[FoRK] Krugman in NYT: The Third Depression
jbone at place.org
Mon Jun 28 05:52:28 PDT 2010
PK says we are in the early stages of a Depression that will be more
severe than the Great Depression.
So far so good. Then, predictably, he goes off his rails in his usual
He complains of "the revival of old-time religion... a stunning
resurgence of hard-money and balanced budget orthodoxy." (Before you
ask what he's smoking, he is admittedly referring to Europe. So far.)
Oh, the irony. He is right about the old-time religion. But it is
HIS old-time religion we should worry about.
The problem, he claims, isn't inflation, it's deflation. Not too much
borrowing / confiscating and spending, but not enough.
Yawn. The ghost of Keynes rides again.
The big difference between today and the GD is obvious. Then, there
really was a serious lack of available money, due in part to the
effects of the gold standard coupled with strange monetary policy that
compounded the problem. And deficits didn't approximate product or
trend in that direction in any long-term sense.
Those are not the circumstances today. We are poised on a knife edge
between historic inflationary pressures due to deficit spending and
deflationary pressures due to credit markets not up to the task. We
can address either or both; to stabilize things, we must address both.
Krugman's well-documented nostalgia prevents him from seeing the
incorrectness of his analogy. He has a universal hammer; he doesn't
see that this is a nuts-and-bolts problem.
Anything but a massive wind-down in deficit spending will continue
inflationary pressures. The required tax increases, only tenable
politically when applied to capital, will continue to ratchet,
reducing future growth and increasing BOTH inflationary and
deflationary pressure, perpetuating and compounding the cycle.
In the environment of today, rather than Krugman's beloved early 20th
century, his universal hammer guarantees nothing more than a fatal
highwire act --- and we're much further off the ground than than in
the early 20th. His prophecy coupled with his obsessive nostalgic
policy focus is, ironically, self-fulfilling. Its the problem, not
the solution. Does it matter which side of the wire we fall off of, or
the trajectory of our fall?
It is impossible to predict the modes through which the wire will
oscillate as the system sheds economic tension-energy. We will likely
see dizzy rebounds between inflation and deflation, and perhaps even
hyper-inflation, until the system reaches a lower meta-stable
This energy cannot be dissipated in a controlled fashion by a central
hand; that's like shaking the highwire from either or both ends in
order to compensate for the acrobat's wobbles. The latency between
the action of the hand and the market's response is high and variable,
and often the cause of minor recessions. Only a fully-distributed
decision process has any hope of being nimble enough to do the job
effectively. Without it, we maximize the destructiveness of this
process necessitated by decades of untenable and inconsistent (except
in its appetite for debt) policies.
Of course, that's the opposite of what the neo-Keynesians believe.
They will get what they want. The good old days of the Great
Depression ARE on their way back. But it'll be even longer and a lot
more exciting with these expert jokers at the helm.
What we SHOULD be doing is desperately trying to build and deploy a
safety net below the acrobat before the inevitable fall. By this I
mean a more sustainable set of policies: reduced and more sustainable
fiscal policy coupled with healthy, long-term, *predictably stable*
productive growth-promoting tax policy.** This won't keep the
acrobat on the wire, but we need to give up on that fantasy. We may,
just barely, be able to avoid killing him in the inevitable tumble if
we act now, and competently.
We probably won't.
** one obvious fix that I've never seen suggested: one major source
of friction impairing long-term productive capital investment at scale
is the uncertainty of the prevailing tax policy at the anticipated
payoff horizon. For large investments, small differences in policy at
the end make big differences in strategy. That's easy to remedy: lock
the payoff tax structure at the end based on policy at the time of
investment. This at least lends a strategic predictability rather
than insuring massive and disruptive reallocations along the way in
response to myopic tactical shifts.
It's an accounting nightmare if there is much in the way of change
along the way and the investment is increased or decreased in the
interim. (Think your 401k, where the investments continuously increase
and shift around.) But it's only a small nightmare, relatively speaking.
BTW, it is this latter process of myopic tactical shifts in policy
that most imperils us today. The massive shifts coming in 2011 and
2013 guarantee massive and disruptive capital reallocations. By 2013,
the percentage of profits going to taxes under various investments are
due to increase by as much as 50-60% over today's structure. If
you're the money, what do you do? You cash in earlier than you might
otherwise and head for safer but less productive investments. We will
see the first wave of this by later this year.
More information about the FoRK