Krugman still doesn't get it

Normally I wouldn't touch Paul Krugman's periodic outbursts of moon-brained stupidity with a ten-foot pole. I leave that to older and wiser people (who also have the time to deal with such things). His latest NYT column, though, is literally a target just begging someone to take a potshot at it:
[A] combination of rising tax receipts and falling spending has caused federal borrowing to plunge. This is actually a bad thing, because premature deficit-cutting damages our still-weak economy — in fact, we’d probably be close to full employment now but for the unprecedented fiscal austerity of the past three years. But a falling deficit has undermined the scare tactics so central to the “centrist” cause. Even longer-term projections of federal debt no longer look at all alarming. 
...
Finally, over the course of 2013 the intellectual case for debt panic collapsed. Normally, technical debates among economists have relatively little impact on the political world, because politicians can almost always find experts — or, in many cases, “experts” — to tell them what they want to hear. But what happened in the year behind us may have been an exception.
[Emphasis here and in all other quotes mine]

It's well-known, of course, that Krugman has a habit of conveniently forgetting his own publicly available writings for the sake of a politically expedient argument. Just to remind ourselves, though, let's see what he actually said about the nature of debt in the economy:
Debt was rising by around 2 per cent of GDP annually; that’s not going to happen in future, which a na├»ve calculation suggests means a reduction in demand, other things equal, of around 2 percent of GDP.
As Vox pointed out in his Absolute Rights article, a critical founding plank of the entire Keynesian sham is that a rise in government spending should, through a lot of mathematical handwaving, result in a multiplied rise in overall output and therefore income (since the two are equivalent in the Keynesian way of thinking). As far as I can tell, Krugman doesn't actually subscribe directly to that argument (which dates back a good 80 years and was largely discredited in the 1970s); he subscribes instead to a derivative idea called the Loanable Funds model:
If the Loanable Funds theory of lending is correct, then rising debt can only tangentially cause an increase in demand (if the borrower spends more than the lender would have done); if on the other hand a change in debt adds roughly one for one to demand, then the Loanable Funds model can’t be right. In other words, Loanable Funds and the argument that macroeconomics can ignore private debt are 'joined at the hip': if one goes, then so must the other.
Essentially, Krugman has been arguing all along (except for when he hasn't) that bank lending and debt are irrelevant to modern macroeconomics, since lenders and borrowers must by definition (in theory at least) offset perfectly. This is complete nonsense once you factor in the reality of debt defaults and fractional reserve monetary policy; it is in fact entirely possible for debts not to cancel out if money is essentially generated "out of thin air" without anything backing it, since multiple rounds of new debt and lending have been created from a single instance of open market operations. And if any one of those lenders then defaults, due to misaligned time preferences from lending, then the entire house of cards collapses in on itself as the very same fractional reserve transmission mechanism then works in reverse to contract the money supply.

Now to get back to where Krugman (as usual) just made s*** up, let's take a look at the two points I've highlighted in his statements above.

The first is this ludicrous contention that we'd back back to "full employment" by now if only the country had printed way more money and gone way deeper into debt. I'm guessing he doesn't pay much attention to the actual numbers (but then, he is a Keynesian; numbers don't matter in the Keynesian world, only formulae):


So... the USA has added huge amounts of new debt, continued to print money at an annual expansion rate of at least 5% p.a., and the next effect on unemployment is... pretty terrible, actually:


(Note: never trust BLS numbers. I've worked for an inflation trading desk. I can tell you straight that the numbers produced by the BLS and the Treasury just don't jive with reality.)

So where exactly was that "unprecedented fiscal austerity", given that Congress and President Jackass have together managed to stack up truly Biblical deficits for the last 5 years?


And then there Krugman's flatly absurd argument that the intellectual case for "debt panic" has collapsed in 2013. Uh, it hasn't. It's still just as salient as ever:
Let us first examine the Debt Fairy. According to the Keynesians, the U.S. economy (as well as the economies of Europe and Japan) languishes in a “liquidity trap”. This is a condition in which interest rates are near-zero and people hoard money instead of spending it. Lowering interest rates obviously won’t spur more business borrowing, so it is up to the government to take advantage of the low rates and borrow (and borrow). 
If governments issue enough debt, argue Debt Fairy True Believers, the econ­omy will gain “traction” as government spending, through the power of pixie dust, fuels a recovery. Governments spend, businesses magically gain confidence, and then they spend and invest. (At this point, we are apparently supposed to just overlook the fact that the Keynesians are saying that we need the Debt Fairy to resurrect the Keynesian version of the Confidence Fairy.) 
The Inflation Fairy also plays an important role, according to Keynesians, for if bona fide inflation can take hold in the econ­omy and people watch their money lose value, then they will spend more of their savings. In turn, this destruction of savings will, through the power of Keynesian sorcery, revive the econ­omy. Thus inflation undermines what Keynesians call the “Para­dox of Thrift,” a theory that says if a lot of people withhold some present consumption in order to save for future con­sumption, the economy quickly will implode and ultimately will slip into a Liquidity Trap in which no one will spend anything. 
These fairies can work their magic if (and only if) one condition exists: factors of production are homogeneous, which means that government spending will enable all lines of production simultaneously. The actual record of the boom-and-bust cycle, however, tells a different story. It seems that the Debt and Inflation Fairies enable booms along certain lines of production (such as housing during the past decade), but as everyone knows, the fairy dust lost its magical powers and the booms collapsed into recessions. 
Austrians such as Mises and Rothbard have well under­stood what Keynesians do not: the structures of produc­tion within an economy are heterogeneous and can be distorted by government intervention through inflation and massive borrowing. Far from being creatures that can “save” an economy, the Debt Fairy and the Inflation Fairy are the architects of economic disaster.
These are criticisms which have been known for decades. Henry Hazlitt's classic, brutal, and inimitably effective evisceration of Keynesian economics has never been properly answered by its targets (I suspect they didn't even bother to try). The intellectual case for sounding the doomsday alarm about debt-deflation is stronger today than ever, and it keeps getting stronger in circles that Krugman doesn't bother paying attention to.

The reason Krugman thinks that the doomsday debt scenario has lost its appeal is because mainstream Republicans aren't promoting it any more. Does this really surprise anyone? Republicans are NOT defenders of free markets and free people. Republicans, especially Republican politicians, are corporatists. They believe in big strong central government- they always have. The idea that the intellectual case for what is happening right before our eyes is somehow lacking or non-existent only makes sense if your entire sample size consists of what is being done and said in the cesspool that is the Federal Mall.

In other words, you have to be smoking a particularly strong Federally mandated brand of crack cocaine to think that
  1. Debt doesn't matter, and
  2. Those who think that debt does matter have disappeared


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