Getting Off the Hamster Wheel

Not one of Kevin’s best – though I suppose I would say that! SIG

As someone who defends Paul Krugman more often than not, I know I stand out from the libertarian mainstream. But given the realities of the form of state capitalism we live under — an essentially corporatist system whose resemblances to the “free market” are mostly coincidental — I find the Keynesians have it right when it comes to analyzing the causes of the Great Recession.

Those on the Right who think the problem is that the rich lack money to “invest in jobs” are living in a dream world. No, the rich invested money in Ponzi schemes like the real estate bubble precisely because they had more capital on their hands than they could find productive ways to invest. The economy was already plagued with excess industrial capacity that could barely be utilized, even with the level of demand revved up by debt on bubble-inflated equity. The rich already have more money than they’re willing to invest, because no sane person would hire people to produce more stuff in an environment where there are fewer employed people out there buying stuff — and the purchasing power of those who are employed is no longer inflated by home equity loans from ditech.

Simply put, it’s not the level of investment that’s the problem — it’s the level of demand.

So the Keynesians have it right about the proximate cause of the problem — an analysis that applies far better than that of most of the libertarian Right to the corporatist economy we actually live under, if not to a genuinely freed market. Their main shortcoming is an inability to penetrate beyond proximate causes and go to the root of the problem.

A good example is Krugman’s NYT column Wednesday on “The Output Gap.” He points to an estimated gap between actual and potential GDP, resulting from a shortfall in aggregate demand, of $903 billion for the coming year. So far, so good.

What he fails to note is that not everything that adds a dollar to GDP is good. A lot of GDP amounts, in the language of Frederic Bastiat, to the cost of replacing broken windows. A lot of the GDP, at its height, resulted from subsidized waste and planned obsolescence. So, with all due respect to Krugman, most of the missing output he points to is shoddy crap designed to fall apart in order to keep the industrial capacity fully utilized, and the demand for it was fueled entirely by people going into debt to keep buying that shoddy crap.

There’s no way of getting around the fact that, as our economy is currently structured under state capitalism, a large share of people are employed making stuff that’s worthless. And there’s simply no way to avoid a drastic decrease in nominal GDP and employment figures short of subsidizing pathological behavior to keep people consuming.

Krugman is entirely correct in arguing that, as the economy is currently structured, there is no way to achieve full employment other than government spending to make up the demand shortfall. But there’s no plausible scenario in which the economy, once kick-started by Keynesian pump-priming (if you’ll excuse the mixed metaphor), gets going on a self-sustaining basis without continued government spending. There’s no plausible scenario where the economy ever attains the levels of demand, or nominal output, that existed three years ago.

Keynesian “aggregate demand management” will work this year, if the government runs a $1 trillion deficit. But the economy will slip back into depression if the budget is balanced next year. So the old Keynesian model, in which the government ran a deficit in bad times and paid it back by running a surplus in good times, is as dead as the passenger pigeon. There are no good times, as state capitalism is currently structured, without a perpetual deficit.

So count me among the “deflationists” that Krugman routinely mocks. The material reality we face is that it takes less investment in physical capital, and fewer hours of labor, to produce what most people regard as a comfortable standard of living.

The agenda of both Bush and Obama was to prop up rent-inflated asset values, as a source of aggregate demand, and to inflate the dollars of investment and hours of labor required to produce a given unit of use-value. But the only way out, in the long run, is just the opposite: Eliminate the portion of the price of goods and services that results from artificial scarcity rents, so that the average person can live comfortably with a shorter work week.

In the short run, Keynesianism is the only way to prevent the collapse of state capitalism. But in the long run, state capitalism is unsustainable. The only way out is to go beyond state capitalism.

In the end, we’ve got to find some way off the hamster wheel.

6 responses to “Getting Off the Hamster Wheel

  1. A foolish, misguided and simply wrong analysis.

    I notice that he atributes opinions to ‘those on the Right’ which no one on ‘the Right’ actually esposes. I have heard NO ONE at all state that the present problems are caused by the rich not having enough money to ‘invest in jobs’. So, his demolition of that ‘point of view’ is both pointless and deliberately dishonest. He then states that he has somehow ‘proven’ that therefore lack of investment was not the problem, ‘therefore’ it must be lack of demand. A logical connection that he has not proven or actually presented any evidence for.

    He then uses this illogical farago of failed reasoning as ‘evidence'(!) that therefore Keynesian economics must be right, ‘therefore’ the US government debasing the dollar, borrowing and printing vast amounts of money and expanding government will somehow stimulate the economy.

    Wow, is that really the best the Leftists can do? Do they even believe their own rubbish?

  2. I am surprised by this given Carson’s familiarity with Austrian business cycle theory, even if he doesn’t necessarily agree with it.

  3. I don’t think this is his best, but Kevin is making a fair point. Modern economies are dominated by big business and organised labour. When, for whatever reason, there is an increased preference to hold cash, both of these will work hard to prevent falls in some prices and some wages. Corporations would rather cut output than price. Unions prefer unemployment to wage cuts. The result will be severe depressions. There will be return to reasonable prosperity, but this can take much longer than in the more flexible times before the Great War. Therefore, so long as the foundations of corporatism remain untouched, inflation may be a better choice than permafrost depression.

  4. The fact that there is an increased preference to hold cash does not equate into printing money to create ‘stimulus’ as a sensible policy response.

    People think that there is a choice, inflation or stagnation. I suggest they check their memories or history books. The last time that ‘choice’ was offered, in the 1970’s, the result was stagflation.

    ‘Stimulus’ made up of borrowed and printed money does not stimulate the economy, it simply acts as as stimulus for more government and more corporate welfare, so making the situation significantly worse.

  5. Inflation simply puts off the moment of reckoning. I am not arguing for Keynesianism as a worthwhile response in its own terms. What I do say, though, is that, in a heavily corporatised economy, it does lubricate what are otherwise very stiff wheels. With some political skill and the right sort of economic management, it can be made to do so for a very long period. It will, in the end, bring about huge distortions and economic collapse. But it gave the appearance of a very jolly 30 years after WWII, and has given us a few decades of less reliable jollity since.

  6. Dr Gabb, if that were so, then the Western economies which followed ‘Keynsesian’ prescriptions would be doing best, while the Western economies that refused to ‘stimulate’ would be doing worst.

    The best performing economies are those that refused to ‘stimulate’, such as Germany which is experiencing excellent growth, the worst performing economies are those that went for ‘stimulous’, such as the USA.

    The facts disprove Kevin’s argument.