SOME INCONVENIENT BUDGET CUTTING FACTS

This Paul Krugman article is spot on.

Krugman writes that the Republican Party is ready to shutdown the government because they want to cut programs and other funds that support jobs that Democrats want to maintain. At the same time Republicans also want to continue cutting taxes for the rich and their partner corporations.

In a few words, they're bent on imposing Third World-like fiscal austerity without actually doing anything about covering the budget holes that 30 years of tax cuts for the rich have created. Simply put, they're not serious about fixing the budget.

Focusing on budget cuts alone - or fiscal authority - is a big problem because:

* A comprehensive study by the International Monetary Fund concluded that “the idea that fiscal austerity stimulates economic activity in the short term finds little support in the data.”

* Britain’s conservative government imposed harsh austerity measures after last May. Rather than create an economic surge business confidence collapsed. It still hasn't recovered. Today, as one report put it, the private sector is “unprepared to fill the hole left by public sector cuts.”

* It does nothing to make up for the budget holes created by thirty years of tax cuts for the rich.

In spite of these realities, Krugman believes that House Republicans "will try to blackmail the Obama administration into accepting their proposed spending cuts, using the threat of a government shutdown."

At the end of the day, claiming that the budget cuts proposed by the Republicans would do wonders for America's current fiscal mess is not backed by the facts. Worse, their efforts are betrayed by the simple reality that the Republicans continue to support tax cuts that have helped bust a hole in our budget.

- Mark

OUR EVOLVING THIRD DEPRESSION

Economist and NY Times' op-ed writer Paul Krugman sees the beginning of "the Third Depression" in America and around the world. Pointing to the Long Depression of the 19th century (beginning in 1873) and the Great Depression of the 20th century (1929), Krugman argues that what we saw both times was "an era of nonstop decline." This is what we face today.

Arguing that the Third Depression is really just getting under way, Krugman writes that "this third depression will be primarily a failure of policy" and points to "last weekend’s deeply discouraging G-20 meeting" where governments obsessed about inflation "when the real threat is deflation." For Krugman "preaching the need for belt-tightening when the real problem is inadequate spending" is a policy prescription destined for disaster because of the millions who remain unemployed.

The primary culprit here is "the victory of an orthodoxy that has little to do with rational analysis," with policymakers slavishly adhering to the idea that we need to assuage markets by holding back on spending. The outcome is a stunningly shallow belief globally "that imposing suffering on other people is how you show leadership in tough times."

When we throw in the fact that Republicans derailed legislation last week that would have extended unemployment benefits and sent billions to states in an effort to avoid layoffs it's easy to understand Krugman's pessimism. Over 1 million people will be affect by this decision. To be sure, apart from being unhinged ideologues who say one thing and do another, the Republican party's real goal is to keep the market collapse going so they can pin it on President Obama in November (so much for "America First"). Still, in the final analysis what we have is a leadership - both national and global - who cling to the tenets of a dying ideology like the monarchs of Europe clinged a decadent and dying feudal system.

Apart from the fact that Krugman has gotten so many things right over the years, I'm inclinded to agree with Krugman's assessment because of the evolving characteristics of our economic situation. The biggest issue for me is how we continue to believe that if we appease the same corrupt market gods who got us into this mess that they'll act good and respond with appropriate investment strategies, just like the textbook says it should happen. This expectation is simply naive.

From the tricks behind high frequency trading, to the astronomical bets made in derivative markets few understand, to the lack of transparency surrounding toxic assets, to the use of unicorn math (mark-to-market accounting) and a genuine depence on government favors (both bailouts and legislation), we are witnessing the wholesale destruction of market capitalism around the world. The focus is no longer on wealth creation, but wealth extraction. Adam Smith is turning in his grave.

That policymakers believe fiscal authority, without serious real financial reform, will save the day in this environment says much about our failure to learn the lessons of history. A third depression, indeed.

