Economic life has turned to shit for most citizens in these United States of America, but you wouldn't know that if you read Notes On Falsifying Fiscalism at the blog This Is Ashok - reality in bits: economics, technology and politics.
Reading the title, you probably thought this post was about standard religion, which has Gods, Holy Books, Saints, Heavens, Hells and all the rest. Sorry to disappoint you. This post is about secular religion, also known as Keynesian economic theory (in all its many variants). See my post Economics As Religion.
Back to Ashok.
If there’s one rational expectation in economics, it’s that Paul Krugman is an inflationary, dollar debasing, austerity-thumping, irresponsible, fiscalist imp that needs to be controlled. And over a decade ago in 1998, the good doctor wrote:
The way to make monetary policy effective, then, is for the central bank to credibly promise to be irresponsible – to make a persuasive case that it will permit inflation to occur, thereby producing the negative real interest rates the economy needs.
Back then, he had to end that phrase noting that “this sounds funny as well as perverse”. That’s a sea change from today, where this is taken as a foregone conclusion in wonkonomics. I see petitions for Larry Summers, Janet Yellen, and Christina Romer as great Fed chairs. That’s wonderful, and I’d be happy with any one of them (particularly Romer).
But someone has to give me a detailed explanation why there isn’t a roaring movement – from Scott Sumner to Brad DeLong – calling on Barack Obama to nominate Paul Krugman for the most prestigious job in the country.
And here's the key passage.
Krugman is the intellectual father of irresponsibility, quite literally.
If there is one man in this world who can convince markets that America will tolerate above-trend inflation, it is Paul Krugman.
If there is one man in this world who can falsify Krugman’s own theory that we need more fiscal stimulus, it is Paul Krugman. Indeed, if Paul Krugman cannot credibly commit to be irresponsible, no one can.
Markets will smoke if he is shortlisted. If he is nominated, they will all but go on fire.
So if you are interested in disproving Paul Krugman’s many calls for fiscal policy in a liquidity trap, you best champion for his nomination as Fed Chair.
You may be wondering what "irresponsibility" is. Basically, it means making a credible commitment to flooding the economy with printed or borrowed money (hence the inflation) to create negative real interest rates, which in turn will force "consumers" to spend their money before inflation destroys it, make it easier to take on new debt, and force investors to part with their money and throw it the "real" economy where you and I live. Presumably, after the money flood, we will get some new Burger Kings and the much-sought after jobs that come with them.
Contrary to Ashok's premise, "fiscal policy in a liquidity trap" (more stimulus) can not be falsified. If this theory could be falsified, then it already was falsified when the nearly $900 billion stimulus of 2009-2011 failed to achieve the desired long-term effect on the U.S. economy. When that move failed, religious acolytes like Ashok and high priests like Krugman (and Christina Romer or Dean Baker, etc.) claimed that the stimulus was 1) not large enough; or 2) poorly structured.
If Krugman were in a position to be irresponsible, as he would be as Fed chairman, it seems that no amount of evidence would suffice to demonstrate to religious zealots like him that an even larger stimulus had failed once again, at least not before your dollar becomes indistinguable from toilet paper. That much is clear.
The reasons for that hypothetical future failure are clear and have been for many years now. First and foremost, most Americans have not received a real (inflation-adjusted) pay raise for over 30 years now. See my post Economic Growth Fantasies. Yet, health care costs, college tuition costs, and many other costs have soared far beyond the official CPI-U inflation rate over those 30 years.
To make a long story short, Americans have no money. They are cash-poor. That story was confirmed once again when a recent survey found that 71% of Americans are living paycheck-to-paycheck, meaning they have less than 6 months worth of savings to cover expenses should the shit hit the fan. We can only hope that it is not a medical emergency which requires hospitalization.
From the Economist's Surgery Required — health care in America is ludicrously expensive.
But none of this matters to the Keynesian Faithful, who can not tell you how being irresponsible will magically increase wages for the working man, a situation which is determined in large part by the wage-depressing effects of globalization.
So the structural reasons why the first fiscal stimulus failed and why future stimuli would also fail are crystal clear. The U.S. economy is fucked for all sorts of reasons which lie outside the DSGE models whatever models economists like Krugman use. Those models are all but useless. But for the zealot, delusional Models Talk and Reality Walks.
When Ben Bernanke hinted that quantitative easing and near-zero short-term interest rates would eventually come to an end, 10-year T-bill rates and 30-year mortgage interest rates started to rise. That's what some people call being responsible, the opposite of being irresponsible. Krugman was very, very disappointed.
And maybe they’ll get away with it; maybe the economic recovery will strengthen and all will be well. But rising interest rates make that happy outcome less likely. And now that everyone knows that the Fed is eager to slacken off, it will be hard to get interest rates back down to where they were.
It’s sad and depressing, in both senses of the word. The fundamental reason our economy is still depressed after all these years is that so many policy makers lost the thread, forgetting that job creation was their most urgent task. Until now the Fed was an exception; but now it seems to be joining the club. Et tu, Ben?
You see, only Paul Krugman—the Conscience of a Liberal—cares deeply about the unemployed in the United States. In Paul's view, Ben Bernanke, who only made the rich richer, no longer cares. And neither does anyone else who disagrees with Krugman. Given what I've written above, I obviously don't care about the unemployed as far as Paul is concerned.
And if you think America's problems are much larger than those which mere money printing and borrowing can fix, especially in light of how the money is likely to be spent, you don't care about the unemployed either.
Only Paul (and Ashok and Dean and others among the Faithful) care about America's unemployed.
Beware of religious intolerance, in whatever form it takes and wherever you find it.
Have a nice July 4th holiday.