: W of the Show-Me State).

Well, of course Krugman is as wrong as often as he is right, whatever those designations may mean.  Krugman is an economist.  He's involved in a silly game of posting graphs and describing the correlations he wants to tease out of them.  Krugman doesn't even talk about the American economy. I don't think he's very interested in it.

Krugman is the ultimate Bar Bet Economist and Faculty Lounge Debater.  His goal is to draw attention to himself, and he is extraordinarily good at that.  And Krugman is smart enough to know that the field in which he plies his dubious trade is about as rigorous as third-grade social studies.  He knows he can't be "right" about anything, not in the same way his Princeton colleagues at the Institute for Advanced Studies are right about things.  And by the same token, he can't be wrong about anything, either.  Mr. Krugman wants to be taken seriously as a "scientist," but he knows that's not possible, because he's in the wrong field.  So he's doing what he can with his field, which is to make himself rich and famous, and a man of his somewhat limited intellectual resources (and awful, clunky writing style) can best do this by creating controversy about himself.  Thus, Niall Ferguson has played right into Mr. Krugman's hands.  Mr. Krugman revels in this stuff.  It's what he's after: attention.

As he travels from his home in the leafy neighborhood of Princeton, to his apartment in Manhattan, or jets down to his condominium in St. Croix, Mr. Krugman makes a big show of demonstrating his deep compassion for poor people.  They are his cause.  Okay, sure.  But to fill in the time and the blizzard of blog posts, Mr. Krugman will throw down the gauntlet to keep himself the center of attention, challenging those things that "everybody knows" that Mr. Krugman knows just aren't true. 

1.  Contrary to popular belief, globalization is a good thing, and it has not harmed the American working man.

2.  Contrary to another popular belief, America does not need Chinese support for its Treasury bond market; indeed, it would be good if China sold out its position altogether, if the dollar became weaker, and we simply allowed the Federal Reserve to buy all of our own debt, and, Friday's capper:

3.  Contrary to the "apocalyptic" ravings of the Deficit Scolds:  

"And I do mean fantasies. Washington has spent the past three-plus years in terror of a debt crisis that keeps not happening, and, in fact, can’t happen to a country like the United States, which has its own currency and borrows in that currency. Yet the scaremongers can’t bring themselves to let go."

There you have it.  Mr. Krugman has at last arrived in the bulrushes of the Hamptons, along with George Costanza.  America cannot have a debt crisis, because the dollar is our currency, we borrow money denominated in dollars, and therefore we can never run out of money.  If those holding dollars won't lend it to us anymore, our own central bank can just conjure the money out of thin air and buy our own bonds.  It's that simple.  You wanna get nuts?  Let's get nuts!

Mr. Krugman's Science: The Curious Silence About Syria

I'm at a loss to understand Paul Krugman's utter silence about President Obama's campaign to bomb Syria.  Mr. Krugman, as serious students of economics know (as oxymoronic a catergory as that might seem), won the Nobel Prize from a Swedish bank for his steadfast opposition to George W. Bush's "war of choice" in Iraq, a war which Bush placed on the "national credit card" while reducing the taxes necessary to pay for such folly.  Mr. Krugman was so exercised about Bush's misrepresentations that led us into an unnecessary war that he warned, quite uncharacteristically, that Bush would ultimately resort to "money printing," the way that all banana republics (as opposed to Banana Republics, which sell cotton shirts from Malaysia) eventually do when they run out of dough.

It turns out that a nation which pays debts in its own currency can't run out of dough.  Mr. Krugman assures us of this now.  I suppose this is the reason he has no problem with bombing Syria, or invading Syria with troops, or whatever.  We have the money after all, even if the national debt is much higher now, both absolutely and as a percentage of GDP.  Indeed, invading Syria, starting yet another war in the Middle East, might stand in for the "alien invasion" he also promotes as a way to galvanize federal spending and, thus, ensure economic recovery for the nation generally.

Cynics might observe that Krugman is a dyed-in-the-wool Democratic partisan, and that Mr. Obama's loose association with that party might explain everything.  They might go further and argue that Mr. Krugman recognizes that he's not likely to draw attention to his economic doodling on the same basis as before.  Would the Swedish bank reward him again with a Nobel Prize for challenging the winner of the 2009 Nobel Peace Prize?  Well, the Peace Prize comes out of Norway, so there's a shot.  I understand the Swedes tell Norwegian jokes.  Vociferous, consistent opposition to Obama's nonstop warmongering (which turns out to be about as flagrant as his predecessor's) might win Mr. Krugman the Nobel Peace Prize, however.  That award hutch is filling up! 

Mr. Krugman always has his eye on the prize, but I don't think he has more Nobels in mind.  He has to worry about the deficiencies in the analyses of almost all other economists, for one thing, and that's a lot right there.  In his column today Mr. Krugman explained why economic policy over the last five years has been so dismal, and why an output gap, the difference between what the American economy could have produced in goods and services over that period, about $2 trillion, was so predictable.

Well, I take that back.  It wasn't actually predictable, because the grand mavens of economics concede that you can't actually predict economic futures with their science.  The New York Times invited a colloquium on this very subject over the last weekend (after first publishing an article asserting that economics was not a science), and the outcome, which the Times appeared to endorse (probably at Mr. Krugman's insistence behind the scenes) was that although economics is not a science which can predict anything, it can explain things, so it's a science. 

An interesting distinction, as Woody Allen said in "Love & Death."  As to its usefulness in explaining things, we have Ben Bernanke's deathless pronouncement before a Congressional committee in October, 2005 :

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households.

Okay, that's an explanation.  We might disagree now that the housing bubble simply reflected "strong economic fundamentals."  We might say that Mr. Bernanke was off his rocker.  Mr. Bernanke holds a PhD in Economics from MIT, however, as does his fellow scientist Paul Krugman.

The Times article, in defending economics as an "explanatory" science, compared it to meteorology, which has "similar" problems of prediction (so the article claimed), but is nevertheless socially useful.  Not to cavil, but Mr. Bernanke was so far off that it would be a little like sitting in the middle of a hurricane and wondering whether the atmospheric low pressure might have something to do with these strong winds we're experiencing. 

Mr. Krugman was able to figure out where the economy ought to be today "on the back of an envelope."  It's all a matter of "textbook macroeconomics," and it tells you that federal spending on a jobs program would have avoided all the pain.  You can explain the past, that is, by applying a theory to it after you already know the results, even if, knowing the preconditions as you did, you could not predict the future. Yeah, why the hell not?  Why look in a textbook, however?  Why not just fart out a theory?