- Mark

RUMP REPUBLICAN(S) CAST ME OUT

Paul Krugman’s most recent op-ed makes an interesting observation. Currently the Republican Party - a.k.a. the Party of No - is bent on standing in the way of legislation that might hand President Obama any degree of success. As a result our national political scene has become more and more burlesque and may soon become “Californified.”

Having become the minority party, and tethered to an increasingly ideological and symbol-responsive base, the G.O.P. has essentially arrived at the point where it has become a “rump” party, interested in little more than making sure that if it can’t govern no else will.

For those of you who are a bit dusty in history, the rump party reference is a nod to the Rump Parliament that rose up during England’s Civil War. The background is illustrative for what it tells us about today’s political environment, and deserves a few brief words.

A Brief History Lesson: The Rump Parliament
Like the Republican and conservative radicals today who refuse to believe that anyone but themselves are capable of virtue and governing, those who rose to oppose King Charles I during the English Civil War (c. 1641-1653) didn’t trust the business of governing to those in Parliament. This was especially the case for members of Oliver Cromwell’s New Model Army.

Cromwell’s army eventually surrounded Parliament in 1648 and only let those who they favored back in. This left a Rump Parliament that was made up of about 20% of its actual membership. These virtuous guarders of English “liberties” went after "enemies" of the state, eventually executed Charles I, and attempted to establish a Puritan republic, with Oliver Cromwell as its leader.

Over time Cromwell, who naturally distrusted assemblies, grew weary of the Rump Parliamentarians inability to create a “godly reformation” in England. Former radicals were no longer held in good standing, or were not seen as pure enough. Cromwell would dissolve the Parliament that brought him to power in a military coup in 1653, which marked the beginning of The Protectorate (1653-1658).

The Tea Baggers as Rump Republicans
The fact that former radicals during the English Civil War were no longer seen as sufficiently loyal is instructive for our political scene today. Paul Krugman finds it especially ironic that Newt Gingrich is now seen as a “sober, reasonable elder statesman of the G.O.P.” The problem, as Krugman points out, is that Gingrich “has no authority: Republican voters ignored his call to support a relatively moderate, electable candidate in New York’s special Congressional election … Real power in the party rests, instead, with the likes of Rush Limbaugh, Glenn Beck and Sarah Palin.”

Put another way, moderation in the Republican Party has been buried by a Radical Right who is either unwilling or incapable of reaching out to middle America. Imagine what this means. The first Republican Puritans of the modern age - Newt Gingrich and his Contract With America crowd - are no longer seen as pure enough. They have been replaced by a group of ideologues who, one would assume, can bring the “godly reformation” and the market purity demanded by Conservative Independents and the dwindling but faithful 20% who continue to claim they belong to the Republican Party.

The problem, according to Krugman, is that because “these people aren’t interested in actually governing” their only recourse is to “feed the base’s frenzy instead of trying to curb or channel it.” These people want blood. This explains why the Republican Party and Conservatives in general have increasingly been captured by a tea-bagging movement that puts hate, empty slogans, and symbolism above social purpose and our nation’s political health.

How does this affect people like you and me? I'm glad you asked.

I'm Cast Out (as a Non-Patriot)
Today, purity tests and name-calling stand in where analysis and judgment once did. While I have had the honor of enduring my share of name-calling while on air, I especially enjoyed this Facebook exchange directed at me (on another FB account) I had over the weekend.

… you belong to that low life, scum sucking, bottom dwelling, dingy smelling group of nefarious would be communist Marxist who are by some twisted fate, members of that disgraceful group known as the Barney Frank, act alike, Democrats.

Interestingly, being part of a “disgraceful group” (the Democratic Party) was not enough. I was also told that I should hide myself in shame, and then was cast out of the “real American patriot” campaign (I didn’t know a drive was going on).

… you really are not American at heart or of mind. But most definitely are an accumulation from some oderferious, decayed part of the world, like the bottom of a human waste pit. Consider yourself properly vetted and cast out of membership with any real American patriot. "WE THE PEOPLE" shall overcome the likes of detrimental ilk, such as you. I will pray for you, but not very much!

