Monday, December 10, 2012

Light Dawns in Paul Krugman's Small Brain

If you are an Obamacrat, and some flavor of bi-coastal liberal, you probably think very highly of Paul Krugman. And you should, he's a seminal intellectual, but mainly of ideas that you hate. Consider NAFTA: Krugman's New Economic Geography provides a powerful argument for reducing trade barriers, because lower trade barriers are, effectively, lower transportation costs, and lower transportation costs make economies of scale more important, and consumer choice in any one location more likely for the likely range of goods.

Krugman is a Neo-Keynesian, and his reading of Macroƫconomics is based largely in the synthesis of Keynesian ideas and neo-classical ideas, which is called the Neo-classical synthesis. The resurgant Keynesian branch, based on a different understanding of stickiness in prices, expectations and Phillips relationships, addressing the critiques of the original versions of these ideas, is Neo-Keynesianism.

Gospel for the Neo-Keynesians was that the past economic downturn was almost strictly one of lack of aggregate demand, and that therefore government borrowing and spending was the only really necessary step to get the economy moving, at which point increased activity and increased productivity could be directed at any long term deficit problems, which were comparatively a mild problem. So: not structural, but cyclical. The Neo-Keynesian argument was bolstered by the reality that the "fresh water" alternative, was for austerity now, with tax cuts for the wealthy, and did not work at all.

However, the heterodox position was, and is, that the economic problem, while it was visible as a drop in aggregate demand, is structural: the economy gives incentives for economic activity, and economic accumulation. We have a lack of aggregate demand, but simply goosing economic demand will lead to demand for already bottlenecked: oil being the poster child. This means that restructuring must be the focus of spending. We are not in a situation where simply lowering interest rates and government spending on roads will do the job.

The reasons for this are myriad, but the root causes are from the nature of the economy: all growth must pass through a very small number of channels, and it is possible to corner those channels relatively early. Oil is the poster child, because all consumer demand becomes demand for things that run on oil in the end.

The problem then is that a demand cycle kills itself: demand is goosed, money flows into resource based acquisition, and that chokes off the recovery. Growth is then limited to the rate below which resources out perform capital, but capital is sucked up to the top of the economy.

The real problem is no lack of aggregate personal demand in a macro-economic sense, but of true mega-economic demand for a better world. The people who constitute the voting majority are fine with how things are, at least compared to anything they can have at minimal cost. The only thing the aging body boomers want, is their ass covered if they get sick before Medicare. Hundred thousand dollar funerals, they're done. They want pot and the right to fuck, but these things don't really touch aggregate spending decisions.

Where the demand is for stability, the inevitable result is that ordinary people have no pricing power, not for their wages, and not on prices. They cannot force their wages higher, and they cannot force prices down as far as their wages. This complex is why deflationism never works: prices never go down by as much as wages minus sticky rents on wages.

No pricing power means that any stimulus that goes to wages will be vacuumed up by either capital rents, or by resource rents. Repeat this: Keynesian stimulus will be boiled away to minting more billionaires. Not income, but through put. This is a structural problem, because the nature of mega- as opposed to macro- demand is that it is related to the long term equilibrium of resources against technology and population.

Thus with this column light dawns on Krugman's skull: no pricing power, wow. Now of course it is too late to do anything about it, and Krugman and the other et al. neo-Keynesians have been so far in the pocket of the Obamacrats that it will be another half generation before there is another political moment. By that time millions of people will have suffered, and many died, because during the one golden chance in a generation to get serious about shifting off the internal combustion economy, the neos were part of the consensus to bail out the banks first, the boomers second, and screw over everyone else.

OK, you got what you wanted, but what you'll also get is the undying hatred of the next generation, that won't care which bunch of billionaires you sold out to. Because that is the other reality: we have austerity and lack of shift, not because it can't happen, but because the mega demand is to create a parallel world for the rich. We can't have that, and a new world. Right now, the old are willing to sell out the future and allow the Davos Consensus build its parallel planet, so long as they get some scraps.
 

6 comments:

  1. Newberry,

    This post highlights a few of the problems you have as a writer and commenter on economics and society in general. Krugman switches between "wonkish" and layman and announces when he does so. You are always in wonk mode and I believe intentionally so, trying to appear intellectual and .. superior. Instead you appear snooty and obscure.

    I'm annoyed by one aspect of this post, namely 'blame the boomers.' How exactly have 'boomers' in any way benefited by the recent happenings? Sure the Republicans have pushed measures that would not apply to anyone currently over 55, but that's just their attempt to divide and conquer. Once they got the boomers to go for that, they'd then screw them (the boomers) too. Divide and conqure - bait and switch. Maybe the AARP went along with some of those attitudes at some point, but that's the AARP leadership, which is even less representative of "boomers" than corporate directors are of shareholders (the suckers).