As the Distinguished Research Scientist from a Great Southwestern University points out, how do we distinguish the accuracy of Mr. Krugman's analysis from a hundred other theories we could develop (or fart) and apply to the same factual history?  What about automation, or the continuing problem of losing high-paying jobs to overseas competitors, or the skyrocketing cost of the master resource, petroleum, or the ecological, environmental and overpopulation limits we are hitting with a vengeance?  Maybe the United States has been in a long, slow, but accelerating decline brought about by all these forces, and the housing bubble was just a palliative interruption of that process that fueled consumer spending.  Maybe the "trend lines" on which "potential output" is based are pure moonshine based on completely unrealistic assumptions.

I don't suppose any of these ideas cluttered up the back of the envelope.  The theories of Paul Krugman, Ace Scientist, cannot be falsified.  Like the Letters of Transit that Mr. Ugarte laid his hands on, they "cannot be rescinded, not even questioned."

Saturday Morning Essay: Mr. Krugman's Science, as the Tapir Comes Crashing Out of the Jungle

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There were tapirs at Fleishhacker Zoo when I was a kid, as my grandmother took me there during those long weekends to see the same animals I had seen in captivity a few weeks before.  A tapir looked like a Divine lab experiment gone 'orribly wrong, as if God wanted to make a pig, changed His mind, and tried to make it into an anteater.  Two such animals make a bad conjunction of genetics; it would have been better if the same indecision had happened, for example, while mixing an impala with a deer.  He probably did, in fact, and thus the antelope.

However, I think Ben Bernanke was not referring to the genus Tapirus, but to the idea of tapering Quantitative Easing, which is the chief American policy response to the ongoing problem of a slowly sinking economy.  Regular readers already are familiar with the Federal Reserve's program of asset "purchases," where the FOMC engages with its cabal of Primary Dealers in a swap of hallucinated money-like electronic pixels for similarly notional things such as Treasury bonds and mortgage-backed securities which are guaranteed by one of the big government-like housing agencies, which are in turn backstopped by the U.S. Treasury, which is in turn backstopped by the Fed's ability to hallucinate money.

We're all clear on that.  Ben Bernanke has been buying bonds and mortgages at a "pace" (his favorite word, along with "moderate," sometimes conjoining the words and coming up with "moderate pace") of about $1 trillion per year, or $85 billion a month, a number which I'm sure was chosen because 12 x 85 billion gives you just slightly more than $1 trillion a year.  It's neat and tidy that way.

According to the Federal Reserve, inflation has remained "subdued," Ben Bernanke's third favorite word.  All of this "money printing" has not created much inflation at all, let alone "runaway inflation," which was the prognosis of many conservative assholes such as Peter Schiff and Niall Ferguson, whom Paul Krugman skewers relentlessly in his columns and blogs.  When I say "relentlessly," I mean on virtually a daily basis, sometimes more than once a day.  It has, indeed, gotten a little unseemly.  Paul Krugman did not think that QE would cause runaway inflation, and said so in debates as early as 2009.  I think this was because Ben Bernanke, who had been the Chairman of the Economics Department at Princeton University before ascending to the Fed, took the time to explain to Mr. Krugman that the "exchange" of assets held by Primary Dealers for Treasury bonds and MBS would result in the hypertrophy of "reserve accounts" held by the PDs on the books of the Federal Reserve and nothing else, and this indeed is what has happened.  The Fed pays the PDs 1/4 of one percent interest on these gargantuan accounts, which have swelled to well over $2 trillion in the last four years, out of a total Fed balance sheet of $3.4 trillion.

These "excess reserves" (amounts which by definition are more than the PDs need to maintain in their accounts under solvency rules) could be the basis of lending activity, and under rules of "fractional reserve lending," these reserves could result in the unleashing of a ginormous tidal wave of lending, if, you see, the American economy was not such a sick puppy.  If such lending were to start up, then inflation would be the natural result of this vast increase in the money supply.  No one borrows the money because we're all broke-ass to begin with and don't want no more debt, thanks just the same.

Recently, Ben Bernanke made various throat-clearing and harrumphing noises before Congress which suggested that the Taper was at hand: the Fed might ease up on this monthly orgy of electronic account hypertrophy, that the Fed might moderate its pace of purchases to a more subdued level, so to speak.  The stock market reacted hysterically, interest rates shot up, and all Hell broke loose.  Mr. Krugman chastised Ben Bernanke for his premature "tightening," which must have been galling to Mr. Bernanke since it was he, no doubt, who had explained to Mr. Krugman how QE worked in the first place, and corrected Mr. Krugman's idiotic solecism of 2003.  However, I think Ben Bernanke is enough of a mensch to understand that Mr. Krugman needs such grandstanding in order to hold down the fort at the New York Times.  Whatever happened, various Fed officials began recanting almost immediately, assuring us that no one meant anything, that moolah conjuration would continue until the economy continues to fail to improve.

QE forever does seem to have the effect, for now, of holding down interest rates, both for mortgages and for federal financing through Treasury bonds.  It's phony, of course, but so is the American economy, which is based almost entirely on issuing the world's reserve currency.  So why would we ever "taper," when the American economy looks, really, kind of a like a tapir?  Former engineers are becoming bartenders, auto workers are taking jobs as janitors or Wal-Mart greeters, college graduates are moving back home with Mom 'n Dad, and there are vast uncounted millions who are living in tent cities, on the streets, in sewer systems, under bridges, in storage units and who have disappeared from official statistics altogether.  The American standard of living continues to sag, as average compensation drops and the "new jobs" created are always at a lower stratum than those that they replace.  We need the hallucinated money, Benji.  We should keep creating it and adding it to the vast unused stashes on the Fed's reserve accounts.  Which is to say, I agree completely with Mr. Krugman, and his insufferable criticisms.  I disagree only with the thinking that this actually leads anywhere.  It won't, it can't; America is not going to suddenly get "traction," it's not going to be 1964 all over again.  But this at least is something, a silly and a dumb thing, at least QE is something, or we won't have anything at all.  Save the tapir, but let the Taper become an endangered species.

Saturday Morning Essay: Mr. Krugman's Science: The Marxist Solution

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Actually, this is quite an interesting development in the intellectual evolution of Our Most Celebrated Economist, the esteemed Paul Krugman of the New York Times.  Since I have written a number of posts based on Mr. Krugman's Scientific inquiries, I thought it was only fitting that I mark this occasion, for it represents a "pivot" (as the big-time journos say) for the wily Mr. K.