And to think, this is the response I got (from a Christian, no less) because I support health care reform. At least he's praying for me (but not very hard). 

For anyone interested in historical lessons the experiences of England's Rump Parliament does not bode well for America. Ideological and spiritual purity are not what the the Framers had in mind when they fought for and shaped our Constitution. Losing an election because your team left a mess of things does not give you the right to throw in the towel on democracy, in the process giving America a case of political constipation.

Should we be worried? Paul Krugman thinks there's something afoot. If the movement driving the tea baggers today gains any real traction, I think he's on to something.

- Mark

NOTE: "Rump" normally means the hind end of an animal; Since 1649, the term "rump parliament" has been used to refer to any parliament left over from the actual legitimate parliament.

KRUGMAN: "ALL THE PRESIDENT'S ZOMBIES"

In today's op-ed column Paul Krugman makes an observation that should be at the heart of our public debates today. Specifically, Krugman looks at the silliness behind the "private sector good-government bad" mentality, and muses over why this mindset continues to persist.

Washington, it seems, is still ruled by Reaganism — by an ideology that says government intervention is always bad, and leaving the private sector to its own devices is always good.

Call me naïve, but I actually hoped that the failure of Reaganism in practice would kill it. It turns out, however, to be a zombie doctrine: even though it should be dead, it keeps on coming.

I agree with this. If you want to understand why Reaganomics was not as successful as the zombie pundits and politicians clearly think it is, here's one of my previous posts on the topic.

- Mark

REAGAN DID IT?

I like it when this happens ...

Paul Krugman's most recent piece in the NY Times made my day. It comes as close to a synopsis of the two biggest points that I made in Chapters 10 & 11 of my book as any I've seen. In a few words, Krugman argues that deregulation and massive deficit spending - which took off under Ronald Reagan - are the keys for understanding how the mess we're in now got started. He even uses the examples I used in the book to make his points (the 1982 Garn-St. Germain bill and debt as a percentage of GDP).

Of course you can read my book for an extended version of what Krugman points out.

- Mark

INFLATION IS OUR FRIEND?

OK, I should have been a bit clearer in my previous post where I discussed economist Paul Krugman's take on why the United State might be able to escape a bout of inflation. Here's what I should have included ...

In a few words, Krugman writes in The Return of Depression Economics that Japan's history during the 1990s is critical to understand because Japan experienced a banking collapse, which was brought on by a speculative real estate bubble that popped. Shades of America in 2008-2009, right? The collapse was followed by a massive transfer of government (i.e. taxpayer) funds that resembled our stimulus program, and an interest rate reduction that kept the cost of money effectively at zero.

So what happened in Japan? Economic stagnation. Banks could/would not lend, stimulus money (or deficit spending) did not work, and people would not spend/invest. As Krugman points out, this is what economists call a "liquidity trap."

A liquidity trap, if I can continue to oversimplify, is cheap money coupled with no spending.

This explains, in part, what kept inflation low in Japan and - according to economists today - is what's keeping inflation relatively low in the United States today (I'm not sure I agree because of international considerations, but that's another story). Krugman's solution for getting out of our current liquidity trap is rather simple and, for some, a scary proposition: Inflation.

The first thing someone might think about when they think of inflation is that it has the same effect as if you started burning your money: you have less and less of it. This may be true. But according to Krugman (and other economists) if inflation occurs during a liquidity trap, and people are afraid their money will be worth less in the future, they will eventually be compelled (scared?) into spending and investing. Why sit on $1,000 today if it's only going to be worth $800 next year?

So, in a few words, we are left with two options. First, in spite of record deficits we can keep inflation at bay if we're willing to suffer through a liquidity trap of cheap money with little spending. Or, we can court inflation which will help convince market players to spend and invest.

An interesting set of options indeed.

