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Friday, May 11, 2012

Transcript: 501 Paul Krugman, Dangerous Man


Paul Krugman is out with a new book, "End This Depression Now." You may expect us to be a big Krugman fan. You will be disappointed. We certainly agree with the sentiment of the title, but ... and we'll get to some audio from Krugman. We won't make him an idiot. More dangerous than an idiot. Paul Krugman is one of the most dangerous economists on the planet.
Listen to this episode

First a couple of items of fact to characterize a real world. The United States is a low wage nation. These are data for 2009, but they are likely even more true now. The proportion of the workforce earning below two-thirds of a median hourly wage—that's median, not average—is higher in the US than in any other OECD country. 24.8 percent. This confirms the US as an unequal society. The next lowest is the UK at 20.6.

David Ruccio who brought this forward on the Real World Economics blog, presenting research done by John Schmitt at CEPR, Center for Economic and Policy Research, Dean Baker's shop, link online. Also chart online. And we did get up the chart on productivity finally. But

United States of low wages

April 24, 2012

from David Ruccio

John Schmitt [pdf] defines low-wage jobs as paying less than two-thirds of the national median hourly wage.

Schmitt explains that low wages are not the only problem for low-wage workers, particularly in the United States:

The intense policy focus on low pay can obscure the reality that low pay is often among the least of the labor-market problems facing low-wage workers, especially in the United States. U.S. labor law offers workers remarkably few protections. U.S. workers, for example, have the lowest level of employment security in the OECD and no legal right to paid vacations, paid sick days, or paid parental leave. The low level of union coverage in the United States means that contractual obligations generally don’t make up for the lack of legal guarantees.

In the absence of legal or contractual rights, low-wage workers are the least likely to have access to core benefits. Almost half of private-sector workers in the bottom fourth of the wage distribution in 2010, ... had no paid vacations. In the same year, about 68 percent of private-sector workers in the bottom fourth of the wage distribution had no paid sick days, .... In the U.S. context, however, probably the most critical problem facing low-wage workers is the lack of access to health care. ..., more than half (54 percent) of workers in the bottom [fifth] did not have employer-provided health insurance and more than one-third (37 percent) had no health insurance of any kind, private or public. The 37 percent non-coverage rate for the bottom [fifth] of wage earners in 2008 was up from 15 percent in 1979.

Next, the chart online shows the crash in public sector employment since 2009, this borrowed from the Calculated Risk blog. Definitely not a feature of prior recoveries. The steepness of the decline has flattened out, but it is no way to handle an economy. We are below 2007 in non-federal public employment.

Krugman makes this feature—public sector employment—a key part of his recovery policy. That's in just a minute.

First, one more note. Europe is back. It is still the banks. Protecting them from any sort of restructuring of foreign debt while demanding austerity and feeding them liquidity is the same recipe that has led to the US non-recovery. Socialist Francois Hollande has turned Sarkozy out of office in France. The Dutch government collapsed. Elections in Greece rejected the austerity coalition, under the leadership of the so-called technocrat Lucas Papademos, the man credited with taking Greece into the Eurozone. Previously he was the Governor of the Bank of Greece from 1994 to 2002, and then and Vice President of the European Central Bank. from 2002 to 2010. Naturally he is the one who negotiated the terms of recent bailouts.

It would be nice when the terms are decided upon if the confidence fairy would guarantee a certain level of growth. All this austerity is being sold under the premise that it will lead somewhere else but down. It doesn't. The economy collapses, standards of living are cut in half, and yet the Greeks are blamed for not bringing down official debt to GDP. Well, GDP is falling faster than debt. That means the proportion of GDP going to debt is higher.

Elsewhere, the Cameron government in the UK is under well-deserved pressure. There are mass demonstrations in Czechoslovakia. Spain is deep in depression, with enormous unemployment. But the Neoliberal Two-Step goes on. Austerity did not work, then reform your labor markets. Reforming your labor markets did not work, then more austerity. Here comes recession. We haven't done enough deregulation.

Now, Paul Krugman, here appearing with Tom Ashbrook. As always the audio is heavily edited, but the context is retained.


What makes Paul Krugman so dangerous?  Certainly we are in a depression as he describes.   Certainly the mainline and still in power got it wrong, badly wrong.  Certainly hiring is the way to go.  You may recall Demand Side was outraged in the first case,  way back in 2008, about allowing states and localities to lose services and lose jobs.

What makes him so dangerous is "It is simple, it is easy, just raise inflation and kick start the economy with these jobs."

We also remember Larry Summers in 2008 with his "Timely, Targeted and Temporary."  That used to
promote the Bush stimulus, which turned out to be ineffective tax cuts.  We remember Larry Summers as Obama's point man on the economy.  Came in with the $700 billion ARRA, again canted to tax cuts, some of them completely useless, those to the corporate sector.  And there is the point.  Paul Krugman made it best.  This was too small, to timid, too insubstantial.  It did create economic activity.  Look at the chart of GDP.  But it was not enough to cover the gaffe of predicting an immediate return to lower unemployment.  Consequently it has been characterized as not working at all.

That is what Krugman is doing.  If his plan were enacted, it would stem the bleeding, but would not lead to recovery.  There is the enormous private debt, the balance sheet recession, as Richard Koo calls it, that is not touched, except with the feather of a few jobs for firemen and policemen and teachers.  We called for principle write-down in 2008, along with others.  But those mortgages were buried under the securitization debacle.  Absent some program to reduce the enormous private debt, now around 250% of GDP, we are in for a long slog.  So we can give the banks their pound of flesh.  If not write-down, maybe just refinancing at the banks' rate, zero percent.  Certainly Corporate American has benefited from refinancing.  Inasmuch as they need to, with all that cash.

And there is no impetus for real investment. 

We have work that needs to be done, infrastructure, education, climate change avoidance and mitigation.  There are millions of jobs doing things that need to be done.  We have the people to do them.  This is a long-term investment in public goods.  It is not a short-term fix so we can buy more iPods built in China.  We have made the financial sector primary, when it is secondary.  Why?  Of course, because they control the policy levers.

But the point is, What would happen if Krugman's program were enacted.  No real investment is forthcoming from the private sector, no matter how low the interest rate goes.  Our contention is that capital goods -- the actual machinery and facilities -- are deflating in value even as we speak.  Otherwise corporations would be investing.  The zero bound would have to be violated by ten percent, and who thinks a ten percent subsidy would lead Corporate America to do useful things.  Would it lead to a rebound in the housing market?  Hard to believe any sub-zero money would ever find its way to that sector, given the miserable history so far.

Krugman cites Joe Stiglitz as a fellow in the band of brothers who got it right.  Stiglitz does not imagine a one-time pop of any amount will lead us out.  Stiglitz is on-board with climate change investment.  Paul Krugman is no Joe Stiglitz.

Stiglitz is one of the economists featured in our book, Demand Side Economics, out very soon in final form and available now in rush version at DemandSideBooks.com in any one of a number of print and electronic formats.  Another is James K. Galbraith, who kindly reviewed his part with approval.  Quote, I just spent an hour or so reading with great pleasure"

Tickles my happy bone.

He also gave us some precious anecdotes on Leon Keyserling, in his later years,

 "I remember Bruce Bartlett telling me years ago how much the Republicans hated him and it was easy to see why. He would trawl through the Rayburn building with his typewritten articles and hand-done charts, relentless and determined."

We may have to do a biography of Keyserling one day.

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