What am I talking about? Well, as I have noted before numerous times, Mr. Krugman belongs to the conceptual wing of economics known as New Keynesian, which is a shape-shifting sort of amalgam of...well, complete nonsense, but what these people are all about is "demand."  This is what ails the modern American economy: American citizens just are not buying enough stuff, or services, or whatever it is that the modern American economy offers to its increasingly confused citizens. Or "consumers," as they are more relevantly called.  Thus, the American economy is "underperforming," it's not using all of its "productive capacity."  The American economy is Oskar Schindler lamenting, "I could have done so much more!"

The answer, according to the acolytes of John Maynard Keynes, is for the government to take up the demand "slack" and flood the economy with money until the juggernaut of American production roars back to life.  While to the casual observer, this may sound moronic and hopelessly out of date, it is an article of faith in Mr. Krugman's scientific approach, and he dwells in an echo chamber of like-minded liberal thinkers who all say the same thing.

Yet I had noted, in my careful appreciation of the protean and wily Mr. Krugman, that a new strain of thinking had entered his learned discourse, that discourse which he displays with frightening freequency in his columns and blogs (his columns are simply longer, and more boring, versions of the blog posts, which in turn are sort of the rough drafts for the twice-weekly column).  To wit, Mr. Krugman became aware, within the last few months, of automation, and of the ways that modern "capital" (Big Business) was using it to maintain a high level of "productivity" and profitability.  And that this development might have an awful lot to do, at this point, with the phenomenon of income and wealth inequality.

Well, that's what Science is all about: integrating new discoveries into the old paradigms, as our understanding of the world evolves, forcing us either to modify those paradigms or, on rare occasions, to re-conceptualize Reality itself.  Plus, Mr. Krugman needed an escape hatch, because it was becoming apparent that the Old Normal was simply not coming back, and six full years after the economy began its final roll-over, his take on the American economy was beginning to look a little out-of-date, based as it was on things that happened in 1929.

So yesterday we got this from Mr. Krugman:

So what is the answer? If the picture I’ve drawn is at all right, the only way we could have anything resembling a middle-class society — a society in which ordinary citizens have a reasonable assurance of maintaining a decent life as long as they work hard and play by the rules — would be by having a strong social safety net, one that guarantees not just health care but a minimum income, too. And with an ever-rising share of income going to capital rather than labor, that safety net would have to be paid for to an important extent via taxes on profits and/or investment income.

I can already hear conservatives shouting about the evils of “redistribution.” But what, exactly, would they propose instead?

Seemingly, just more of the same, you might think.  But no: this is a major departure.  This is Mr. Krugman recognizing that the jobs are not coming back.  He's still a little confused: he talks about the middle class "working hard" and "playing by the rules" (that tired political cliche - what rules?), without remembering that the absence of meaningful employment is the whole problem.  But he's moved away from his old insistence that the "potential jobs" are there now (unemployment is not "structural"), it's just that the federal government is not stimulating "demand" enough.  No, he's on to something else altogether.  He's singing the same tune I heard James McMurtry sing at the Freight & Salvage: We Can't Make It Here Anymore.  

Now Mr. Krugman does not want to go so far as to admit that offshoring of jobs, and allowing Big Capital to "leverage" the cheap labor of the Third World, is the other half of this story.  He's still not ready for that, ardent international trade proponent that he is.  But he's halfway there; he now sees that Big Capital increasingly doesn't need human beings in order to make money.  This has been one of my points: what is it, exactly, that we lack on a day-to-day basis as the result of this high "unemployment?"  Food on the shelves? Gasoline? Natural gas for the furnace? Cheap electronic toys? Books? These things are all available in fantastic abundance.  And if you're sentimental about the Planning & Tanning Economy, you can still hire a wedding planner or go to a tanning salon.  It's just that business is down at such places because we're a broke-ass society.

Once you put automation and offshoring together, you're there.  You see reality.  Well, almost.  Mr. Krugman still does not see that resource scarcity dooms the Western industrialized economies to perpetual stagnation anyway, and that even this twilight period of lurching adaptation is not going to last. But in the interim, Mr. Krugman advocates Marxism: support the great mass of the American Booboisie with heavy taxes on robot-employing, offshoring Big Business.

Yes, it's utterly ridiculous as a solution.  Since Big Business owns the government which imposes taxation, why would Big Business undertake the care and feeding of the hoi polloi, those very same proles it is shitcanning from jobs on an ongoing basis?  To appreciate that, Mr. Krugman would need to think about two variables at once, and unfortunately, his Science is not sufficiently advanced at this point to allow that.

Saturday Morning Essay: Mr. Krugman's Science Meets Liebig's Law of the Minimum

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Mind you, the "Mr. Krugman's Science" series is so entitled only as a reference to a certain type of dry-lab economist, of which Paul Krugman of the New York Times, Princeton University and talk shows everywhere is a leading exemplar.  It's nothing personal.  It is true, however, that his columns and blogs are excruciatingly dull and repetitive, and have virtually no relevance to the real world.  That being the point of this post, sort of.

Mr. Krugman, along with Neo-Classical, Neoliberal, Keynesian economists everywhere, believes that the American economy is in the doldrums because the "inadequate demand" from the consuming populace results in an "underutilization" of our economic potential.  Thus, high unemployment, slow or no growth, and the need for what economists call "policy" measures, fiscal and monetary.  The first being federal budget deficits, the second Quantitative Easing.

I suspect Economists must be tempted on a regular basis to start swinging hammers forcefully against their own skulls.  Simply the act of saying or writing such words as "demand," "policy," "inflation expectations," and "economic potential" over and over again could understandably undermine one's will to live.

Anyway, the economic models of the Neoclassicals apparently explain what is going on in the industrialized countries of the West and in Japan to their satisfaction.  An inadequate "policy response" (wham!) leaves these economies in a perpetual state of stagnation, whereas borrowing lots of money and printing even more would revive these juggernauts to their former robust performance. Our problems are the result of self-inflicted wounds.

If, as to me, this sounds a little fishy to you, you might be tempted to look elsewhere for an explanation.  The first place I would look is the real world.  See, my a priori assumption about my fellow humans is that if these problems were as simple as declaring ourselves rich by printing lots of money and writing lots of IOU's against the future, that's the very first thing we would do. Let us not forget, as Craig Dilworth told us in Too Smart for Our Own Good, that Homo sapiens is a species that avoided farming for 30,000 years after it knew how, simply because it was way too much work compared to killing animals and plucking wild plants. Mr. Krugman's smug disdain for political and banking leaders everywhere, that they allow this "depression" to go on because they lack the will to print and borrow enough (and this is what Mr. Krugman is saying) is, to put it mildly, a little grandiose.  (However, Mr. Krugman, in reality, is simply using this as a marketing shtick, and we should not take it so seriously.  It is his carnival barker routine.)

