I didn't even want to write about Krugman's absurd piece today: "Mugged By the Moralizers," in which he completely fails to understand what has America so angry. Krugman mis-diagnoses the problem:
"“How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills?” That’s the question CNBC’s Rick Santelli famously asked in 2009, in a rant widely credited with giving birth to the Tea Party movement.
It’s a sentiment that resonates not just in America but in much of the world. The tone differs from place to place — listening to a German official denounce deficits, my wife whispered, “We’ll all be handed whips as we leave, so we can flagellate ourselves.” But the message is the same: debt is evil, debtors must pay for their sins, and from now on we all must live within our means.
And that kind of moralizing is the reason we’re mired in a seemingly endless slump."
Krugman brushes aside "debt moralizers" as wingnuts who want others to suffer, and mockingly derides "moralizers" as the root of the problems, where he of course sees the solution as spend spend spend.
Fortunately, a few comments on Krugman's piece really hit the nail on the head, and are very worthy of publication here:
From "DC" in NJ:
"As a Democrat but one who lives closely with Tea Partiers, I have to say you are seriously misreading the problem. The complaint is not at all about morality or moralizing, although certainly there is an undercurrent of righteousness. It is about what the Tea Partiers regard as a vast fiscal irresponsibility and a deep inequity in what they see as the government enabling the 'lazy' poor and the irresponsible big spenders.
The undercurrent is that while you and I were scrimping and doing without a vacation and a new bathroom, our neighbor was spending idiotically with money he didn't have. And who is rewarded? The neighbor. While bankers and Wall Street was gambling with money that wasn't theirs, you and I were working two shifts or 10 hours each for both husband and wife. And whom does Obama reward? The bankers. While you and I were responsibly spending $500/month on health insurance we could barely afford, our low income neighbor decided against health insurance - although he enjoys drinking beer and partying - and when he had needed medical he just went to emergency, free of charge because he has no assets. Whom does the government support? The beer guzzling neighbor (I have seen this personally many times by the way--something higher income people in their gated communities never see).
That is what Rick Santelli's rant is about---it is very little to do with moralizing and everything to do with a deeply American sense that things ought to be fair, that hard work should pay off and laziness and irresponsibility ought to be punished.
By miscategorizing the problem you cannot find the solution; by condescendingly dismissing the complaint as merely one of 'moralizing' you ignore that there is indeed a valid world view here that the Tea Partiers and others are addressing. Do I agree? No. But that doesn't make their world view simplistic and without any merit..."
Kudos DC - very well put. It's the parable of the Ants and the Grasshoppers, Krugman - read it.
I also liked comment # 81 - from Mike in Shenzhen, but I don't want to excerpt it here as it brings up a little more potential for off-topic nonsensical backlash in the comments.
-KD
23 comments:
I am no fan of "The Krugmonster". From another post of his that gets me all worked up:
"The End Of Western Civilization
Gauti Eggertsson writes in to follow up on my piece on quantitative easing in the Great Depression. He points me to a 2008 paper (pdf) in which he shows that the coming of FDR, combined with America’s exit from the gold standard, was seen by markets as a huge regime change; it was, said FDR’s own budget director, “the end of Western civilization.”
This regime change immediately shifted expectations of future inflation, well before there was any actual surge in monetary base. That, rather than the quantitative easing per se, is how monetary policy — or more accurately, expectations of future monetary policy — gained some traction in the 30s liquidity trap.
Again, an important lesson — but how relevant is it to current circumstances? Bernanke, unfortunately, cannot convince people that he’s bringing the end of Western civilization."
Clowns like The Krugmonster would prefer you panic and buy 10 tons of rice and 5 houses out of fear your money will be worthless just to support "aggregate demand" on one of his stupid equations.
yup, good one. given the choice between a robust and growing economy where we let some speculative behavior slide or deal with it selectively and intelligently and a depressed economy where opportunity is withheld from some basically random set of people -- mostly unskilled workers and hardly the perpetrators here -- you'd choose the depressed economy. that's fine, and your opinion, but i think it's a lousy one.
not to mention the fact that the politicians behind the tea party are basically looters and liars. do you think the bankers and doctors and drug reps would get any LESS rich under a republican regime? (what party do you think they are supporting?) excuse me, but it's difficult not to be cynical when i see how these people are talking.
let me put it another way. the way i see it, we have a responsibility to our macro-economy in the same way that we have a responsibility to other forms of mass order. the reason for this is simple: the success of individuals is largely contingent on the growth of the economy as a whole. it is very difficult for individuals to move up financially when the economy is contracting.
