Really Scary Austrianism at National Review

I wake up this morning to this, from Paul Krugman:

Rottenness: Treasury secretary Andrew Mellon, according to Herbert Hoover:

Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.... It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people

Larry Kudlow, via Angry Bear:

Recessions are therapeutic. They cleanse excess from the economy. Think about excessive risk speculation, leverage, and housing. Recessions are curative: They restore balance and create the foundation for the next recovery...

And here is PGL of Angry Bear:

Angry Bear: The Labor Market Over the Past 15 Months: [The] E[mployment-to-]P[opulation ratio] has declined from 63.4% as of December 2006 to 62.6% last month. In the early part of 2007, the unemployment rate didn't move much as LFP fell from 66.4% to 66%. In other words -- Paul [Krugman] is right in saying that the deterioration in the labor market has been going on for a while.

In fact, it is so bad that even Lawrence Kudlow has to concede the obvious point:

The unemployment rate went up to 5.1 percent. Non-farm payrolls have fallen for three straight months. Private payrolls have fallen four straight months. And the entrepreneurial small-business-oriented household survey is below its November peak, showing a loss of 678,000 jobs. These are relatively mild job losses so far. So one can hope this will be a relatively mild recession. But frankly, no one knows for sure.... Recessions are therapeutic. They cleanse excess from the economy. Think about excessive risk speculation, leverage, and housing. Recessions are curative: They restore balance and create the foundation for the next recovery.

Yes -- Kudlow thinks recessions are good things as the job you just lost was an "excess." In fact, he is calling for economic policies that would make the recession worse:

[T]he U.S. dollar, which some are now calling the U.S. peso, should be appreciated in order to curb inflation.

Dollar appreciation might have a very modest impact on the inflation rate but it would have a significant impact on net export demand. And given that Mr. Kudlow apparently never learned international macroeconomics, let's remind him that appreciations tend to lower net exports. One would think such idiotic comments would have the editors of the National Review take the curative step of getting rid of village idiots like Mr. Kudlow. Then again -- who would write their pieces on economics if not for their group of village idiots?

Comments

[Bruce Wilder]

CNBC

[Neal]

So the question remains, is there a sustainable "locomotive" for the economy?

No one seriously wanted a recession, but the "nattering nabobs of negativism" that predicted an economic crisis now have the satisfaction of being proven correct in their assessment that the economy of real estate inflation was not sustainable.

What would you have happen? Is endless 20% annual real estate inflation possible or even desirable? When put this way, I don't think that there is anyone who could believe this. But this was the mood of the past few years--and this was the engine of growtth.

Analysis will show that the abberational real estate inflation disguised the continued downward trend of the fortunes of the American worker. The fundamental noncompetitiveness of the US worker in the world economy did not change for the better in that peiod of time. The subsequent recession and ignited inflation will hurt them the most at a point in time where they have maximum debt. They are the one who will suffer the most in the recession. Who could be happy about that? Are they the real speculators? Were they the rotten core of the system? Will crushing them cure the system of its ills?

So the answer is another bubble?

It will be awfully hard to find another way as effective in putting those globally noncompetitive workers to work.

It also will be awfully hard to find a more effective way of crippling the worker with excessive debt.

[anne]

http://krugman.blogs.nytimes.com/2008/04/08/surprising-surprises/

April 8, 2008

Surprising Surprises
By Paul Krugman

Barry Ritholtz * tells us that the president of the Boston Fed is surprised that housing isn't recovering.

This is truly bizarre. Like Calculated Risk, ** my working assumption throughout the housing boom and bust has been that history, if it doesn't repeat itself, at least rhymes: the rise in housing prices looked a lot like bubbles past, and we should expect the bubble's deflation to follow past patterns too. And that tells us that we should expect a prolonged, grinding decline in home prices, back to more or less their pre-bubble inflation-adjusted levels.

[Chart] Those who refuse to learn from history...

* http://bigpicture.typepad.com/comments/2008/04/yet-another-sur.html

** http://calculatedrisk.blogspot.com/2008/04/housing-bust-duration.html

[PaulC]

The good news is that awful little book "Who Moved My Cheese?" is no longer in fashion. On the next big round of layoffs, you'll all receive copies of the vastly improved motivational guide "Who Cleansed My Excess?"

[save_the_rustbelt]

Not to agree with Kudlow, but one tiny benefit of a recession is that struggling and dying businesses get a merciful end. There is a reallocation of capital.

Sort of like losing weigh by having the flu, not something to be recommended.

There will always be recessions. How we respond is the key.