Back to the real world, and Liebig's Law of the Minimum, to which many more-comprehensive thinkers have directed their attention.  Liebig's Law was developed in the context of agriculture, and essentially holds that if a plant needs certain essential nutrients for optimal growth, its growth rate will be limited by the scarcest resource among these essential elements.  The image of the short-staved barrel above is used to illustrate the principle: it doesn't matter how long the other staves are; the barrel will begin to overflow (and to hold no more water) when the level reaches the height of the shortest stave.

An increasing number of "ecological economists" such as Herman Daly of the University of Maryland have pointed out that the Limits to Growth foretold by the Club of Rome in 1972 are now being reached, more or less along the lines predicted.  The resource or "nutrient" of economic growth most often cited (but not the only one) is the relative scarcity of petroleum.  As the price has remained persistently high (graph below), the use of gasoline (graph above) in the United States (and elsewhere) has flatlined to levels not very different from usage of about 15 to 20 years ago (source: Energy Information Agency of the U.S. Department of Energy).  Only about 12% of this constraint is the result of fuel efficiency.  Thus, despite the large growth in U.S. population in the intervening years, gasoline usage is way, way down.  Or, as Mr. Krugman would have it, is "inadequately demanded."

Petroleum (and its proxy marker, gasoline) represents a good reference point for Liebig's Law.  As noted by Gail Tverberg, Dmitry Orlov, Richard Heinberg, and many others, petroleum is a "master resource."  To move things in the global economy, you need oil.  You need it to power ships, to fly planes, to fertilize soil (and run the machinery of agri-business), to get people to work and to retail outlets, to go on vacation, to do practically anything requiring energy, which is to say - everything. A modern Western economy runs on the stuff, and nowhere is this truer than in the United States.

Mr. Krugman is left with the quandary: why do petroleum prices remain high in the face of "inadequate demand?"  The answer is: relative scarcity, in terms of the tight fit between worldwide usage and available supply.  (About 88 million barrels per day, in both cases.)

It's difficult for me to see how printing money or borrowing money from each other would change this fundamental problem.  Oil prices are likely to fall over the coming months as usage continues to sag, but if the economies are temporarily "revived" by the availability of cheaper energy, usage will increase to the point that prices will again soar and the economies will again sag.

As I've said before, Mr. Krugman and his fellow Scientists do not like this way of looking at things because it makes all of their model-driven, dry-lab quackery manifestly irrelevant.  Nevertheless, we remain limited by the short stave in the economic barrel.

Saturday Morning Essay: Mr. Krugman's Science and Jerry Mander's "The Capitalism Papers"

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Unexpected help from an old friend: Jerry Mander, who wrote the brilliant Four Arguments for the Elimination of Television, is back with a new book entitled The Capitalism Papers: Fatal Flaws of an Obsolete System.  The "fatal flaw" is that capitalism, by its very nature, by definition, requires growth:

"Either the system grows, with a constant stream of new income and investment, or it fails...Even liberal media economic gurus like Paul Krugman agonize over growth rates if they fall to a mere 1.5 percent, when they must become about 2.5 percent for adequate profit distribution, and 3.5 percent for new job creation. In capitalist economies, growth is what it's all about...To achieve constant growth in the real economy, capitalism requires constant expansion of three primary ingredients that are, alas, impossible to sustain."

These three ingredients are an expanding stock of cheap resources; expanding consumer or industrial markets ("and a generalized philosophy of life that equates constant consumption with happiness and success."); and cheap (or slave) labor, as in Asia. As Gail Tverberg writes in her simple, logical essays on her blog Our Finite World, you cannot sustain infinite growth on a planet with finite resources.  Herman Daly, the University of Maryland eco-economist, made these points long ago in Steady State Economics.  The economy, when all is said and done, is based on a derivation of livelihood from the natural world.  The complexity of modern life sometimes obscures this basic truth, and we get carried away with "virtual capitalism" (as Jerry Mander calls it) where "derivatives" such as stock options and credit default swaps and the rest of the flotsam and jetsam of modern day financial wheeling and dealing get counted as "wealth" in the calculation of gross domestic product (GDP) as if something real were happening.  When it's not. All of the costs associated with the war in Iraq contributed to the national tabulation: all of the bombs dropped, the Hummers blown up by roadside bombs, the prosthetics built for the traumatically-amputated, the downed helicopters, the coffins purchased for the war dead, the counseling for the bereaved, and all of the other elements of this trillion dollar folly: ka-ching!

Which is to say, the calculation of GDP is by its very nature sociopathic and amoral.  Yet "mainstream" economists, liberal and conservative alike, are slaves to the concept of growth in GDP, and one of the reasons that the liberal darling Paul Krugman spends so little time criticizing the trillion dollar yearly defense and "homeland security" budget is that, by and large, his Keynesian proclivities lead him to believe that every dollar spent by the federal government is a good dollar because it boosts "aggregate demand," that is, it feeds the insatiable desire of the American populace for more stuff.  And that keeps the economy going.

Which is also to say, Mr. Krugman uses his Science in the service of the status quo, but he is regarded as a force for Good by his liberal supporters because he wants Americans to have "jobs," and no one can criticize him for that.

In point of fact, job creation in a stagnant economy with a growing population is a real problem. I note these days that the mainstream economists are throwing a lot of rocks at each other, even more than usual.  The liberals blame the conservative fixation on "austerity," and the conservatives blame the debt-ridden condition of the modern industrial economies (e.g., Ms. Reinhart and Mr. Rogoff).  The liberals (chief among them, Mr. Krugman) believe that the way to ignite the economy into a new simulacrum of growth is to borrow more money and go more deeply into debt until the economy gains "traction" and operates once again at "full potential."  Just like the good old days when the Earth was home to three billion people (instead of seven), no one was worried about climate change (instead of wondering whether we have initiated runaway global warming), the "master resource" for energy, petroleum, was plentiful and cheap (instead of increasingly scarce and ruinously expensive), the oceans were thriving (instead of acidified, with the base of the food chain, phytoplankton, half-dead, and 90% of the large fish stocks gone), and the Green Revolution was easily feeding the world's billions (instead of straining now to meet demand, with famine spreading with climate change-induced droughts). 