(the way i like to think of it: i've worked for companies that were expanding and for companies that were contracting. guess where there is more opportunity? same thing for the macroeconomy as a whole.)
not to mention the fact that if you spend your life angry about what is and isn't happening to other people, your life is probably going to suck, so you'd best get over it. life isn't fair, and the markets and macroeconomy isn't going to make it any more fair.
Mr Kugman should read up on the results of behaviour economics, one of which is that cooperation only happens when the gains are split fairly. Considering this result it should be less of a surprise for him that people are outraged about policies they deem unfair, even if rationally they would have to concede that they would benefit marginally from these policies as well.
Good point, Owe, and yet, every time I write about the subject, I get comments like the Anon before you... they don't understand that moral hazard is not some Randian wingnut fantasy. and a "robust and growing economy" has nothing to do with limitless deficit spending. Santelli himself responded sarcastically today ""How dare we take away their spending privileges, those chosen few with letters after their name who say the only problem with the medicine is that we didn't give a big enough dose." "
once the incentive to act responsibly goes away, society crumbles. and no - i'm not being dramatic.
Anon - ants and grasshoppers. read it. read it to your kids.
same anon here as above.
i agree that the incentive to act responsibly is important -- both individually and collectively.
i know the ants and grasshopper story. it's not relevant here. saving food is completely different from saving money. saving food means that you are putting something real away for future use. saving money doesn't mean that at all. it means that you have a future claim on someone else's economic activity. that in turn is contingent on the robustness of the economy.
krugman et al would be very happy if you took your money and bought something real now that you would use in the future. that would put people to work, or it would raise asset prices (thereby causing people to work hard at creating more such assets, because it could be done for profit). that would be an excellent way out of the mess we are in.
but hoarding financial assets is the exact opposite of this. when it's done en masse it's akin to saying Let's shut down the factories today so that we will be able tomorrow to buy the things the factories make. it doesn't make any sense at all.
Good stuff.
same anon here.
another way of saying what he usually is saying (not so much in this article) is that our economic problems are caused by hoarding of financial assets. a more "moral" way of putting that -- since you like to talk about moral hazard and such -- is to say that people have decided not to directly participate with their money in developing the real economy. they have decided not to invest, but instead to accumulate nominal claims on future value backed by nothing productive, often just tax dollars.
personally, i find the fact that so many people are willing to "save" their money rather than invest in productive activity morally repugnant. i'm not sure why more people don't make the same conclusion.
It's funny: human lifespans have never been longer but it seems lately like we've never been more short-sighted. A thousand years from now, they'll probably be able to turn off a lot of the cellular aging switches and modifications to our bodies and brains will be like iPhone apps.
Hopefully it will mean more efficient people that do more with a smaller population and consume less as a whole. Instead, we're arguing over what kind of pissed off we should express when we vote tomorrow!
I like Krugman -- and I mostly agree with his story of how the crisis happened, and with his advice for what ought to be done, the thinking behind which he explains more fully in these two essays:
http://www.nybooks.com/articles/archives/2010/sep/30/slump-goes-why/
http://www.nybooks.com/articles/archives/2009/jun/11/the-crisis-and-how-to-deal-with-it/
As per Rick Santelli, I got the chance to meet him on the CBOT floor several days after his famous rant.
It was unforgettable. Santelli didn't know me from Adam -- and so was at first a little wary -- but after learning a little about me he opened up, even became effusive.
He is NOT a right-wing nut. He's a former pit trader (who obviously still works on the floor) and so he thinks like pit traders.
