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.