As I've said before, I don't know how mainstream economists could fail to notice the real world around them.  I don't understand why they have pointless arguments about whether the Federal Reserve made a mistake in 1937, or whenever, as a means of explaining what is going on now.  I suppose it comes down to academic turf: Scientists such as Mr. Krugman have built a reputation (and an opulent lifestyle) on dry-labbing their analyses of what's going on, and once they open the Pandora's Box of considering the state of the environment, and humanity's 40% overshoot of sustainability, and of the urgent need to power down to avoid a climate catastrophe, then their models become instantaneously obsolete.  So they ignore the real world and focus instead on their abstract models of an abstract world where none of these messy details gets in the way.

Reality, of course, is that thing that doesn't go away even when you ignore it.  So rail on, Mr. Krugman & Co., against the dastardly proponents of Austerity, and argue for increased borrowing (from whom? from ourselves, from everyone, it doesn't matter), and keep contending that all could be well, right now, if we would just listen.  While you do so, I will try not to notice the flop sweat beginning to drip down your forehead and dampen your collar.

Saturday Morning Essay: Liberalism Lives on in Berkeley: Brad DeLong, the Krugman of the West

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Brad DeLong of the Berkeley economics faculty tends to mirror his Princetonian mentor, Paul Krugman, in a somewhat sycophantic way, as the following passage suggests:

I would say that six years ago something like 80% of economists and commentators, certainly including me, shared Niall Ferguson's belief that the debt capacity of the United States government was limited and that rising debt would produce rising interest rates and rising inflation rates, and that old-fashioned Keynesian expansionary fiscal policies were of very limited utility in achieving economic prosperity. Today the 20% minority six years ago are all saying "we told you so"; We 60% in the middle are trying to figure out whether we were always wrong or whether simply the world changed in 2008 in a major way; And there are 20% dead-enders--including Niall Ferguson--who from my perspective at least continue to fail to mark their beliefs to market, in part because they think that doing so would require them to declare some form of intellectual bankruptcy.

Mr. DeLong, on his "Grasping Reality With Both Invisible Hands" blog (this, which I didn't think possible, is actually worse than "The Conscience of a Liberal"), often spills a lot of cyber-ink defending Paul Krugman from his many detractors.  He's kind of Mr. Krugman's bulldog or palace guard.  They share other tendencies, such as a fascination with America's military history.  Krugman's obsession is Ulysses S. Grant and the Civil War, and Delong is mad about World War II.  Right away, this tends to make me sympathetic to the Berkeley guy, aside from the connection to my alma mater.

DeLong's defenses of Krugman are vociferous and tendentious, in general, although the above quoted passage from a couple of days ago, which I quite like, is a welcome exception.  Here Mr. DeLong is admitting, in an appealing way, that he used to base his economic analyses of fiscal and monetary policy on the "Weimar" principle that you can't simply finance the federal government with printed money without running the risk of runaway inflation, rising Treasury rates, and budgetary breakdown, so that the government should not attempt a full-tilt Keynesian recovery (increasing the budget deficits in an effort to stimulate "aggregate demand").

What I think Mr. DeLong is forgetting is that Mr. Krugman was himself more or less of this school in the days when George W. Bush was President. I quoted the relevant passage in my "Mr. Krugman's Science" series.  From March 11, 2003, in his column "A Fiscal Train Wreck":

My prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt.  And as that temptation becomes obvious, interest rates will soar.

Well, in a "science" as flexible as economics, one can always dance away from such an analysis, if it later proves embarrassing, as it probably did, since Mr. Krugman based his decision to switch to a fixed rate mortgage at 2003 rates from whatever he had before.  I'm sure Mr. Krugman would point out that in 2003, America was not in a "liquidity trap," or something along those lines.  (I may take over the West Bay position of Mr. Krugman's Praetorian Guard, or Chief Eunuch at the Harem.)

But back to the estimable Mr. DeLong, who, in general, is a far more fluent and incisive writer than the economist he worships.  I suspect, given the clarity of his expositions, that Mr. DeLong is a very good teacher, with the only limitation on this accolade the recognition that the subject he teaches is complete and utter nonsense. He muses about an important point: did the "world change in some major way in 2008" ?

At first blush, that seems like a pretty dumb thing to say.  As in, what does it even mean?  What does "way" mean, for example?  Huh?  The world changed in a major way.  Did the Earth assume a cube shape, for example?  Did it begin revolving around the sun in the opposite direction?  Did it become 70% land and 30% ocean?  I would regard these changes as major. 

Mr. Krugman, going way back to 2009, defended his thesis by an instrumental argument; that is, he analyzed the way that quantitative easing actually worked and concluded that it could not be inflationary because the Federal Reserve's money creation simply plumped up the excess reserve accounts of the Primary Dealers. It did not find its way into the real economy (that's where you and I live). This was a very intelligent insight.  So what was the difference between Mr. Krugman's 2003 "banana republic" warning and his 2009 position, other than the fact that it was no longer Mr. Bush's ox he was goring?   I suspect the answer's simple: his Princeton colleague, Ben Bernanke, sat Mr. Krugman down and explained how quantitative easing actually worked.  It's good to have friends in high places.

This is not idle speculation, really.  Mr. Krugman is capable of missing the most obvious things in the world, such as the effect of modern automation (robots, etc.) on unemployment, and (the howler to top all howlers) that Americans used the fictional equity in their homes during the housing bubble to sustain the massive "aggregate demand" that Mr. Krugman now insists on using as a trend line for determining whether the economy is under performing.  Yes, Mr. Krugman missed that.

Quantitative easing is for the purpose of helping the federal government service its massive debt at manageable interest rates.  The Federal Reserve provides a giant secondary market for Treasuries and for junk debt such as mortgage-backed securities, so that Primary Dealers can buy this sketchy paper at very low rates knowing that the Fed will take it off their hands and submerge it into the enormous debt sink of the Fed's balance sheet if the paper promises begin to lose their face value.

Nothing "changed" in the world in 2008.  Something, instead, was revealed once again.  The great industrial economies of the Western world and in Japan have run out of steam because they're up against real world limitations brought on by the Limits to Growth.  The housing bubble game masked this reality for a while by allowing massive inflation in equities.  Now we're lumbering along in more or less the same fashion as a Disney brontosaurus stuck in a tar pit in "Fantasia," with similar prospects.  But party on, Garth & Wayne Paul & Brad, and keep writing like it really matters.