- Mark

DUELING PERSPECTIVES ON INFLATION

This is from Professor Thoma's site, Economist's View ...

Are we headed for a bout of inflation like we saw in the 1970s? Political economist Allan H. Meltzer seems to think so, as he points out in this NY Times' piece"Inflation Nation."

If President Obama and the Fed continue down their current path, we could see a repeat of those dreadful inflationary years.

As evidence that the United States is heading for an inflationary wall Professor Meltzer offers the following.

Besides, no country facing enormous budget deficits, rapid growth in the money supply and the prospect of a sustained currency devaluation as we are has ever experienced deflation. These factors are harbingers of inflation.

Paul Krugman refers to this ...

There's a few more exchanges but, it would appear, Krugman wins this one. If you want to understand why Japan didn't experience inflation after pumping tons of money into the economy (and how it could work out this way for the U.S.) see Krugman's book, The Return of Depression Economics

- Mark

EXTREME DO OVER ...

I just took a look at Paul Krugman's latest op-ed piece in the NY Times. It's one of his usual masterpieces - chock full of information, with powerful insights that others miss.

In a few words Krugman is pointing out that what President Obama is doing for the banking and financial sector is rebuilding the system that got us into this mess. Rather than get into the details of securities and banking the best way to think about what Paul Krugman is saying is to think about ABC's hit program Extreme Makeover.


In Extreme Makeover, ABC's design team arrives to bailout a struggling family who do the right thing through their lives, but find themselves overwhelmed by development, most of which they had no control over. Rather than take the family's old frame ABC's design team demolishes everything and rebuilds an entirely new home, with beautiful landscapes and, at times, they even throw in a car and tuition for college.

Krugman correctly points out that rather than demolish the commercial banking and investment infrastructure that got us into this mess - and then rebuilding everything with strong firewalls - the Obama administration has signed off on the old framework. The idea is to leave the framework (that encourages security markets) and strengthen the foundation with lots of taxpayer money and new regulations (which Geithner asked for this week). Krugman thinks this is a bad idea.

So do I.

This post is already long enough, but you can read Krugman's article to understand why he doesn't like what's happening. I also discuss the dangers of keeping the old framework in chapters 11 & 12 of my book. In a few words, we're setting ourselves up for an extreme do over.

- Mark

NATIONALIZE THE ZOMBIES? YES, SAYS KRUGMAN

Yet another excellent op-ed piece from Paul Krugman. This one explains why we need to nationalize failing financial institutions, which are now being called Zombie Banks. In a few words he's saying what I've been saying all along: We already own their losses so we might as well make it official.


The other upside to nationalization is that we put the fear of God into shareholders across our economy. With nationalization we're sending the message: Do your jobs and watch what the people with your investments are doing or suffer the consequences; no more socializing the losses, while you privatize profits ... you, know, the way capitalist markets are SUPPOSED to perform.

- Mark

BUSH YEARS WEALTH ... AN ILLUSION

Paul Krugman has done the numbers and he makes a critical oberservation:

The bottom line is that there has been basically no wealth creation at all since the turn of the millenium: the net worth of the average American household, adjusted for inflation, is lower now than it was in 2001.

In real simple terms, all the wealth created during the Bush years was an illusion ... it was all smoke & mirrors. If that isn't depressing enough, you can read Krugman's comments explaining why the stimulus package isn't big enough here.

- Mark

KRUGMAN WINS NOBEL PRIZE

Princeton economist and NY Times op-ed writer Paul Krugman has been awarded the Nobel prize in economics. While the award is based on his insights on international trade, the Nobel prize also recognizes Krugman's capacity to clarify general economic principles. Here's a partial list of the books that Krugman's written ...

Written in 1999, The Return of Depression of Depression Economics is one of the "must read" books for anyone interested in understanding the economic mess that confronts the international community.