[RedCharlie]

Neal,
"So the answer is another bubble?" No, and to imply a bubble is the only alternative to "liquidation" and cleansing of "excess" is a straw man argument. Moreover, if you are looking for locomotives, then to raise the value of the dollar would be a sure fire way to shut down the one little engine that we do have: export growth.

I do agree with you, however, that the asset price boom masked the continual downward trend for the median American. The normal inflation we would have seen with a prolonged period of low rates was "sublimated" into an investment asset price boom. This was because only the top 20% has really seen any income growth since Bush took office, the rest of us have seen incomes flat or declining in real terms. But the "Bush Boom" has been real for the top quintile, especially the top 1%. But this narrow sliver of the population used their massively rising income to invest, not to consume staples. As Greenspan has illustrated with his comments that the Fed is not responsible for asset prices, house prices are not part of our conventional measurements of inflation.

But I would agree with Krugman that the declining fortunes of the American worker have little to do with declining competitiveness. After all productivity growth has increased, not decreased, in the last 20 years. Rather it's due to a combination of factors, chief among which are regressive tax policies. Add to that a strong dollar which makes American workers in such fields as textiles uncompetitive with imports even though their productivity is much higher. Add to that a health care tax imposed by private insurers on employers that drives up the cost of American produced goods and services. (Note that I DO NOT favor repealing the health care deduction WITHOUT also introducing single payer health care for ALL americans).

Yes, the Fed helped cause the problem, but let's not through Keynes' baby out with the bathwater of lax regulation. Greenspan's claim that the Fed isn't responsible for asset prices is misleading, as a bubble and crash in asset prices helped precipitate the Depression, and the Glass-Stegall act specifically forbade banks from selling the assets for which they were lending money and also created the Fed with power to regulate the banks. The financial innovation of which Greenspan was so proud was merely a way to get around regulation and other barriers to conflict of interest. Just because the Greenspan Fed has done a bad job does not mean that the job doesn't need to be done. It just needs to be done right.

The problem we have now was not caused merely by a prolonged period of low interest rates, but also depended on a lack of oversight over completely new financial instuments. I'm not sure what the solution is, although I'm quite sure that following Kudlow and Mellon off the deep end would mean privation for us all.

Finally, I have to vent about the constant theme that American consumers are to blame for living beyond their means. Yes, I'm sure people take/took out home equity loans to pay for vacations and boats. And you know, why shouldn't they? I read so much about how our economy depends on consumers that it bugs me when they get blamed for our mess. But my real quibble is that house prices rose for everybody, not just speculators and spendthrifts. Yes, I'm in debt, but the money didn't go to pay for vacations in Europe. Try health care, graduate school, groceries, and gas. I got a good fixed rate on my home but my mortgage payment still eats up a quarter of my take home pay. I'm holding on, but not by much. Meanwhile the economy still goes down while I watch more and more of my co-workers get outsourced to India and Poland.

Frankly I'm cheering the dollar down every step of the way. Yeah, gas will get more expensive, and also cheap plastic junk from China, but if it means a few more Americans get to keep their jobs (including myself) then it's better than the alternative. Cheaper junk at Wal-Mart means nothing if the reason it's cheaper is that your job just got shipped overseas.

[Paul G. Brown]

I'm gonna say a couple of things that are mildly unkind.

See where Andrew Mellon babbles in Herbert Hoover's memory about '...work harder, live a more moral life...'? That's an emotional sentiment that's also fundamental to Kudlow's world view. It's a manifestation of the psychological bias that accrues from personal success; what "I" have achieved is entirely due to my "working harder and living a moral life". The failure of others is due to their laziness and immorality.

To admit otherwise, "I" would have to face the reality that "my" success is the largely the consequence of pure luck; being born white, male, affluent and moderately intelligent in a culture which privileges these things. Folk like Kudlow, Mellon and Hoover cannot embrace the idea that public policy has personal consequences. To do so would undermine their personal sense of self respect.

[Neal]

No, those are genuine questions that I have no answer for. Real estate inflation created a lot of money, it also created a lot of debt.

Real estate was the primary locomotive for the economy the last few years. It has run out of steam. My question is--where do we go from here? The boom of the last few years was an unhealthy thing--totally unsustainable. The current administration was the witting or unwitting beficiary of the social opium of apparent wealth (my guess is witting). The longer it could be sustained, the longer they could remain in power. We need to find a sustaianble way forward.

Yes, productivity gains have been tremendous. Those gains due to technology are not the sole preserve of the US worker though--there are no more secrets in the world economy. Also, there is good research showing that productivity gains are skewed up by the "off-shoring"--fewer US workers (plus more overseas workers) doing the same or more work leads to apparent gains in productivity. As a result, I view productivity gains as somewhat less than convincing in the argument ralted to worker competitiveness.