Sunday Morning Essay: Mr. Krugman's Science, Part 9, and Stockman on "Breadwinner Jobs"

I remain a stranger in a strange land when it comes to economics.  Generally speaking, the "science" of economics appears to be on a par with witch doctoring, only with fewer useful social applications (and oddly - more smoke).  As part of my auto-didact adventures in this dubious field, however, I faithfully read the columns and blogs of Mr. Krugman, who does the valuable service of setting the terms of the debate for the other quacks.

If you dip into the vast ocean of Mr. Krugman's writing, your ladle will doubtless contain (simply through statistical probability) the words and phrases: liquidity trap; zero lower bound; austerity; stimulus; Keynesian multiplier; and, occurring more often than all other phrases, I'm right.  Also, "as a percentage of GDP;" I'm convinced Mr. Krugman has a Casio watch with an algorithm built into it so that he can instaneously calculate anything, his lunch tab, for example, as a percentage of GDP.

As Mr. Krugman is wont to tell you (as he's desperate to tell you), he has been right that the Fed's money-printing has not ignited runaway inflation, nor has it caused the yields on Treasury bonds to spike higher.  After four years of money-printing, the excess reserve accounts of the Primary Dealers (the favored members of the Fed's banker cartel) have been engorged. That's been the main effect. The big Wall Street stock indexes, allowing for inflation, have recovered to about the level of late summer, 2007; through complicated financial channels, this rise is an artifact of the Fed's legerdemain and is unrelated to the moribund state of the general economy.

Mr. Krugman's tendency to be right on a narrow range of predictions makes him my favorite Bar Bet Economist. Will the next woman walking through the door be blonde or brunette?  On that order of significance. His predictions don't really mean anything, they don't diagnose the problem, but his focus on this narrow spectrum means that he can write the phrases listed above (dipped from the Krugman Ocean) on refrigerator magnets, push them around on the door of his Sub-Zero, and produce another deathless column/blog/paean to his infallibility. 

Yet sometimes I wonder what's going on in America, and there I find Mr. Krugman's writing somewhat useless.  Distractingly pointless, in fact.  Which is why my attention was drawn to the "breadwinner jobs" analysis in David Stockman's 700 page magnum opus, The Great Deformation.

The "breadwinner job" was a hallmark of the Greatest Generation.  My father had a breadwinner job. A lot of American males did in that era between 1900 and about 1970.  I was alive for part of that, and many of my attitudes about life in America were formed then.  My "parallax of nostalgia" (to quote myself, and N.B. to Krugman: don't steal that without attribution the way you did "Very Serious Person" from Glenn Greenwald) encourages me to think life here in America should always be that way, even though it so obviously isn't anymore.

A Breadwinner Job is a job that can support a family.  A man or a woman can hold such a job.  In most parts of the country, it takes about $50,000 per year to accomplish the task.  Let's imagine it's 1965, adjust for inflation, and think about what such a job might have been.  A man could work in Detroit, in an auto plant assembling cars, and work 40 hours a week for 40 years.  At the equivalent in today's dollars of $25/hour, he could earn about $52,000 per year.  He would also receive full medical insurance for his family with no deductible, a union pension plan, and Social Security on his retirement, along with Medicare. His kids could attend free public schools of excellent quality, then outdo the Old Man (to his satisfaction) by attending Michigan State or the University of Michigan virtually for free.  I'm not saying that I would want that life, but America made such an existence possible back then.  A man could live with dignity, raise a family, follow the Lions on Sunday TV, play poker and go bowling, and die a reasonably happy man.  In a lot of ways, as Jack Nicholson told us, that's As Good As It Gets.

Increasingly, that's all gone.  This is what Stockman is writing about.  Of the 133 million jobs in America, how many are now Breadwinner Jobs?  About 66 million.  How many Breadwinner Jobs existed in America in 2000?  About 72 million.  The jobs being added during this "Recovery" are all part-time or lower-paying jobs (McJobs of the barista, restaurant, bartending, Walmart Greeter variety) or those of the "HES Complex," referring to health care (nursing home workers, home health care) education (diploma mills siphoning off money from the Student Loan Bubble), or social services.  The HES jobs are derivative of government spending, one way or another, and are an artifact of our preferred approach to our declining fortunes, the borrowing or outright hallucination of money. 

The "internals" of the job market are obscured by the relentless focus on "GDP" (a dumb beast of a statistic if there ever was one) and "growth."  Mr. Krugman and his ilk talk about "jobs," but they do not get down to the granular detail that an angry renegade like David Stockman does (who is motivated to skewer everybody, of whatever political persuasion).  This is what makes Stockman so valuable.  In Krugman's case, his obfuscations are because he's in the tank for the Obama Administration and his buddies on the Federal Reserve Board.  While Krugman makes no secret of his belief that Obama is doing everything wrong (Obama is not borrowing and spending enough), Mr. Krugman also wants you to believe (it helps if you can achieve a headstand with a full-length mirror for this one) that Obama is doing everything right, because of the recovery, which is so much better than anything Mitt Romney could have done.

The larger point being: it's better for The Powers That Be if you go along with the gag that we're getting somewhere, even if we aren't.  Even if we're so obviously moving backwards. Thus, the emphasis on "GDP."  In a society where wealth is so grossly unbalanced, so ruinously concentrated at the top, growth in GDP might simply mean that Jamie Dimon has added another 10,000 square foot guest house on his Hamptons estate.  It's better if we say the unemployment rate is going down, without a lot of messy detail about what kinds of jobs are being "created" in the recovery, or how many people have simply given up looking for work and dropped out of the U3 denominator.  Ben Bernanke likes to talk about the "wealth effect" of a soaring stock market engendered by money printing - a wealth effect for whom?

Even if you concede that the Breadwinner Jobs have been replaced by McCrap Jobs, you're not quite done yet.  Because the total number of jobs, period, has not increased significantly over the last 12 years, certainly not with respect to the "job entrant" category of at least 125,000 per month (Stockman uses 150,000 per month, but I'm not quite the polemicist he is).  Let us say that this latter number is about 1.5 million new workers per year, over and above deaths, retirement and other ways of escaping this lousy job market.  Between 2000, when there were a total of 130.8 million "non-farm payroll jobs" (and it may be easier to keep 'em down on the farm, after they see these data), and late 2012, when there were 133.5 million NFP jobs, America added 2.7 million jobs, of whatever quality. This needs to be measured against about 18 million new job entrants.