In a few words Krugman questions whether the type of trading and market rescues that went on before 1999 is prudent and sustainable given that there is no real framework for dealing with systemic crisis. He asks the right questions - especially given what we're seeing now. Krugman makes it very clear that the conditions that existed at the domestic level in 1929 (weak regulations, market myopia, little understanding of the financial instruments, etc.) now exist at the international level. Hence the title of the book.

In The Return of Depression Economics Krugman goes through several case studies to demonstrate how the economic fault lines that existed pre-1999 pose a danger to global trade. I've used this book many times in my International Political Economy class. While the book is a bit technical in some places, it is highly accessible. I'm surprised this book hasn't been cited by pundits today. Perhaps it will now.

Another Krugman book that I like is The Great Unraveling: Losing Our Way in the New Century (2003). The book is really a collection of his essays, mostly from the NY Times. I especially like this book because it allows the reader to see how prescient Krugman has been on the economic challenges of our day.

Few recall that it was Paul Krugman, at the height of the California Blackouts, who first raised the issue of whether Enron and other energy players were deliberately gaming the system and ripping off California consumers. It turns out Krugman was right. The narrative on this rip-off was real time; the analysis alone makes the book a bargain.


Krugman's most recent book, The Conscience of a Liberal (2007), pulls his ideas together in a very readable fashion. Quite simply, Krugman proves that he is one of the best writers on the planet when it comes to explaining complex financial issues, and the challenges of our day.

In all, the Nobel Prize helps validate what Paul Krugman has been saying for years. While the right wing crazies will no doubt lament the Nobel committee's "declining standards" or refer to other "shiny spoon" nonsense, the fact is the Nobel Prize is well deserved.

Our presidential candidates, and the world, would do well to listen to what Krugman has to say about the economic issues confronting us today.

- Mark

UNIONS AND AMERICA'S MIDDLE CLASS

If you want to understand why stagnant wages, debt, bankruptcies, and economic insecurity dominate the concerns of America's middle class look no further than the tragic political marriage between conservatives and industry (Adam Smith's "invisible hand" is absent here). To help us understand these dynamics, Paul Krugman once again nails it ...

It’s often assumed that the U.S. labor movement died a natural death, that it was made obsolete by globalization and technological change. But what really happened is that beginning in the 1970s, corporate America, which had previously had a largely cooperative relationship with unions, in effect declared war on organized labor ...

... These hardball tactics have been enabled by a political environment that has been deeply hostile to organized labor, both because politicians favored employers’ interests and because conservatives sought to weaken the Democratic Party. “We’re going to crush labor as a political entity,” Grover Norquist, the anti-tax activist, once declared.

Two points. First, can you imagine the uproar if someone from organized labor said "We're going to crush industry and commerce as a political entity"? The fear mongering over intolerant "Lefties" would never end. Second, democracy is nothing if it's not about competing factions. Why does Norquist hate democracy?

On the positive side, the numbers above suggest individuals understand that unions help America's middle class. Conservative politicians and the corporate controlled media would have us think otherwise. Looks like we need a champion to start framing the political debate differently ... is John Edwards our guy? He's definitely my candidate.

- Mark

HOW BAD: Return of Depression Economics Bad?

When Paul Krugman talked about the necessity for greater capital controls seven years ago in The Return of Depression Economics not many paid attention. Among the points he made was we have an obsolete global economic system that’s not prepared for today’s financial "innovations."

Today that system is starting to crumble. And no one – especially the so-called “experts” – really know what’s going. Many are pointing to the housing market boogeyman as the culprit. The real problem is much deeper. According to Krugman it’s so deep that “nobody knows where the financial toxic waste is buried.”

For my part, I think two of our major problems stem from (1) a belief in “deregulation” for deregulation’s sake (i.e. laissez faire economics), and (2) the Federal Reserve working to protect George Bush’s economy rather than the integrity of the dollar. For now, take a look at Paul Krugman’s latest masterwork.

Rest assured, I will be discussing the financial and economic problems we face in the future.

- Mark