Taking on Krugman: Venturing Far from Shore. . .

“I shouldn’t have gone out so far . . .” Like Santiago in Hemingway’s classic The Old Man and the Sea, I’m going out way too far. Putting a hook into something that’s well beyond my skills or strength. Actually, I expect that, unlike Santiago, I won’t even get my hook into it, and if I do, again unlike Santiago, I’ll not keep my hook in.

So, into my tiny boat and out into the too big ocean I go. Hunting Krugman. A man who I admire so much that I buy his books retail. . . He’s the big fish. The one whom I respect as much as Santiago respected his 18 foot long marlin and the raging sea.

Here’s Professor Krugman’s June 5th posting:

Where’s the money coming from?

[by Paul Krugman, June 6, 2009]

The huge borrowing by major governments, the U.S. government in particular, has confused many people — and not just Niall Ferguson. What I hear again and again is either the assertion that all this borrowing must drive up interest rates, or worries that the Chinese won’t be willing to lend us the money.

We know as a matter of principle that these concerns are misplaced: if there were a shortage of savings, the economy wouldn’t be depressed. Indeed, one way to think about our current problem is that the world as a whole wants to save more than it’s willing to invest.

But it’s always nice to have some real-world data illustrating a principle. From Brad Setser, private and public borrowing in America, as a percentage of GDP:

We’re actually borrowing less from foreigners than we were before.

Yes, the chart does indicate that households and firms are saving more, therefore, our net borrowing needs from foreigners, private and public, are less because of it. (I think that’s the Professor’s point.) The Seltser article he quotes adds another chart as well to further break out the household and firm data:

Yet, contrary to Krugman’s lack of concern, in that article Brad Seltser goes on: “Both charts highlight the risk that worries me the most. In both the early 1980s and the first part of this decade, both the private sector and the government were large borrowers. And in both cases, borrowing rose faster than domestic savings, so the gap was filled by borrowing from the rest of the world. . .” [Emphasis added]

And the highlighted text leads to my puzzlement about Krugman’s point that we are “borrowing less from foreigners than we were before.” Not its fact, but its meaning, its importance. The sheer amount of planned U.S. borrowing already in the pipeline during this decession* is greater, I believe, in all terms (per capita, per GDP, per anything) than we have faced before in our economic history, other, perhaps, than WWII or the Civil War. We are also quite likely to be still underestimating the full amount that will be needed to move the economy forward (even anemically) and to cover losses still coming to financial institutions. I think Professor Krugman may be fighting the last war, the one that led to Bretton Woods . . .

*Decession – coined here, signifies an economic collapse of greater depth than the worst American recession but lesser depth than the Great Depression. For example, at its worst a decession will cause unemployment greater than 12% but less than 20%.

Now, I’m radical, so I’m not suggesting for a minute that we choke on Republican or Blue Dog Democrat fiscal strangulation prescriptions that would lead to the impoverishment of millions for who knows how long. I do think, though, the Professor is a bit blithe in his recent post.

I do agree with Seltser, though – even though Krugman would, I bet, consider what follows to be neanderthalic:

But now, [Seltser continues,] yields are low (even after the recent rise in the yield on the ten year Treasury bond), and need to be low to support a still weak US economy. And China (and others) are visibly uncomfortable with their dollar exposure; banking on their continued willingness to finance a large external deficit seems like a stretch. . . The challenge this time around consequently will be to bring down the government’s borrowing as private borrowing resumes. . .

And there’s the rub. I don’t think we will be able to bring down government spending at a fast enough rate to meet the challenge Seltser identifies. Our borrowing needs are staggering. And, as I’ve written here before, I think it’s time for us to forge ahead with radical policies to put in place new social welfare programs, most notably nationalized healthcare. It’s time that Democrats practiced the GOP strategy of “shock capitalism,” or, in our case, let’s call it “shock progressivism.” We must make a daring attempt to land the big fish: social reforms that benefit all Americans, revive the middle class, promote unions, regulate capitalism meaningfully, ensure equality, and expand and protect safety nets.

But that’s what makes this time different of course. We’ll be deficit spending massively and different outcomes will result, and then, from somewhere in this big world a new Keynes will arise who will rock the economic world with new principles and, I believe and hope, a less mathematical, less “social sciencey,” less pseudo-scientific, but more humane economics. Perhaps we’ll call it something like the old term “political economy,” but it will be far less self-assured than the economics of today, and I’m beginning to wonder if it will be based upon the almighty dollar, or upon either Keynes or Friedman.

In any event, in this crisis, using the old hidebound economics of either of the competing schools, we’re in a small boat and the ocean is so very big. We’ve got a big fish to catch and to land without, like Santiago, the effort killing us . . . and the big fish as well.

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And before you leave, please