End this Depression Now, Paul Krugman

Paul Krugman’s new book, End this Depression Now, paints the reality of Depression II with the colors of truth and the promise of a solution. Anyone concerned about current politics, jobs and our future, no matter the political persuasion, had better read this one. A Nobel Prize winner in Economics, Paul knows whereof he speaks ---a must read.

Dr. Krugman makes clear that indeed we are in a depression. He defines our present circumstances as a liquidity trap in which the majority of the population cuts back on spending in order to reduce debt. Businesses do the same; they lay off workers and build up a reserve. Banks too deleverage to ride out the storm, but get right back into the shadow-banking, derivatives and chinagins that helped get us into this mess. (J.P. Morgan just lost two billion through misdirected dark derivative trading.) Consumers will not borrow even at zero percent and interest rates can’t go much lower than that. Like Japan for a decade, we cannot grow out of the liquidity trap.

Krugman goes to great lengths to describe the polarization of economists in their conflicting understanding or misunderstanding of the causes and solutions to our dilemma. Economists apparently understood the causes of the Great Depression, and legislators as well enacted regulations and safeguards to prevent it happening again. Since the 1980s, however, legislators supported newer, more fashionable and erroneous economic beliefs, systematically repealed those earlier safeguards. I like Krugman’s description of current economists as: salt water economists versus freshwater economists. Those may be euphemisms for Democrats and Republicans. In any case Salt Water Economists appear to be the good guys.

Quoting from the book, “Yet Lucas, a Nobel laureate who was a towering, almost dominate figure in macroeconomics for much of the 1970s and 1980s, wasn’t wrong in saying that economists had learned a lot since the 1930s. By, say, 1970 the economics profession really did know enough to prevent a recurrence of anything resembling the Great Depression. --- And then much of the profession proceeded to forget what it had learned.” He goes on to explain, “How a mix of politics and runaway academic sociology, through which basically absurd notions, became dogma in analysis of both finance and macroeconomics.”

I love the phrase, “runaway academic sociology.” I take it as a foreshadowing of the trade deficit and the funneling of middle class wealth into the hands of the wealthy. I call it a money pump that drained wealth from the Middle Class, first to our trading partners and then back in the form of foreign investment into the hands of the novo rich plutocracy that so benefited from this flow of wealth, the 1% and the 0.01%. I thought - and I was mistaken - that Krugman would define academic-sociology as the near messianic belief that unregulated trade could do no wrong.

Krugman makes a compelling case for using the tools that we still have to end this depression. He argues soundly that the stimulus package did not go far enough. His suggestions listed first of all government-spending as the essential ingredient for getting us out of the liquidity trap.  The list includes areas of immediate impact like funding states and local governments at such a level as to meet the need for projected but canceled spending on critical local measures -- such as teachers. The list further includes spending on critical infrastructure, not exotics, but things like the electric grid, rail-bed upgrades, roads, bridges and so forth. Interestingly, Krugman shows that a measured degree of inflation at around 4% could further stimulate production reduce the cost of debt and allow for a real interest rate below 0%. He establishes, at least to my satisfaction that inflation will not come roaring back. He additionally favors more and extended relief for those who struggle, and he further proposes mortgage payment relief through refinancing. He also mentioned the need to push China to follow the rules about the value of its currency.

Krugman attributes the depression to the systematic dismantling of the banking rules designed to prevent the depression from recurring and the aggressive behavior of banks and other businesses as a result of those rule changes.

I did not find any description of the role that the trade deficit did or did not play in this crisis. Last month’s deficit in the balance-of-trade came in at over fifty billion dollars. The trade deficit just keeps growing -- and for many decades now. I do not know how you can explain the depression without acknowledging the not so slow drain on the US consumer from jobs, manufacturing and sales revenue going overseas. I do not see in Krugman’s book, the big money flow that makes the 1 – 0.1% so wealthy and the middle class so poor. We all know that for generations now our wives have had to work. We also know the struggle to pay college tuition for our children, many if not most deferring to college loans – but that’s another story. Politically incorrect as it may be, the trade deficit looms as the unmentioned elephant in the room. Six hundred billion a year amounts to over 4% of the GDP. Any way we look at it that’s a drain. Furthermore most of it returns in the form of foreign investment seeking a safe haven. It must keep hedge fund managers staying up at night thinking up investment instruments to sop up that transferred wealth. I don’t see numbers equating the loss to the middle class by jobs lost overseas either, or the loss of local jobs as a result of manufacturing overseas.

 As for the National debt, overseas profits remain overseas because of high corporate tax rates. Furthermore, domestic corporations reduce their tax burden by paying upper management inflated salaries. The executives manage tax shelters by their own means, thus paying less tax than the average middleclass consumer. So, the Middle Class not only unwittingly transfers wealth to the wealthy, but pays their share of the taxes on it as well.

Let’s end this trade deficit now and end the money pump. Daddy Warbucks will scream his head off and pay a fortune in PR convincing the public that you can’t do that. He is laughing all the way to the bank – he is the bank.

Not being too clear on Keynesian economics, I looked up my college professor’s opinion of Keynesian theory. In the introduction to his 1950 text, Economics In the introduction, John Ise writes, “Although I do not regard Keynesian doctrine as the whole of the `new economics, ` I have injected Keynesian theory at various points in the book, as well as in the new chapter.” Apparently, not all fresh water economists were anti  Keynes, or was Kansas the exception with no water at all, just sod and wheat?