Krugman vs. Keen: Rhetoric vs. Reality

(10 am. – promoted by ek hornbeck)

 About two months ago economists Paul Krugman and Steve Keen got in a very public, somewhat unpleasant, and very unusual, online spat.

  It is worth noting that not only did Krugman not win the debate, he was pretty convincingly defeated. Businessinsider, which didn’t have a dog in this race, explained it as thus:

 Ultimately, Krugman does not come off as persuasive in this fight, writing that continuing to respond is “wasting [his] time,”

  The points of dispute probably went over the heads of most people, and thus the debate was probably ignored by most people, but the fact the debate happened at all is very significant. Why? Because this wasn’t a left-right debate that we see in Washington. This was a debate that displays just how extreme the discussion of economics has drifted in today’s world.

 So who is Steve Keen? He’s an Austrialian economist, author and a disciple of John Keynes and Hyman Minsky.

 Nouriel Roubini appears to be the most commonly recognized by (virtually all) the main sources I’ve seen. Yet, economists chose Australian Professor Steve Keen over Roubini for the Revere Award (outvoted by more than a 2 to 1 margin – details below) for publicly warning of the Global Financial Crisis.

 If you listen to mainstream media, you will hear that there are two alternative economic theories in the world today: 1) right-wing, Chicago School, “austerians”, who believe that to get back to “growth” and get more “competitive” we need to lower our standard of living and balance our budgets (except when it comes to military spending, of course), and 2) neo-Keynsian liberals like Paul Krugman who think we need massive amounts of deficit spending in order to get the economy going (including more military spending).

  On one side you have faith in markets, in the other you have government-managed economy.

  Right, left. Black, white. Good, bad. Either you are with us, or you are against us. All other “alternative” are beyond the pale and are simply wacko.

Does this look familiar to anyone else? It looks like the same choices you would see in a Hollywood action flick, where the only intellectual question is if the good-guy can kill enough of the bad guys before the movie ends. (note: He can)

 What we see are two different versions of the status quo. Neither the Chicago School, nor the Krugman school would make any fundamental changes to the system. Neither version would fix any systemic problems. Neither version would upset the financial elites of the world.

  It takes either extreme ignorance or brainwashing to buy into this limited universe. Not only are we being presented with a false choice (that there are only two alternatives), those two alternatives are false.

 For starters, the status quo is NOT a free market economy. If it was a free market economy then the banks would have failed in 2008. A free market economy without the risk of failure is like gambling without the risk of losing.

  The government is currently, actively, picking winners and losers in the economy. That’s the whole idea behind Too-Big-To-Fail. What’s more, they’ve picked the working people of America to be the losers, eventhough we may not have made any bets at the gambling table. The TBTF banks have bought off the politicians of both parties to force the taxpayers to bail them out when their looting of the public goes to extremes.

  That’s not a democracy or a free market. It’s a kleptocracy and a plutocracy, and its unsustainable.

 The other false alternative is presented by Paul Krugman.

Krugman correctly attacked the neo-cons early, and that’s why they hate him. Krugman consistently exposes the intellectual midgets in the conservative extreme every month. Thus it is easy to consider him as someone on your side.

  The problem, as Steve Keen exposed, is that Krugman isn’t what he presents himself as. Krugman says he’s a New Keynsian, when in fact he’s a neo-classical economist, which is just another branch of mainstream economics.

 For instance, during the debate Krugman said this:

 first of all, my basic reaction to discussions about What Minsky Really Meant – and, similarly, to discussions about What Keynes Really Meant – is, I Don’t Care.

 I can sort of understand that point. If taken to an extreme it just becomes mental masturbation. But then Krugman goes on to admit that he doesn’t understand what Keen is saying. That’s not just a bad position to put yourself into to start a debate, it’s downright stupid.

  The problem is if you call yourself a New Keynsian and then fail to understand what Keynes actually said. Then you become a fraud.

 Keen went on to demonstrate how Krugman is just another neo-classical economist.

 One crisis later, leading Neoclassicals like Paul Krugman continue to argue that only the distribution of debt can matter:

   People think of debt’s role in the economy as if it were the same as what debt means for an individual: there’s a lot of money you have to pay to someone else. But that’s all wrong; the debt we create is basically money we owe to ourselves, and the burden it imposes does not involve a real transfer of resources.

   That’s not to say that high debt can’t cause problems – it certainly can. But these are problems of distribution and incentives, not the burden of debt as is commonly understood. (Krugman 2011)

So can we ignore the level of private debt? No-because this “profound insight” is in fact a blind-spot about the role of banks and debt in a capitalist economy….

a Senior Vice-President of the New York Fed asserted it when arguing against the Monetarist experiment of the 1970s:

   “In the real world, banks extend credit, creating deposits in the process, and look for the reserves later.” (Holmes 1969, p. 73)

 This relatively simple explanation, as one example, was for some reason too complex for Krugman. I’m not sure why.

  Krugman then goes on to display truly neo-classical thinking that was disproven 100 years ago.

  Most of the world considers 2008 to have been a global Minsky-moment. Krugman, for some reason, proudly proclaims that he is not a Minskyite.