    Blaming boomers seems to be a theme with your clique. I remember Welsh pulling the same bullshit. If you want to post that young people should hate old people you've got to explain yourself much better or then become just another demagogue, like Limbaugh (without the revenue).

    This reminds me of why I found the "oldman" nick annoying when I found out that oldman wasn't even vaguely close to being old. He had no idea what it was like yet he pretended to understand the situation. I'm not trying to disparage those no longer with us. It was just this aspect of him, or rather his pseudo persona, that annoyed me. Otherwise, he was fine.

    But then again he was no more representative of boomers than the AARP is.

    Sure. At one point Krugman was an economist for Enron. And he hasn't been on Obama as much as he was before Obama was elected (the first time) or during most of the first term. But he's still the loudest voice of reason on the bullshit that we as a nation and a planet are buried in (Limbaugh writ large).

    Pick on someone else or be much more specific and detailed in your arguments against him.

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    1. Oh yes, I'm just like Limbaugh. Your screed isn't worth replying to, except to note that it is shot full of boomerite tripe. There's no discussing things with you, the truth is only useful to you when you want to lie with it.

      Delete
    2. "Pick on someone else or be much more specific and detailed in your arguments against him"

      Jesus. He was specific and detailed. Did you even read the post? Almost everything between the first 2 and last 2 paragraphs was a targeted critique of the ideas held by Krugman (and Neo-Keynsians) and an explanation of why they are not sufficient to address the problems we face.

      Your entire reply is about how you feel and how annoyed you are and how you don't like the post's tone. You are all form, no content.

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  2. "any stimulus that goes to wages will be vacuumed up by either capital rents, or by resource rents" is a key point. It is also a key tell about our intelligentsia that this point is so hard to admit and even harder to admit the pivotal nature of. It is one thing for anyone in the mainstream to admit that the financial sector (and the resource sector to the degree one sees that as independent of the financial sector) will hoover up anything extra injected into the system in any way. It is yet another to admit that this fact not marginal, not accidental, but absolutely at the core of the current version of capitalism.
    I would submit that this is a degenerate version of capitalism. Basically, the transition to a genuine knowledge-driven economy (instead of a capital-driven one) has thus far failed. Parasitical rent seeking is the form that capitalism must take now because its useful historical role is already complete but it refuses to get off the stage.

    The paradox of the knowledge worker class (in a very broad sense) is that both the technologists and the image manipulators are the privileged servants of a decaying capitalist class whose sole remaining historical capacity is to prevent that same knowledge worker class from maturing into its full capacity. For most of the knowledge worker class, this manifests as a profound split between the work you really want to do and the work you can get paid for. Sometimes this is like the musician who becomes a salesman. Sometimes, it is the medical worker who has to do their job the way the insurance companies etc. want rather than the way that best promotes the health of patients.

    "lack of .... true mega-economic demand for a better world"
    Very true and crucial. I tried to engage this in your "A Bust to the Baby Boom 2" post.

    "The people who constitute the voting majority are fine with how things are, at least compared to anything they can have at minimal cost."
    Looking at the percentage of the vote in the recent US election that went to the two parties, I regretfully must agree with this. So then what do those who want something better do? I think this question does not get the attention it deserves. It is the same question the anti-war movement was never able to fully engage with without going nuts (Weathermen) or giving up.

    "Thus with this column light dawns on Krugman's skull: no pricing power, wow. Now of course it is too late to do anything about it, and Krugman and the other et al. neo-Keynesians have been so far in the pocket of the Obamacrats that it will be another half generation before there is another political moment."

    The owl of Minerva is only let out of its cage at twilight?

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  3. "The owl of Minerva is only let out of its cage at twilight?" A poetic metaphor.

    "The paradox of the knowledge worker class (in a very broad sense) is that both the technologists and the image manipulators are the privileged servants of a decaying capitalist class whose sole remaining historical capacity is to prevent that same knowledge worker class from maturing into its full capacity. "

    I think it is crucial to realize that we no longer aim for capital, that is improvement in labor real productivity, but in rent creation. As Buffet says: he looks for companies that have a permanent advantage. That is, a rent. Thus the technocratic layer is, increasingly, present either to sustain, or create, rents.

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  4. No pricing power means that any stimulus that goes to wages will be vacuumed up by either capital rents, or by resource rents.

    This was what I was asking you about on FB a month ago. "Tax cuts" will not really stay in the hands of workers but will simply be vacuumed off by resource rent.

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