As for the theme of "American consumer is to blame", all I can say Elm Street is Wall Street writ small. Somehow, we have all become convinced that what we have is what we are.

[nemo]

Larry Kudlow was certainly singing a different tune in August 2007, only 9 months ago, when he was screaming and ranting for the Fed to cut the fed funds rate to rescue the financial markets from their high-risk excesses:

http://delong.typepad.com/sdj/2007/08/noooooooooo.html

"Pour in the Cash [Larry Kudlow]: [M]y campaign to get the Fed to permanently inject new cash into the banking system and deal with the dysfunctional commercial paper market — as well as the general credit freeze-up. There’s housing price deflation... commodity deflation.... Stock prices for materials are off nearly 13 percent since July 19, while metal and mining shares are off 16 percent. There’s the deflation of loan values, both CDOs and CLOs."

[N]

Didn't Kudlow used to work at Bear Stearns?

[RedCharlie]

"My question is--where do we go from here? The boom of the last few years was an unhealthy thing--totally unsustainable"
Yes, but recession or bubble are not the only alternatives. Keynes pointed out that whatever the excesses of the 20's, that was no reason that perfectly good productive capacity should lie idle. Yes, we need a bit of "creative destruction" here and it is a good thing that Bear Stearns is no more. But the last thing one wants in a recession is for everybody to tighten their belt at once.

"We need to find a sustaianble way forward." Amen to that. I'm not exactly sure what that way is, but I'm sure it involves more progressive taxation and more equitable distribution of income. Just consider how the past 8 years would have looked under a Gore presidency. No windfall tax breaks for the rich, more federal assistance to the middle class with education and health costs, no trillon dollar Middle East quagmires, more spending on infrastructure and energy research, etc. We could have seen a boom similar in scale to the real estate bubble, except paid for by rising incomes of the middle class, not mortgage equity withdrawals.
Krugman makes a good empirical argument that government policy has a big effect on income distribution. I don't think the Clinton boom and the Bush bust are political coincidences.

"gains due to technology are not the sole preserve of the US worker", true, my point was merely that they are also not the sole preserve of foreign workers. The US worker is still among the most productive in the world, on a per hour basis. What we need to turn the trade deficit around is a weaker dollar and higher wages abroad. And both are happening, if belatedly.

Finally, your conflation of Elm Street with Wall Street just sounds like a complaint about materialism. You can take it up with your priest or your shrink, but it doesn't help in this context. "Keeping up with the Joneses" is such a trope; not everyone aspires to live the life of Paris Hilton. For most people, their priorities are housing, health care, and education. For most Americans the bulk of the cost of keeping up with the Joneses goes to paying for a decent house in a decent neighborhood with decent schools, to paying doctor bills, and to paying college tuition/student loans. It's not going to Starbucks and cruises. Books like "The Two Income Trap" go into how the rising cost of paying for these things has put more and more American families into more and more dire financial straights.
But even if you forced everybody to drink Folgers, drive nothing larger nor more fancy than a Camry, and vacation in state parks, it wouldn't matter more than a hill of beans. It's like right-wingers love to talk about how even poor people have TV sets, so they can't be too poor, right? But it doesn't matter. What matters is that the cost of housing, health care, and education have skyrocketed while incomes have remained flat or declined. An stay in the hospital could bankrupt you if you don't have insurance, whether your jeans cost $150 or $15.

[Ken Houghton]

If inflation is such an issue, the Fed has an appropriate monetary policy: raise short-term rates. A higher dollar should follow, and those "struggling and dying businesses" reffed by s_t_r above will go The Way of All Flesh as well.

Of course, a few financial institutions ("privatize the profits, socialize the risk") might end up going under or being merged as well.

N - There's a reason some of us refer to him as Cokehead. Having seen him close-up when he was at his worst--just before Bear terminated him--I'm happy he's clean now. Unfortunately, he's gone from graduating from Woo-Woo to just being woo-woo.

[robezhs]

it appears that economic growth cannot take place without monetary expansion, because there are limits to how much 'more effective and innovative' you can be for yourself and there is huge 'liquidity/viscosity' problem of w/o-money-medium conversion of 'i'll do this better for you and you do that better for me and both of our lives will improve' (not literally w/o money, but an improvement w/o extra money).
resulting monetary expansion, which by all modern theories is known for its vices, will result in huge amounts of 'non-productive' expansion which just cannot be sustained. so it has to be cleansed. it's of course a disaster on a personal level, but economically it's hard to disagree that a job that is paid for selling an item above it's price (i.e. above anything, anyone willing to live in that house could possibly produce during his lifetime) is net loss as is the whole activity. and there's zillions of such instances in the world. myself including.