 Keynes was famous for saying: “When the facts change, I change my mind. What do you do, sir?”

   I think its time for some to re-examine their core beliefs.

Why is this important?

 The first thing to understand about the economic debate today is that the right-wing blames all government interference with the economy as either socialism or Keynesianism.

 The right-wing has long since proven that they don’t have a clue what the word “socialism” even means. They lump the word in with fascism, feminism, atheism, terrorism, and any other “ism” that scares them.

 You might think the right-wing understood what Keynesianism is. As it turns out, the New Keynesian crowd doesn’t even totally understand what Keynes had to say. Thus the economic debate between the Chicago School and Krugman is really red herring. It is a distraction to keep us from considering the full range of choices we have.

  My other favorite economist is Michael Hudson. While Keen focuses on the mathematical flaws in today’s economics, Hudson looks at the historical flaws. The debate between Krugman and Keen was not overlooked by Hudson.

 All this is a good idea as far as it goes. But Mr. Krugman stops there – as if that is all that is needed today…Thus dumbs down his argument, and actually distracts attention from what is needed to avoid the financial and fiscal depression he is warning about.

  Here’s the problem: To focus the argument against “Austerian” advocates of fiscal balance, Mr. Krugman hopes that economists will stop distracting attention by talking about what he deems not necessary. It seems not necessary to write down debts, for example. All that is needed is to reduce interest rates on existing debts, enabling them to be carried.

 Hudson lists a couple items that Krugman doesn’t endorse, such as:

1) Writing down debts, which would cause the banks to lose money

2) Shifting taxes off labor onto property, an idea which is not just morally correct, but good economic policy – endorsed by such economists as Adam Smith and John Maynard Keynes where he famously advocates “euthanasia of the rentier”

The effect of Mr. Krugman’s suggestions is for the government to subsidize the existing financial and tax structures, leaving the debts intact and ignoring the largely regressive, unfair and inefficient system of taxation…

 In Mr. Krugman’s reading, private debts need not be written down or the tax system made more efficient. It is to be better subsidized – mainly with easier bank credit and more government spending. So I am afraid that his book might as well have been subtitled “How the Economy can Borrow its Way Out of Debt.” That is what budget deficits do: they add to the debt overhead.

 The primary problem in the world economy today is extreme debt levels. The bond markets are saying that public debts are too high. You and your neighbors are saying that private debt levels are too high. In fact, debt saturates every segment of society.

  Once upon a time a prominent blogger here named Bonddad was concerned with increasing debt levels. He was 100% correct in being concerned with them.

  When Bonddad said that the country is collapsing under the weight of debt he was right. His statement is still right, even though he no longer appears to believe it.

When Bonddad said that Obama’s plan for spending our way out of economic trouble is unworkable he was right. His statement is still right, even though he no longer appears to believe it.

  Bonddad is far from being alone. The current economic debate these days seems centered around stimulus spending vs. austerity. The spectrum of economic thought has been shrunk down to microscopic levels that neither address the heart of our economic problems, nor threaten the status quo.

 I understand the message when people say that we can’t worry about deficits and debt levels in middle of an economic crisis, I just think that people are missing the most important idea here: massive amounts of debt are the cause of this economic mess, so why would even larger amounts of debt be the solution?

 It’s interesting that Hudson says that Krugman is trying to stop distracting attention from right-wing talking points. I’ve recently been reading “Death of the Liberal Class” by Chris Hedges, and it seems rather obvious that what Krugman is doing IS distracting by design. Hudson sort of gets it:

 The effect of his narrow set of recommendations is to defend the status quo – and for my money, despite his reputation as a liberal, that makes Mr. Krugman a conservative.

 Krugman is no conservative, but he does do his part in defending the status quo. What Hudson is confused about is what the current purpose of liberals in America are.

  Chris Hedges, who’s expertise is politics instead of economics, explains:

 In a traditional democracy, the liberal class functions as a safety valve. It makes piecemeal and incremental reform possible. It offers hope for change and proposes gradual steps towards greater equality. It endows the state and the mechanisms of power with virtue. It also serves as an attack dog that discredits radical social movements, making the liberal class a useful component within the power elite.

 This is the role that Krugman has assumed – the attack dog of the liberal class. The reason he attacked Keen was because Keen was working working outside of the status quo (and yet, somehow, getting serious attention) and was proposing radical solutions to our economic problems, solutions that if seriously considered might get people thinking about the more fundamental problems in society.

  The problem for the status quo is that the liberal class has been almost completely discredited and gutted by the corporate class.

 The inability of the liberal class to acknowledge that corporations have wrested power from the hands of citizens, that the Constitution and its guarantees of personal freedom have become irrelevant, and that the phrase consent of the governed is meaningless, has left it speaking and acting in ways that no longer correspond to reality….

 The media, the church, the university, the Democratic Party, the arts, and labor unions – the pillars of the liberal class – have been bought off with corporate money and promises of scraps tossed to them by the narrow circles of power.

 As long as the economic debate comes down to nothing more than how much debt the government should take on, then nothing will ever change. Krugman should stop carrying the water for the wealthy elite and start addressing the structural problems in the economy. Krugman needs to start thinking outside of the establishment box.