Stockman calculates that we've added about 18,000 jobs per month over the last 12 years (his numbers cannot be derived from my calculations above because he uses slightly different assumptions, but there's no material difference).  There has been no net gain of "Breadwinner Jobs" during this period - not a single job.  We've lost 6 million of those.  Yet of whatever quality the putative jobs may be, another question naturally arises:  How can we have only 2.7 million jobs more now than in 2000 and yet only post 7.5% as the U-3 unemployment rate, when the job pool (the denominator) grew by 18 million?  Where did all the people go?

I don't actually agree with David Stockman's emphasis on the Fed's "easy money" policies as the font from which all of America's economic travails flow.  I am afraid it is much more serious and intractable a problem than that.  In some ways he is like Krugman on that score, since Mr. Krugman is forever talking about stimulus spending until the American economy "gains traction" again.  In essence, Mr. Krugman is making a fundamentally circular argument: he is arguing that the Bubble Years of 2000 to 2007, where Americans could spill an extra tril per year into the consumer economy, can be regained on a sustained basis, and that the aberrant trend line of this one-off event can become the permanent state of affairs.  Yet even those Bubble Years did not produce Breadwinner Jobs, and without such employment, there is no foundation for sustaining such prosperity.  Put another way, what is the evidence that more Keynesian stimulus of the economy, with its concomitant increase in the debt load and fiscal imbalance of the federal budget, will lead to the massive creation of Breadwinner Jobs necessary to handle such debt and sustain such a trajectory?

Stockman's approach is to establish the "sound dollar" such as existed under the former gold standard, and to limit government spending to that which we're willing to pay for with current taxes.  To give up the money printing games, the Quantitative Easing, the American Snake Eating Its Own Tail, in other words.  Given the demographics of current America, with its aging Baby Boom population (you rang?), the utter dependence of so many on present government largesse, the breakdown of the American economic contraption caused by globalization and high energy prices, Stockman is simply sketching out a different Road to Perdition.  Both Mr. Krugman and Mr. Stockman are dabbling in fantasy, but they sell different kinds of books as a result of the choices they make.

Mr. Krugman's Science, Part 7

On Monday the 29th of April the good professor (Mr. Krugman) laid it out:

So what could we do to reduce unemployment? The answer is, this is a time for above-normal government spending, to sustain the economy until the private sector is willing to spend again. The crucial point is that under current conditions, the government is not, repeat not, in competition with the private sector. Government spending doesn’t divert resources away from private uses; it puts unemployed resources to work. Government borrowing doesn’t crowd out private investment; it mobilizes funds that would otherwise go unused. 

Now, just to be clear, this is not a case for more government spending and larger budget deficits under all circumstances — and the claim that people like me always want bigger deficits is just false. For the economy isn’t always like this — in fact, situations like the one we’re in are fairly rare. By all means let’s try to reduce deficits and bring down government indebtedness once normal conditions return and the economy is no longer depressed. But right now we’re still dealing with the aftermath of a once-in-three-generations financial crisis. This is no time for austerity. 

Essentially, this is The Krugman's Weltanschauung:  he writes many columns, many blogs (an unglaublich number, in fact), and essentially this is what they all say.  Along with saying that he's right about everything, as often as he can.  Mr. Krugman is comically insecure about his ego; his relentless self-promotion alone makes it fun to read along.

Yet I'm grateful for this summation by Mr. Krugman, Scientist.  Mr. Krugman, by referring to a "once-in-three-generations financial crisis," must mean, of course, that our present predicament is like the Great Depression of the 1930's.  Therefore, if we use tools such as those employed to lift the United States out of the Great Depression (specifically, starting a world war), or, more humanely and conducive to international esprit-de-corps (and more fun), preparing for an alien space invasion, we could end this silly downturn and return to prosperity.  "For the economy isn't always like this."

When I read Mr. Krugman's Science, my impression is that he views an economy as a sort of econometric abstraction.  Real people live in it and try to derive a livelihood from it, and in a way it's part of the natural world (you know, Earth), but the idea of "cycles" implies that whatever this abstraction is, it behaves over time in more or less predictable ways, and it can be fine-tuned and modulated by human intervention so that it performs optimally, producing 2% inflation, unemployment at 5% honestly calculated, and a generally rising standard of living with a strong middle class, right here at home.  That's the thesis. 

In 1930, three generations ago, the Earth's human population was about 2.07 billion people.  India was a British colony and essentially medieval, as was China.  Agrarian, rural, subsisting in villages and poor urban centers.  Certainly these countries were no threat to the United States or Europe as economic powers.  Latin America, Africa and the Soviet Union were either extremely undeveloped or mired in unworkable Communism.  The United States was energy independent and the world's industrial powerhouse.  It seems very likely that the Great Depression can be characterized, given all this, as a self-inflicted wound.  The means to recovery were always at hand: plenty of land, plenty of fresh water, plenty of manpower, plenty of energy, plenty of all natural resources, plenty of everything, and no significant international competition which threatened any of these things.  Thus, when the United States, still gripped by the effects of the Great Depression, mobilized to meet the challenges of Fascism, the veil fell from our eyes and we realized we had had the means to become rich all along.  There followed thirty years of prosperity such as the world had never seen.  I personally came of age during that era, and I must say: damn, it was nice.

Today there are 7 billion people in the world.  The CO2 concentration in the atmosphere has risen to about 385 parts per million, or .04% of the air we breathe (up from its historic, CRC-listed level of .03 - think about that).  There are those who argue cogently that we face near-term extinction as the result of our destruction of the atmosphere and oceans.  What might save us from this fate is the economic collapse that seems built into the interlocking system of international fiat currencies and mutually-dependent economies.  Door One or Door Two?

Brazil, Russia, India and China (the BRICs) are rising economic powers, competing mightily with the United States in world trade and utilization of natural resources, especially oil.  Our once-vaunted middle class has been hollowed out by offshoring of labor and dependence on cheap labor markets for our daily goods. Automation threatens many of the remaining manufacturing, "value-added" jobs.  The Big Box revolution has destroyed the Main Street mercantile businesses. Big Ag eliminated the family farm and the agrarian life that employed 20% of the United States in 1930. 

On Monday night I attended a lecture at the Jewish Community Center in San Francisco (what, you gotta problem with that?) where Eliot Spitzer gave an impassioned, highly cerebral talk on the American economy and the general state of our democracy (one can see why The Powers That Be needed to lay this man low - how could the oligarchs get on with Fraud As Our Business Model with this guy in the way?).   Mr. Spitzer, an authentic liberal Jewish New York intellectual, laid particular emphasis on this chart:

We all got rich together until about 1975; then the middle class began to lose ground, as the effects of globalization began to kick in, as jobs left for cheaper labor markets, as a relentless surge of mergers & acquisitions created larger and larger monopolies which could "leverage" the global trade and access the cheap labor markets, turning Americans into menial "consumers" who could not keep up with the general increase in wealth, which was in turn concentrated in fewer and fewer hands.

