Monday, November 18, 2013

Krugman versus Krugman?

Prof. Krugman has now introduced me to “secular stagnation” which is a persistent state in which a depressed economy is the norm with episodes of full employment few and far between”.

Well, heavy stuff, to be sure. Prof. Krugman suggests (but he gives credit for it to Larry Summers) that the US economy has been in a mild depression since about 1985; an economy of inadequate demand which only gets anywhere close to full employment when it is being buoyed by bubbles.

From 1960 to 1985, Prof. Krugman says, US household debt relative to income was relatively stable but it rose rapidly and inexorably from 1985 to 2007. Yet even with households going ever deeper into debt, the economy’s performance over the period as a whole was mediocre at best.

Now I am confused. On one hand, Prof. Krugman seems to suggest that not even rapid and inexorable spending by consumption-addicted and no-fear-of-debt-having American consumers could generate sustained economic strength since there was a problem with the underlying economy. On the other hand, I read almost every day a piece by Prof. Krugman where he recommends rapid and inexorable spending, albeit this time on the part of the state because consumers have run out of their own money while the state can always spend other people’s money. Hmmm.

What does that have to do with Greece?

Well, I have always been puzzled by the following. Everyone seems to be in agreement that the Greek state had gone overboard with spending in the last 10-15 years, particularly after 2006. But the reverse question would be a what-if question. What if the Greek state had not done all that spending? What if the Greek state had not increased public employment so much, particularly after 2006?

It seems to me that the Greek state had no choice but to go overboard with spending. Otherwise, the destructive side effects of the Euro (declining domestic economic value creation; GDP decline; rising unemployment) would have become apparent much sooner. If I recall correctly, in 2009 not even a 15% budget deficit (if that is not a stimulus then I don’t know what is!) could prevent the GDP from declining!

What explanations does Prof. Krugman offer about this mild depression in the US economy since about 1985? One is slowing population growth. But the really interesting factor which Prof. Krugman notes is the second one – persistent trade deficits!

A trade deficit always implies, at least to a certain degree, an export of jobs. Obviously, a country like Greece cannot avoid importing cars when it does not produce cars. However, if the US is importing cars which it previously produced domestically, then the corresponding jobs have been exported. First the jobs are lost (in many cases forever). Then employment becomes unstable. Then unemployment will persistently increase UNLESS there are consumers who rapidly and inexorably overspend (borrowed) money and UNLESS there is a state which takes over that overspending once the consumers themselves run out of steam. But what kind of an economy is that when you need bubbles to keep it afloat?

I still remember Ross Perot’s warning – when he first ran for President in 1992 – that the US would have to be very careful with its trade position. At that point, the issue was NAFTA which Perot opposed because he felt it would further deteriorate the US’s trade balance. He warned of a ‘giant sucking sound’ which would be heard as American jobs left the country to other countries where they would produce exports to the US. His analogy was: “Our children will be selling hamburgers to each other and pay for them with money borrowed abroad”. Does anyone recognize similarities with Greece?

Back in the early 1970s, I discussed the American import situation with a colleague who was in the same training class at an American bank. His position was: “If the Japanese want to work 18 hours a day in exchange for us signing promissory notes, that’s fine with me!” Well, not having to work in exchange for signing promissory notes would be fine with everyone if those promissory notes could be signed forever and if they would never be presented for payment. And, ABOVE ALL, if the export of promissory notes were not accompanied by an export of jobs.

Returning to Prof. Krugman, I could perhaps accept his point (low interest rates; high public spending) with regard to the US economy because that economy is so huge, has such productive capacities and so much innovative and enterprising energy that even artificially increased demand might lead to positive consequences.

With regard to Greece I don’t see it that clearly. I still maintain that the first priority for Greece, as a country and as a national economy, has to be to increase productive capacities, build up new ones, unleash innovative and enterprising energies, etc. If only aggregate demand is increased, ceteris paribus, it will simply be a return to the past – increased imports, increased trade and current account deficits, increased demand for foreign funding and, at the end of the day, renewed external payment problems.

Regardless of what Prof. Krugman says.

1 comment: