No, No, No! First Loot, Then Burn...
Three Flavors of the Economic Crisis

Paul Krugman and Mike Konczal on the Political Economy of the Lesser Depression

Paul Krugman:

The Political Economy of the Lesser Depression: Everyone in the forecasting business is scrambling to mark down both their estimates of second-quarter growth and their forecasts for later in the year.... [t]errible growth prospects; low inflation; oh, and low interest rates, with no sign of the bond vigilantes. Ordinary macroeconomic analysis tells you very clearly what we should be doing: fiscal expansion and monetary expansion by any means we can manage; in fact, the case for a higher inflation target pops right out of just about any model capable of producing the kind of mess we’re in.

And what are we talking about in policy terms? Spending cuts and an end to monetary expansion.

I know the arguments — fear of invisible bond vigilantes, fear that 70s-style stagflation is just around the corner despite the absence of any evidence to that effect. But why do such arguments have so much traction, while everything economists have spent the last three generations learning is brushed aside?

One answer is that macroeconomics is hard.... But the susceptibility of politicians — including, alas, the president — and pundits to these wrong ideas demands a deeper explanation.... [T]he wealthy [are] gravitating toward views of economic policy that make immediate sense in terms of their own interests, and politicians believing that only these views count as Serious because they’re the views of wealthy people.

But the upshot is terrible: more and more, this really does look like the Lesser Depression, a prolonged era of disastrous economic performance. And it’s entirely gratuitous.

Mike Konczal:

A Response to Corey Robin on The Political Idea of Monetary Policy: [M]onetary policy balances the relationship between savers and borrowers.... Given the concentration of wealth at the top and the indebtedness of everyone else, it’s arguable one of the most important political projects out there. From a series of legal codes favoring creditors, a two-tier justice system that ignore abuses in foreclosures and property law, a system of surveillance dedicated to maximum observation on spending, behavior and ultimate collection of those with debt and beyond, there’s been a wide refocusing of the mechanisms of our society towards the crucial obsession of oligarchs: wealth and income defense.  Control over money itself is the last component of oligarchical income defense, and it needs to be as contested as much as we contest all the other mechanisms.

If one of your primary political objectives is income defense then anything that increases, as Yglesias puts it, “the cost of hoarding cash,” is a major problem....

It seems like a lot of historians and political scientists are turning their focus to the 1970s as the time when the liberal coalition fully collapsed and conservatism found its legs (see this Rick Perlstein summary in The Nation).  I’ll leave it to others to figure that out, but it certainly seems like the 1970s stagflation was the death of the Keynesian economic agenda.  And in the same way the strong language of justice disappeared from liberal lexicon in the 1960s, the language of inflation, money and the demand in the economy disappeared in the ashes of the 1970s....

[G]oing back to the Cross of Gold speech, through Franklin Roosevelt’s abandonment of the gold standard and aggressive price targeting, progressives and liberals have had a long-tradition with monetary battles.  These battles have disappeared from the agenda, but it needs to come back as we have the right answer: money is a social creation, one that the government has a responsibility to use to stabilizing growth, prices and full employment with a view towards building a future without overheating the system or letting it choke to death from a lack of oxygen.

Back before World War I there was a hard-money politically-powerful rentier class: landlords whose lands were let out on long-term leases at fixed nominal rents, coupon-clippers whose money was in nominal government bonds or private bonds or mortgages. They did not benefit from faster economic growth and lower unemployment. They lost significantly from inflation and devaluation.

But today there is no such rentier class. Even--especially--the shareholders and option holders of JPMorganChase make much more money with 5% unemployment and 5% growth than with 9% unemployment and 2% growth. 5% unemployment and 5% growth turns their lead troubled fixed-income assets into silver. 5% unemployment and 5% growth turns their equity positions into rivers of gold. It greatly increases the confidence of their creditors that JPMC will still be around in a decade--and so allows them to leverage up cheaply and profit even more from a general rise in financial asset values.

Wall Street especially stands to gain the most from a rapid recovery and a high-pressure economy--even one that comes along with slightly higher rates of inflation.

The problem is not that the modern state is an executive committee[1] for managing the affairs of the rentier class: there is no rentier class and there has not been one for a century. The roblem is not that the modern state is an executive committee for managing the affairs of the bourgeoisie: every day I pray to the Holy Name of the One Who Is that it become such...

[1] I know, I know: Marx and Engels did not write "the modern state is an executive committee for managing the affairs of the bourgeoisie". Instead they wrote: "he executive of the modern state is but a committee for managing the common affairs of the whole bourgeoisie". For Marx and Engels in 1848, the democratically-elected legislature of a modern state (one that allowed elections, at least) was the friend of the people and the arena for socialist politics.