 

Thus, Mr. Krugman, is it really cyclical?  Or are you part of the Cargo Cult which stands on the shore and waits for the masts of the distant ships of prosperity to appear over the horizon?

 

More on this gripping tale in the days to come.

Saturday Morning Essay: Mr. Krugman's Science, Part 6

One of my purposes in attempting to demonstrate the pro-status quo bias of the fearless Liberal, Paul Krugman, ace economist for a great metropolitan newspaper, is to encourage fellow hooper Bob Somerby, who mans the keyboard at The Daily Howler, to include Krugman in his daily thrashing of columnists at The New York Times and the Washington Post.  Bob does this exceedingly well, in a meticulous, recursive, penetrating way. 

I take it on faith that Bob exempts Krugman for reasons which are sufficient to Mr. Somerby, and that his accolades for Mr. Krugman are sincere.  However, I can't help feeling that Bob is himself a liberal who has been taken in by Krugman's self-promotion as a "Liberal" with a "Conscience" who fights for the little guy on Social Security and Medicare et cetera, and that without him we would be exposed to the slings and arrows of outrageous Republicanism.

This I doubt.  I was gratified to see that Mike Whitney, who often writes about economics for Counterpunch, has come over to my way of seeing things; that is, of seeing through Mr. Krugman.  In a recent, hilarious account of the David Stockman vs. Paul Krugman "debate" on "This Week" Mr. Whitney had this to say: 

 But while Stockman’s editorial has broad popular appeal, it’s come under ferocious attack by the liberal commentariat, who’ve savaged Stockman on issues that are largely meaningless to the average working stiff.  Obama’s primary apologist, Paul Krugman, has been leading the jihad against Stockman; pounding away at his economic theories while dismissing him  as a “cranky old man”. 

 Whitney narrates the play-by-play as he continues:

Krugman, one last time:

“This isn’t about machinery, it’s about people and visions. We have two parties who have fundamentally different visions of what America should be. We have Democrats, who want the expansion of the safety net and have gotten it in Obamacare. They want it to be even more. And we have Republicans that want to dismantle a lot of the legacy of the Great Society and the New Deal.”

This is such nonsense. What difference have we seen under the Dems?
Zilch. The drones, the wars, civil liberties, regulation, spying, Guantanamo; you name it, it hasn’t changed a bit. Same shit, different leader.
Obama claims he can kill a US citizen without charges or trial, but Krugman maintains the Democrats have “fundamentally different vision of what America should be.”
Uh huh.
Finally, Stockman goes in for the kill.

“The (Democrats) don’t stand for anything.
They don’t believe in anything. Why do we still have Too Big To Fail? We allegedly had a heart attack, the banks are bigger than ever. Why don’t Democrats do something to break them up and cut Wall Street down to size?”

And that’s how it ended, with Krugman backing up against the ropes while Stockman delivered one haymaker after another like a windmill spinning in a gale-storm.

That's great stuff.  The animus against Mr. Krugman is pretty apparent from the imagery Mike Whitney uses: he imagines David Stockman simply beating the shit out of  Krugman once and for all.
The essential point that I think people miss about Mr. Krugman's science is that Krugman deploys his science (private joke: in the same sense that Percy produced science) as a political operative who carries water for the Democratic Party, and for that wing of the Party known as the Democratic Leadership Council (the DLC), the Clintonian, Robert Rubin, Larry Summers, sell-out wing of this once-great institution who ushered in the Casino Capitalism of modern America with their relentless drive to deregulate and turn Wall Street into Vegas-on-the-Hudson.

That is what David Stockman is writing about in The Great Deformation and in his Times essay which sent Mr. Krugman into paroxysms of rage and jealousy.  Mr. Krugman wholeheartedly supports the money printing operations of the Federal Reserve, but does not bother to explain (as Stockman does) the mechanics by which the Too Big to Fail banks use this endless stream of largesse to play the stock market and become Too Bigger Even to Fail.  Stockman does explain how this comes about.  I've wondered about the differences in their approaches; does Krugman give the Fed Reserve a pass because his Princeton colleague runs the Fed? Or is it because Mr. Krugman is a pure academic who simply doesn't understand how things actually work in the business world, but pretends that he does?

Whatever the reason, the result is as Mike Whitney says: Mr. Krugman is simply an apologist for the Crony Capitalist-Hugging faction of the Democratic Party, who sheds crocodile tears for the plight of the American Commoner as his logo and cover story for self-promotion. 

Anyway, Bob: take a closer look.  You do a great job savaging the bullshitters on MSNBC.  Your series on Chris Matthews and his efforts to rewrite his history as an Iraq war hawk were priceless.  But that's the point: what happened to a genuine anti-war crusader like Phil Donahue on MSNBC?  They got rid of him.  What would happen to a New York Times columnist who wrote a sincere economics column that took on the Wall Street casino and the corruption endemic in the two-party system?  Gone in a New York Minute.  What happened to Bob Scheer, a relentlessly honest journalist who used to write for the Los Angeles Times until he became too hot to publish?  Bob Scheer, who had this to say about David Stockman, by the way:

“Why is David Stockman driving everyone crazy?…What’s all the outrage about?…
The headline on Stockman’s piece—“State-Wrecked: The Corruption of Capitalism in America”—is unquestionably accurate…..What his critics find so disturbing is not a quaint argument about the purity of monetary policy but rather the bold assertion that the overall American system of crony capitalism is in fact wrecked. This is a contention that most Americans might readily agree with in terms of their daily experience, but one that the hardly suffering pundit class would rather not contemplate…
Bernanke, who throws $85 billion a month at the bankers who caused this mess, purchasing their toxic mortgage based derivatives, is still treated with respect. But Stockman, who opposed bailing out the banks so they, like those tens of millions of foreclosed homeowners, could learn a tough love lesson in real economics, is now an object of derision…
That fiasco’s enablers—Alan Greenspan, Robert Rubin and Lawrence Summers—and the more disastrous ones to follow were crowned “The Committee to Save the World” on Time magazine’s Feb. 15, 1999, cover and are still welcomed in those polite circles where truth-teller Stockman is being treated as a pariah.”