If all the economists were laid end to end, they'd never reach a conclusion.
- George Bernard Shaw
There are numerous versions of Shaw's dictum, boiling down to one thing - no
matter how many economists one consults, the actual answer is almost never
found, not even one that can be worked with profitably. An argumentative bunch,
economists are forever derided for being a dismal bunch who see a cloud in
every silver lining and an accident around every corner.
Still, even within this dismal bunch of people who are almost always wrong,
there is one bunch that stands out with its habitual, if not predictable,
wrongheadedness. That group is of course the folks who call themselves
Keynesian economists, followers of a mystic religion formed in the earlier part
of the last century and today attempts to pass itself on as a legitimate
science. John Maynard Keynes was wrong about nearly everything, but in not
following a lot of his own advice managed to turn a quick penny now and then,
he garnered an aura of success where none should have legitimately existed.
As I wrote in a previous article, "the best thing about Keynes is that he is
dead".
Leading acolyte who lags
This article, though, isn't about Keynes or Keynesian economics, but about the
increasingly silly pronouncements coming out of the columns of America's
leading exponent of Keynesian economics, namely Paul Krugman of the New York
Times.
Now, perhaps I must confess two incidental points here: first, that there was a
time when I was quite impressed with Krugman's acumen and his ability to make
sense out of a complex series of numbers. Perhaps the most celebrated of his
pieces was one in the mid-90s wherein he exposed the Asian economic "miracle"
as nothing more than the effect of increased factor inputs; that is, that
taking away the factor inputs (land, labor, capital, and raw materials) would
inevitably end the miracle; indeed altering the prices of these inputs would do
the same.
As it happened, once capital costs became prohibitive in the aftermath of the
Asian financial crisis, the miracle did fall on its face and its most important
illusion, that foreigners could benefit from interest rate arbitrages in Asian
local currencies, evaporated with it as currencies sharply fell against the US
dollar. This was an important statement, and one that went against the
consensus of the day, which had been assiduously promoted by the International
Monetary Fund as well as Asian regimes.
As foreigners pulled out of the local debt markets of Asia, currencies
collapsed and soon investing behavior for the region had also changed so that
all savings "had" to be in the so-called hard currencies, including the US
dollar, and a few years later the euro. As a matter of policy, Asian central
bankers also came to eschewing any currency rises against the US dollar.
In the aftermath of the crisis, I attended some lectures that included Krugman
as a keynote speaker; these polemics, as I recall them, were generally in favor
of the free market and the need for Asian governments to sell their banks to
foreigners.
Today's version of the same person is a different kettle of fish. By now having
pinned his lapel on left-leaning economics as a response to eight years of
George W Bush, Krugman, winner of the 2008 Nobel Prize for economics, has also
forgotten the very points that he made in Asia 12 years ago.
The second point I must confess to is that in general I do not read the New
York Times, or its online version; in fact, most of the times that I find
myself perusing its website is when redirected by one of the news aggregator
websites (Huffington Post, Drudge Report and so forth).
But on a nice sunny day in the beginning of July, waiting in an airport lounge
somewhere, I had no choice but to pick up a copy of the International Herald
Tribune, the recycled international version of the New York Times. As always, a
quick scan through to the editorial pages found the grimacing (smiling?) visage
of Krugman staring back at me. His prose was as nonsensical as it had become of
late, but one sentence really caught my attention
From his article titled "That 30s Show", dated July 2, 2009
And the deeper the hole gets, the harder it will be to dig ourselves
out. The job figures weren't the only bad news in Thursday's report, which also
showed wages stalling and possibly on the verge of outright decline. That's a
recipe for a descent into Japanese-style deflation, which is very difficult to
reverse. Lost decade, anyone?
Dig ourselves out? This is a bit
of modern media phraseology that escapes me completely. If you are in a hole,
the way I think about it is that you instantly STOP digging, not continue
digging (unless you wish to proceed through Earth's hot core and end up coming
out in China; which I believe a number of Americans have been trying lately,
but that's a different story). Physically and logically, it isn't actually
possible to DIG yourself out of a hole; what you need to do is to FILL the hole
hopefully in a safe enough manner that those in the hole can walk out of it.
The US Federal Reserve under former chairman Alan Greenspan had to confront the
aftermath of the technology bubble and decided to DIG itself out of the hole
caused by job losses in the higher technology sector by lowering interest rates
and essentially creating an asset bubble that helped to foster higher
employment but didn't actually improve the net worth position of Americans.
This is the reason millions of Americans chased the dream of easy money through
house-flipping, and the Republican Party attempted to capitalize on the trend
in order to move leverage down from large construction and homebuilding
companies (typically Republican donors) to the poor of America, who typically
voted Democrat.
As I wrote before on these pages (see
Deaf frogs and the Pied Piper, Asia Times Online, September 30, 2008),
Greenspan got away with it because of slavish Asian central bankers, who were
following the dictum of Krugman ironically enough and moving away from
investing through their local bond markets into investing purely in US
government debt. This in turn propped up the stupid policies of the Fed, caused
the US housing bubble and so on ... but funnily enough, the intervention of
Asian central bankers isn't mentioned in describing the mechanics of the above
bubble.
Indeed, the moral pendulum somehow swung to the point of free markets being
blamed for the crisis, rather than as being seen as the victims of manipulation
(the Fed) and intervention (Asian central banks). In this new "Mad Max reality"
it is the Keynesians who are the saviors, led by their cheerleader-in-chief,
one Paul Krugman.
