Paul Krugman's Universe of Stupidity

Krugman sharts once again with an amazing bit of partisan hackery:

But while the blockade is over, its lessons remain. Some of those lessons involve the spectacular dysfunctionality of the Senate. What I want to focus on right now, however, is the incredible gap that has opened up between the parties. Today, Democrats and Republicans live in different universes, both intellectually and morally.

Ah, here we go - an appeal to morals.  Why did I know - right in the second paragraph (and why did you bury the leade, Paul?)

Take the question of helping the unemployed in the middle of a deep slump. What Democrats believe is what textbook economics says: that when the economy is deeply depressed, extending unemployment benefits not only helps those in need, it also reduces unemployment. That’s because the economy’s problem right now is lack of sufficient demand, and cash-strapped unemployed workers are likely to spend their benefits. In fact, the Congressional Budget Office says that aid to the unemployed is one of the most effective forms of economic stimulus, as measured by jobs created per dollar of outlay.

But this makes an assumption Paul, and one that you and the rest of the Democrats have refused to face (to their credit, the Republicans haven't faced it either!): This sort of "bridge" or "pump priming" only works if there is underlying final demand that can come back.

But here's the problem - the so-called "stimluls" didn't do much in the US.  Why not?  It stimulated China!

The Senators have singled out a particular wind project in Texas for criticism. China's Shenyang Power Group, the U.S. Renewable Energy Group and a Texas company called Cielo Wind Power are involved in a joint venture to build a 648MW wind farm. The Senators says the project is on the verge of receiving $450 million in grants, despite the fact it uses Chinese-made turbines, and that the lion's share of jobs it creates are in China.

Yeah.

In point of fact, that 1603 "green" recovery act stuff has, thus far, diverted eight out of ten dollars outside of the United States.

This belies the real issue that underlies all of this.

Take Chicago.  It used to be home to the Zenith picture tube plant in Melrose Park which, as you might surmise, made television picture tubes.  It had been there for a long time.

But in 1998 it was announced that the plant would close, as the company was losing $300 million annually trying to compete with offshored production by people working in near-literal slave conditions with no environmental laws to add cost to the product.  Thousands of good-paying local jobs disappeared.

I used to drive by that plant on a regular basis, the proud sign of American manufacturing throwing its illumination on I-294.  My parents owned a Zenith television when I was growing up.

That's a microcosm of what's happened.  We've offshored our production, by and large, to places like China.  What has replaced these jobs are positions in finance, which is a parasitic enterprise - that is, it obtains the money that is "earned" not from producing things, but from siphoning off cash flow from everything it touches.

Such a shift is inherently destabilizing.  We made up for it by running our credit cards to the moon, both figuratively and literally.  We blew a bubble first in Internet stocks and then in housing, which allowed people to then "access" (the true word, "extract", is so ugly isn't it) the faux value that we claimed it.  We, on balance, did so and spent it.

The error in Krugman's analysis is that he believes that all this "pump priming" will do the job and the economy will recover, allowing us to pay back what he avers is an effective loan.

My question to Paul and all those like him: How?

We can't support a financial system that consumes 1/4 of every dollar that goes into the economy, siphoning it off.  The margins are not there to permit that.  They never were, but refusing to attend to this, as Paul and his cohorts have done (and to be fair, the Republicans are no better in this regard!) is how we wound up with a debt bubble.

So what's the solution?

As much as you don't want to hear it there are only two answers:

1. Drive manufacturing back to the United States.  There is only one way you can compete with someone making $2/day unless you're willing to make $2/day, and that is government interference.  We have a constitutional mandate for such a thing - they're called tariffs.  Yes, I know all about Smoot-Hawley.  Guess what - trade imbalances are at their core behind a lot of depressions, and the founders were smart enough to leave us with the hammers to pound down those nails.
   
   
2. Accept a much lower standard of living for huge swaths of the American Population.  Essentially, if you're not a rocket scientists (or his equivalent) you're going to pound nails for minimum wage - maybe.

Both of these outcomes require that the financial system's "grift" shrink dramatically.  It cannot be otherwise.  But #2 means the end of the social program "backstop" that we currently have, because it cannot be sustained.

We cannot spend $1.3 trillion more than we take in via taxes for these "support programs" indefinitely.  Krugman thinks we can, but he's wrong.  Iceland thought this, Greece thought this, Argentina thought this.

You know what happened in the former and latter, right?  The middle nation in that list might meet the same fate.  Their so-called "austerity measures", from my back-of-the-envelope calculation, won't work.  It's nowhere near enough!

Now let's look at what did happen to Greece.  Their 10 year bond offering went off at 6% - double what Germany is paying to borrow for the same amount of time.

What happens if our bond carrying costs double?

We carry, today, $8,026 billion (that's $8.026 trillion) in publicly held debt in the United States.  Ignoring the $4.482 trillion in "intergovernmental holdings" (that's fancy speak for Social Security and Medicare "current issue" promises that we won't keep, as those "promises" back 20x that in claimed benefits for the next 75 years!) if we were financing the debt at our current 10 year rate we'd pay $289 billion a year.

Of course we don't do that - some of it is longer duration, some shorter.  Last year it cost us about $180 billion in total, mostly because of the collapse in interest rates.

Now let's assume that we have a "Greecefire" here in the US and our Ten Year rate goes to 7%.  Interest costs would go from $289 billion to $562 billion.

But that assumes we don't add to the debt, and we are.  In fact, we added $1.4 trillion last year and will add $1.7 trillion this year.  If we keep "pump priming" through the end of the decade (as the CBO says we will given their projections - and they are projecting GDP growth in the 4% range for the entire period!) we will go from the current $8.02 trillion to approximately $14 trillion in public debt by the end of the decade.

That figure, at 7%, would produce an interest cost of close to $1 trillion a year - or about half of all federal tax receipts.

So which is it Paul?

At some point we have to face the facts: We can't continue to spend more, as a nation or as individuals, than we make.  We cannot make promises that are impossible to fund, instead putting it off with more borrowing.  We must face the imbalances we have fostered in our economic system, along with the trade imbalances that we not only have fostered over the last 20 years but are feeding with so-called "stimulus" that instantaneously flows overseas instead of helping Americans.

There's plenty of blame to go around, but what is not helpful, and solves nothing, is ranting about how Jim Bunning's demand that these extensions in unemployment payments be offset with federal spending cuts somewhere else, or that they be taken from already-budgeted funds such as the TARP.

That, Mr. Krugman, was his objection.  Not that the benefits were being extended, but rather that they were not paid for.

The liberals are always quick to pull out the national credit card.  They've been doing so for the last 30 years.  But this sort of spendthrift approach to everything that ails us has left us with a severely-imbalanced economic structure that no longer produces enough to carry its own weight.

The (credit) drunk needs a stint in detox Mr. Krugman, not another bottle of whiskey.