Santelli took a LOT of criticism (from people I otherwise think smart) for calling underwater homeowners "losers." But his critics are ignorant of the specific meaning that "loser" has on the trading floor.
Independent pit traders ("locals") do hundreds of "scalp" trades every day; some are profitable ("winners") and some are unprofitable ("losers").
In his rant Santelli was (IMO) making an analogy between over-leveraged homeowners (who gambled with HELOCs to buy extra bathrooms and new kitchens) and similarly leveraged pit traders who gamble on tick movements.
HELOC-ed homeowners and futures traders occupy similar positions with regard to risk: being highly leveraged, small movements can make or break them.
But the treatment afforded to homeowners' "losers" is nothing like that accorded to futures traders.
Pit traders whose "losers" exceed their "winners" are "blown out," "busted"; they move into their parents' basements and live "small."
But leveraged homeowners who gambled and lost with HELOCs apparently have a call upon the Treasury to reduce, cover or make-good their losses.
This seeming fact enrages traders.
Pit traders & HELOC-ed homeowners both made leveraged bets. But the locals have to eat their "losers" in silence, while homeowners win the sympathy of the POTUS & of the Left-leaning blogosphere (Paul Krugman, Yves Smith, Felix Salmon, Mike Konzcal, et. al.) who advocate something euphemistically called "principal reduction" -- fancy talk for 'gift,' 'free money,' 'welfare.'
My last point is this:
At the end of my short visit with Santelli he began railing at me, shaking his fist, bewailing the stupidity & incompetence of people like Larry Summers & Tim Geithner, and bemoaning the repeal of Glass-Steagall.
Santelli bore down on me, waving the sheef of papers in his hand and asked me:
"Do you know who the only Senator who voted AGAINST the repeal of Glass-Steagall was?"
I admited I didn't. And Santelli replied, as if he were invoking the name of his hero: "Paul Wellstone."
So, there you have it: the man whose rant launched the Tea Party also idolizes one of the most politically liberal Senators of the modern era.
Take that Sarah Palin -- and all you Lefty bloggers.
anon - you can sign your posts with initials - it makes it easier.
but anyway, you summed up your view in a simple sentence which describes why it boggles my mind: you find savings repugnant.
"personally, i find the fact that so many people are willing to "save" their money rather than invest in productive activity morally repugnant."
Ants save. Grasshoppers constantly lever themselves up with more debt. While my dad was being an ANT, living in his old, crappy kitchen, watching his old crappy TV because he didn't want to get himself into financial trouble, others were spending money they didn't have on flat screen TVs and new pools. Now, when prices come down, the savers will be, and SHOULD be rewarded. they should reap the benefit of their prudence.
M -
of course, one big problem was the bank bailouts - which nullified that "capitalism must have losers" thesis - and perpetuated a mantra of moral hazard throughout society. By bailing out the banks, we instilled in everyone a "hey - the banks got bailed out, i should get bailed out too" mentality. It's another reason why the bank bailouts were so destructive psychologically.
Really want to agree with M's nice comment, except traders know they're swimming with sharks. Things are less black and white with homeowners taking risks on making capital improvements. Using HELOCs to consolidate credit card debt, okay, but remember Greenspan refused to even acknowledge the existence of a housing bubble. The average person had no ability to decode the cryptic term "irrational exuberance." Plus, you're not going to convince me that the lenders and their appraisers were in on it, everyone feeding the MBS monster.
So I see principal reduction as an ex post balancing of the equation between consumer and lender, unwinding a fraudulent market, rather than as a freebie/windfall for the consumer. The accounting rules change didn't help matters.
s/b:
the lenders and their appraisers WEREN'T in on it
TZ - does the average person have the ability to determine what he can afford to spend? or not?
i think he does, and claims to the contrary disgust me.
as Krugman's commenter Mike in Shenzhen noted:
"Any way you look at it, you are advocating a massive transfer of wealth from people like me who saved their money and lived within their means to people who spent more than they could safely afford."
I think the argument is the result of cognitive dissonance - two incompatible beliefs. One can agree with the Santelli mindset, but even if that result is what happens, how do you avoid the paradox of thrift and some pretty fundamental economic theories regarding GDP?