Reading other articles posted recently also don't help make sense of where
Krugman is going with his pet theories. Take more of his July 2 article cited
above:
Wait - there's more bad news: the fiscal crisis of the states.
Unlike the federal government, states are required to run balanced budgets. And
faced with a sharp drop in revenue, most states are preparing savage budget
cuts, many of them at the expense of the most vulnerable. Aside from directly
creating a great deal of misery, these cuts will depress the economy even
further.
Wonderful, and right there, all readers should
appreciate the use of the word "unlike" in the second sentence. Cutting through
the jargon, what Krugman is saying here is that states in the US do not print
the dollar currency, but since the federal government does, different rules
apply for the management of debt and deficits.
That view is nonsensical of course - the only way to issue debt is to convince
someone else that you are good for it come the time to make interest and
principal repayments. US states, starting with California, have quickly come to
realize that their wells could run dry rather quickly so why does anyone
believe that the story is magically different for the US federal government?
There are only two possible answers: Convince someone else to buy all your debt
(developing countries, commodity exporters and so forth) or print your own
money (thereby debasing its purchasing power). The US government is clearly
doing both - witness the rounds of "investor" meetings being done by Treasury
Secretary Tim Geithner in Asia even as the Fed openly has started purchasing US
government securities.
In a very short while, the US government could find that the strike by
creditors afflicting California could adversely impact federal debt too.
But I digress. Here is Krugman again, in an article titled "The Stimulus Trap"
dated July 9:
As soon as the Obama administration-in-waiting announced
its stimulus plan - this was before Inauguration Day - some of us worried that
the plan would prove inadequate. And we also worried that it might be hard, as
a political matter, to come back for another round. ... Unfortunately, those
worries have proved justified. The bad employment report for June made it clear
that the stimulus was, indeed, too small. But it also damaged the credibility
of the administration's economic stewardship. There's now a real risk that
President Obama will find himself caught in a political-economic trap. ... And
that's what the Obama administration should be doing right now with its fiscal
stimulus. (It's important to remember that the stimulus was necessary because
the Fed, having cut rates all the way to zero, has run out of ammunition to
fight this slump.) That is, policy makers should stay calm in the face of
disappointing early results, recognizing that the plan will take time to
deliver its full benefit. But they should also be prepared to add to the
stimulus now that it's clear that the first round wasn't big enough.
This stuff is delightful, if a geeky, guilty pleasure. Right in the beginning,
Krugman pre-determines that the sole method of fighting an economic downturn is
to expand the fiscal stimulus. And when that policy fails obviously in the next
few months, his refrain isn't so much about "Is that the RIGHT policy?", but
rather that "It was the WRONG amount".
There is the mumble about the Fed having no more ammunition because interest
rates are close to zero; quite ignoring the fact that the failure of the
economy to rebound at zero interest rates suggests obvious structural flaws,
that shouldn't be made worse by Japan-style pump priming. He goes in the
article as below:
Unfortunately, the politics of fiscal policy are very
different from the politics of monetary policy. For the past 30 years, we've
been told that government spending is bad, and conservative opposition to
fiscal stimulus (which might make people think better of government) has been
bitter and unrelenting even in the face of the worst slump since the Great
Depression ... But there's a difference between defending what you've done so
far and being defensive. It was disturbing when President Obama walked back ...
[Vice president Joe] Biden's admission that the administration "misread" the
economy, declaring that "there's nothing we would have done differently." There
was a whiff of the Bush infallibility complex in that remark, a hint that the
current administration might share some of its predecessor's inability to admit
mistakes. And that's an attitude neither Mr Obama nor the country can afford
... What Mr Obama needs to do is level with the American people. He needs to
admit that he may not have done enough on the first try. He needs to remind the
country that he's trying to steer the country through a severe economic storm,
and that some course adjustments - including, quite possibly, another round of
stimulus - may be necessary.
I loved the bit about the Bush
infallibility complex in the statement, but it should have been directed not so
much at the poorly advised Mr Obama, as the people advising him; an august
group of Keynesians that includes Krugman himself. It is they who have ridden
the infallibility complex that has failed to make the most important
observations about the US economy:
1. Leverage needs to shrink across the economy, not merely get shifted
around between the hands of private individuals and the US government; 2. When consumption is almost three-quarters of any economy, you cannot
cut leverage without hurting consumption. So live with it; 3. For the economy to generate profits, it probably needs to become
smaller, a lot smaller.
Recycling waste
All that said, Krugman's uselessness is actually quite useful, with the right
application. To turn George Bernard Shaw's maxim on its head, it is futile to
follow any gaggle of economists not because they are wrong as a group but
because individually some of them are right sometimes, but not always. It is
almost impossible to find someone who is right all the time, but failing that
it would be great to find someone who is wrong all the time.
Unfortunately for all of us, Krugman's pronouncements don't actually have
enough market views thrown in for any of us to make money by taking the
opposite view. The good news, though, is that it appears, with Fed chairman Ben
Bernanke on a very short leash, he may be succeeded by Larry Summers in January
2010, and it could well be Krugman's new beat to take over the job that Larry
Summers leaves - namely as head of the US president's economic advisory team.
Now, if only we could convince him to make market suggestions while in that new
job (for example, "the economy will rebound in two quarters so the US
government can cut borrowings"), then it would be trivially easy to position on
the opposite trade (that is, "borrowings will continue to rise"). But don't
tell him any of that.
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