Monday, November 23, 2009

Krugman on Stimulus, Debt and Hysteria etc

Paul Krugman has long been the most accessible economic commentator on the US scene. I've been reading his work from the early 1990s when his contrarian views were aimed at those centre-left commentators like Lester Thurow, Robert Reich and Robert Kuttner who he argued were over-estimating the impact of globalisation.

His book Pop Internationalism was a fairly savage attack on what he implied was an economically illiterate position. In those days I saw him as a bit of smarty, who set up straw man constructions of his opponents' arguments (and he really did see the debate in these oppositional terms).

But in the main, I soon realised he was largely correct about globalisation and indeed his scepticism was needed. The belief of the Clinton Liberals that they were "held hostage by a bunch of f...king bond traders" was indicative of the overblown (financial) globalisation thesis that effectively argued that finance ruled and needed to be obeyed. (Susan Strange and Philip Cerny also argued this position).

This was always crappola, especially in the US, but the lobbies were extremely powerful and US policy-makers saw a more free-wheeling approach to financial regulation as in the US's interests. Unfortunately, the fact that the Clinton admin gave so much ground to financial interests is a fundamental antecedent of the global financial crisis.

No doubt Krugman has shifted to the left since those days and perhaps today he is the most influential liberal (in the American sense) economic commentator in the US, writing regularly for the New York Times.  His blog The Conscience of a Liberal is definitely worth following if you're interested in the US or world economy.

His latest crusade is against the fear mongering about US public debt. Now US debt is extremely high at $12 trillion, but Krugman argues that the crisis was and is still so bad that this debt is worthwhile and needs to be extended.

The NYT itself ran a story on the front page about the debt quoting Bill Gross of Pimco, who argues that
What a good country or a good squirrel should be doing is stashing away nuts for the winter ... The United States is not only not saving nuts, it’s eating the ones left over from the last winter.
You got to love folksy parables about government debt. Not.

But government debt makes good copy. It is, after all, the tax payers' money. And, you'll be pleased to know that the financial sector has the taxpayers' interests at heart!

Krugman's most recent target in "The Phantom Menace" is Obama, whom he argues is losing his nerve and rationality.
In December 2008 Lawrence Summers, soon to become the administration’s highest-ranking economist, called for decisive action. “Many experts,” he warned, “believe that unemployment could reach 10 percent by the end of next year.” In the face of that prospect, he continued, “doing too little poses a greater threat than doing too much.”
Ten months later unemployment reached 10.2 percent, suggesting that despite his warning the administration hadn’t done enough to create jobs. You might have expected, then, a determination to do more.
But in a recent interview with Fox News, the president sounded diffident and nervous about his economic policy. He spoke vaguely about possible tax incentives for job creation. But “it is important though to recognize,” he went on, “that if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession.
What? Huh?
Most economists I talk to believe that the big risk to recovery comes from the inadequacy of government efforts: the stimulus was too small, and it will fade out next year, while high unemployment is undermining both consumer and business confidence
Now, it’s politically difficult for the Obama administration to enact a full-scale second stimulus. Still, he should be trying to push through as much aid to the economy as possible. And remember, Mr. Obama has the bully pulpit; it’s his job to persuade America to do what needs to be done.
Obama, according to Krugman is getting the wrong advice from Wall Street. One wonders how much credibility is left on the Street, but I guess that money (especially when buttressed by the tax payer) can buy a lot of influence.
Ever since the Great Recession began economic analysts at some (not all) major Wall Street firms have warned that efforts to fight the slump will produce even worse economic evils. In particular, they say, never mind the current ability of the U.S. government to borrow long term at remarkably low interest rates — any day now, budget deficits will lead to a collapse in investor confidence, and rates will soar.
And shouldn’t we consider the source? As far as I can tell, the analysts now warning about soaring interest rates tend to be the same people who insisted, months after the Great Recession began, that the biggest threat facing the economy was inflation. And let’s not forget that Wall Street — which somehow failed to recognize the biggest housing bubble in history — has a less than stellar record at predicting market behavior.

Still, let’s grant that there is some risk that doing more about double-digit unemployment would undermine confidence in the bond markets. This risk must be set against the certainty of mass suffering if we don’t do more — and the possibility, as I said, of a collapse of confidence among ordinary workers and businesses.
And Mr. Summers was right the first time: in the face of the greatest economic catastrophe since the Great Depression, it’s much riskier to do too little than it is to do too much. It’s sad, and unfortunate, that the administration appears to have lost sight of that truth.
 Let's hope that Obama doesn't take too much advice from Wall Street or the Pentagon (but that's another story).

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