If GDP = Consumption + Investment + Govt_Spending + Net Exports, then what is the solution the this board proposes?
What happens under the preferred Tea Party resolution that somehow escapes a large hit to GDP? You'll have to make some pretty strong arguments about how the private sector quickly responds with job growth and why the consumer starts spending at a 3++% annual growth rate. In the middle of personal & corporate deleveraging and with a large output gap.
Strategic debt is not clearly not what the US has accrued in the past several 15 years, but there is a case for strategic debt in the face of a sustained output gap. Is it better to have productive assets lying fallow and growing rusty with disuse (the US workforce, capital equipment, productive processes), or to incur debt to drive demand to alleviate those conditions, with the idea being that the future incremental growth from NOT letting those assets waste more that pays for the debt incurred to make that demand happen.
A closed economic system is NOT like a household. What makes sense for a household does not necessarily make sense for the entire economy. That is the core misunderstanding, I think, and what Krugman tries to argue on behalf of.
Steve - who says GDP can/will/should grow constantly? It shouldn't/can't when the growth isn't "organic" - which ours wasn't - it was based on financial engineering.
those non-productive assets you alluded to are what Anon was talking about - they aren't factories and workers - they are IDLE DOLLARS!!!
I refuse to have the MMT debate again in these comments today, but the point is that Krugman's solution steals from savers (via money creation and inflation). More debt and more spending is again a transfer of wealth from those who saved to those who did not.
Of course we can spend spend spend as much as we want to - we have the printing press. We can inflate our debt (AND OUR SAVINGS!) away if we want to.
Alternatively, we could let asset prices such as house prices FALL to reasonable levels instead of trying to prop them up to unreasonable levels - letting them fall would reward the SAVERS, while propping them up rewards the SPENDERS.
The unwind is between lender and consumer, the two parties to the transaction. TARP was, is, and always shall be complete bullshit. What can I say? We're represented by a bunch of captured a-holes that put the taxpayers and our future on the line to backstop scumbags. Supposedly Dodd-Frank is setting up improved resolution of insolvent institutions -- yeah, right. Again, what do you want me to say?
TARP using taxpayer wealth as cannonfodder got me political for the first time in 20 years. I was apeshit and still am.
But all of that just confuses the issue here, which is between lender and consumer. Lenders, who were completely at fault on one side IMO, made loans they should not have made on bubble-valued collateral they helped inflate to consumers who were partly at fault for being greedy/careless and partly innocent of the big picture and partly victimized by predatory lending.
Dude, homeowners have already gotten thrashed to the tune of 30% on their home values. How long before it goes back up - 10, 20 years? That's net worth. Banks are undersecured. This will remain an unstable situation for years if the consumer doesn't get a re-set to bring principal in line with FMV.
And where do you think the principal reductions will go? For many, it will just keep them solvent. For some, it will free up monthly income to buy stuff again, supporting manufacturing instead of FIRE. Shit, give homeowners who have played by the rules a tax credit for not opting in to a principal reduction program. I don't care. I'd support that.
KD wrote: "but the point is that Krugman's solution steals from savers (via money creation and inflation). More debt and more spending is again a transfer of wealth from those who saved to those who did not."
I agree, and I am a saver with no debt. I would relish deflation if I only had to think about myself.
But there is something called a Society, made of a Community of People, who elect officials to make decisions partially for the Common Good. Taxes steal from me, inflation steals from me, paying unemployment benefits to other people steals from me. The War in Iraq steals from me. Medicare Part D steals from me and gives to the old.. Unfunded tax cuts give me money and steal from my children, Me me me.
How about Us Us Us?
I know that anything even approaching that concept is reflexively called Communism, which is sheer intellectual laziness at best and often simply small-hearted viciousness. It's not the 1960's, the Commies aren't taking over, and private property rights are still the fundamental economic basis in the world that matter.
True, GDP doesn't have to always grow. But since the population is always growing, your argue that the government do nothing while the pie gets smaller and the slices smaller still, and the distributed pain is fine because you got yours. That is a fine mindset in the micro, but I disagree with that mindset for the macro.
