In the Financial Times yesterday, Summers again trotted
out his nonsensical secular stagnation theory: the idea that demand will be
depressed for a long time and there’s no way we can raise it. I dealt with this
nonsense here
about a week ago. Plus Krugman has written TWO articles supporting Summers one
of which I dealt with at the latter link. So I’ll run thru K’s other article
to see if it’s any better (which it isn't).
When prudence is folly.
In the first section of K’s article (entitled “When
Prudence is folly”) he points to the fact that Keynes’s paradox of thrift is
responsible to a significant extent for our current woes, and then points out
(as indeed did Keynes) that in a paradox of thrift environment, ANY SORT OF
SPENDING however daft helps the situation. Now that’s true. E.g. if people are
employed all day to dig holes in the ground and fill them up all day long, at
least the money they earn will be spent on something more sensible, and on
balance we’ll benefit.
But K then concludes that since “daft” spending doesn’t
bring huge benefits (or won’t last all that long), that therefor we’re
scuppered!
Complete bullshit.
What’s wrong with simply creating new money and
spending it not on something daft, but on something sensible (as advocated by
Keynes, MMTers and others)? If you’re on
the political left you’ll tend to want to see extra money spent on public
sector items: roads, education, law enforcement or whatever. And if you’re on
the political right you’ll want to see extra money fed into household pockets
so that householdes can sepend the on whatever they want: better housing,
longer holidays, etc.
A ten year old can understand that, but apparently it’s
beyond the comprehension of “sophisticated” economists like Krugman and
Summers.
Krugman’s second section.
In the 2nd section of K’s article entitled
“An economy that needs bubbles”, he deals with Summers’s point that prior to
the crisis, economies were being driven by housing bubbles. True: they were.
But Summers and K then argue that but for bubbles, we’d
have been in recession well before the crisis, ergo we’re in for some sort of
PERMANENT AND NEVER ENDING recession.
Bullshit again.
That is, given a recession starting around the year
2000, what would there have been to stop us applying well known Keynsian
techniques to escape such a recession? Nothing!!!
Krugman’s third section.
This section is entitled “Secular stagnation?”
Basically this section just argues that population growth is lower than it was
during the baby boom era, ergo less investment is needed and less investment
spending means less aggregate demand. Well sure: less investment spending means
less AD, but so what? Money that WOULD HAVE been spent on investment may be
automatically re-allocated by the market to consumption spending, in which
case: problem solved. But if it doesn’t all we need do is apply the Keynsian /
MMT solution.
No problem there. The problem is entirely in the bad
dreams that Sumner and Krugman seem to be having.
Krugman’s fourth section.
This is entitled “Destructive virtue”. This contains a
truly wonderful sentence: “He (i.e. Summers) goes on to say that the officially
respectable policy agenda involves “doing less with monetary policy than was
done before and doing less with fiscal policy than was done before,” even
though the economy remains deeply depressed.”
Well quite. Our economically illiterate politicians and
several economically illiterate economists are sitting around saying “nothing
can be done”, when in fact the solution can be explained to a ten year old, as
pointed out above.
And in the next sentence, K refers to Summer’s claim
that “improved financial regulation is not necessarily a good thing – that it
may discourage irresponsible lending and borrowing at a time when more spending
of any kind is good for the economy.”
Nonsense.
“Irresponsible lending and borrowing” is . . . what’s
the word I’m looking for . . . ah yes . . .
“irresponsible”!!!!
That is, there is no need to expand the financial
sector to the point where it has to resort to NINJA mortgages to keep itself
employed. The financial sector should be regulated sufficiently tightly that it
keeps to . . . what’s the right phrase . . . ah yes . . . “responsible lending
and borrowing”. And if that doesn’t produce enough aggregate demand, then apply
the solution spelled out about which ten year olds ought to be able to
understand.
Negative interest.
Finally, K advocates disposing of physical cash and
imposing negative interest rates. (The reason for disposing of physical cash is
that if negative rates were imposed but physical cash were still available,
people would be able to hold monetary base without paying the negative interest
rates by simply storing cash under their matresses or wherever.)
Now disposing of physical cash is a hilariously dumb
idea. Physical cash is U-S-E-F-U-L. That’s why people use it. The total
turnover of physical cash has doubtless declined as a result of the rise of
plastic cards and other methods of payment. But people still hold billions of
dollars of the stuff in their wallets.
Moreover, what’s the big idea behind negative rates? It’s
to induce people to cease storing and thus spend more of their stock of money than
they otherwise would. Now I can think of a better way of inducing people to
spend at a rate that brings full employment. It’s the Keynsian/MMT policy
mentioned above: i.e. create and spend money into the economy (and/or cut taxes)
in a sufficiently large amount that the private sector has a stock of monetary
base sufficiently large that it spends at a rate that brings full employment.
As leading MMTer, Warren
Mosler puts it at the top of his site (in yellow print): “There is no
financial crisis so deep that a sufficiently large tax cut or spending increase
cannot deal with it.”
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