I guess it really does come down to one's view of what society is, and what the proper role of government is in that society.
I do have to take exception with this statement - "While bankers and Wall Street was gambling with money that wasn't theirs, you and I were working two shifts or 10 hours each for both husband and wife. And whom does Obama reward? The bankers." Bush (and Paulson) started this mess, and Obama and Geithner are continuing the mess. I believe the rich are laughing as most of America engages in the Democrat vs. Republican spat. Meanwhile, in the real struggle of the corpatocracy (rich) vs. the people, the rich are laughing all the way to the bank as the people are fighting the wrong war. - MDE
> the proper role of government
Right, that's the question. (I am pretty sure you would not relish deflation, but leave that aside.) One place I like to start when the haves start ranting is with government subsidies.
A quick look at the JCT's most recent report on tax expenditures finds the following individual subsidies for 2009-13:
- $597B, retirement (Keogh/DB/DC/IRA)
- $573B, mortgage interest deduction
- $568B, health care exclusion
- $419B, reduced dividend/cap gains
- $315B, Medicare exclusion
- $261B, earned income credit
- $184B, charitable deductions
- $173B, cafeteria plans
- $160B, step-up basis
- $160B, child tax credit
- $159B, life insurance
- $126B, property tax deduction
- $116B, making work pay credit
That's roughly $4 trillion in subsidies, of which programs that largely benefit those who really have to scrimp to live represent 10%.
The putative moral hazard of 'bailouts' that maybe hit $1 trillion isn't quite as vanishing as that of things like unemployment insurance and emergency care, but it's small compared to these. Where are the worries about these ongoing, heavy subsidies to the investor class?
FD: I met Paul Wellstone when we were in Minnesota. Very nice guy, very talented politician, imperfect as anyone but the Senate could use a hundred like him. RIP.
good comments guys.
WCW: "Where are the worries about these ongoing, heavy subsidies to the investor class?" ahhhh... but surely you realize that so much of our economy is based upon the wealth effect from our paper assets. The tipping point was when it even spilled over into paper values of real assets: home prices!
MDE: of course it's not about republican/democrat blame game.
Steve - yes - it does come down to what we believe the role of government is. Capitalism isn't perfect, but it's the best available option. That's why people flee communist countries to come here. I want to keep it that way. In the past few years we've bastardized capitalism brutally. Am I saying that extending unemployment benefits past 99 weeks makes us all commies? of course not - but the economic models do not model human behavior very well. Moral hazard is very very real, and the tipping point can be fast and furious. That was my entire point in posting the Krugman comment in the body of this post - the commenter enunciates the anger very clearly and very real-ly. It would flat out shock me if people didn't understand it.
TZ - yes - borrowers and lenders. Yet, we have the Government in the way screwing it up. But what's ironic is that you say "backstop scumbags" yet you ignore the benefit that backstopping these scumbags had on the common man. It's hard to measure, but you can be damn sure that Wall Street wasn't bailed out to keep the CEOs rich - it's really not true. It's because all of us idiots have all of our wealth in all of these crappy paper assets - stocks, bonds, even homes (not everyone treated homes like a paper asset, but...). AlL i mean to say is that I was against the wall street bailouts, and I'm against the main street bailouts. You seem to be saying you like main street bailouts because they help the economy - but that was also the express purpose of the wall street bailouts.
Those people who are owed money that they feel would be devalued if the government printed money or otherwise dispatched debts should look to France in the late 1920s.
France was owed lots of money. It refused to negotiate. It refused any sort of settlement. It had no real hope of collecting on the debts. Still, it stuck out its tongue at Germany. Crazy Hitler took care of that in short order and it wasn't pretty.
If money doesn't flow from accumulators to those that need funds, the economy won't work. Period. This can't work as debt forever. You may not like taxes, but that's how some of this redistribution occurs (by taking money away from the rich). This also occurs through government deficit spending. Get rid of those, and there is no mechanism for this transfer, and things get ugly.
About this reply to Krugman from DC:
Remind me again when anyone in the Tea party ever raised his/her voice to publicly denounce the big banks?
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