Krugman’s Dopey Diatribe Deifying The Public Debt (Demo)

On August 23, 2015, David Stockman writes on Contra Corner:

Actually, dopey does not even begin to describe Paul Krugman’s latest spot of tommyrot. But least it appear that the good professor is being caricaturized, here are his own words. In a world drowning in government debt what we desperately need, by golly, is more of  the same:

“That is, there’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt.”

Yes, indeed. There is currently about $60 trillion of public debt outstanding on a worldwide basis compared to less than $20 trillion at the turn of the century. But somehow this isn’t enough, even though the gain in public debt——-from the US to Europe, Japan, China, Brazil and the rest of the debt-saturated EM world—–actually exceeds the $35 billion growth of global GDP during the last 15 years.

But rather than explain why economic growth in most of the world is slowing to a crawl despite this unprecedented eruption of public debt, Krugman chose to smack down one of his patented strawmen. Noting thatRand Paul had lamented that 1835 was the last time the US was “debt free”, the Nobel prize winner offered up a big fat non sequitir:

“Wags quickly noted that the U.S. economy has, on the whole, done pretty well these past 180 years, suggesting that having the government owe the private sector money might not be all that bad a thing. The British government, by the way, has been in debt for more than three centuries, an era spanning the Industrial Revolution, victory over Napoleon, and more.”

Neither Rand Paul nor any other fiscal conservative ever said that public debt per se would freeze economic growth or technological progress hard in the horse and boggy age. The question is one of degree and of whether at today’s unprecedented public debt levels we get economic growth—–even at a tepid rate—–in spite of rather than because of soaring government debt.

A brief recounting of US fiscal history leaves little doubt about Krugman’s strawman argument.  During the eighty years after President Andrew Jackson paid off the public debt until the eve of WWI, the US economy grew like gangbusters. Yet the nation essentially had no debt, as shown in the chart below, except for temporary modest amounts owing to wars that were quickly paid down.

In fact, between 1870 and 1914, the US economy grew at an average rate of 4% per year——the highest and longest sustained growth of real output and living standards ever achieved in America either before or since. But during that entire 45 year golden age of prosperity, the ratio of US public debt relative to national income was falling like a stone.

In fact, on the eve of World War I, the US had only $1.4 billion of debt. That is the same figure that had been reached before the Battle of Gettysburg in 1863.

That’s right. During the course of four decades, the nominal level of peak Civil War debt was steadily whittled down; the Federal  budget was in balance or surplus most of the time; and at the end of the period a booming US economy had debt of less than 5% of GDP or about $11 per capita!

In short, nearly a century of robust economic growth after 1835 was accompanied by hardly any public debt at all. The facts are nearly the opposite of Krugman’s smart-alecky insinuation that today’s giant, technologically advanced economy would not have happed without all of today’s massive public debt.

Indeed, on a net basis every dime that was added to the national debt between Jackson’s mortgage burning ceremony in 1835 and 1914 was 100% war debt that never contributed to domestic economic growth and was mostly repaid during peacetime. In effect, Rand Paul was right: In a modern Keynesian sense, the US was “debt free” during the 80 years when it emerged as a great industrial powerhouse with the highest living standard in the world.

Thereafter, there were two huge surges of wartime debt, but those eruptions had nothing to do with peacetime domestic prosperity;  and they were quickly rolled back after the war-time emergencies ended. Its plain to see in the graph below.

During WWI, for example, the national debt soared from  $1.4 billion to $27 billion, but the great Andrew Mellon, as Secretary of the Treasury during three Republican administrations, paid that down to less than $17 billion, even as the national income nearly doubled during the Roaring Twenties. That meant the public debt was back under 20% by the end of the 1920s.

To be sure, for the last 70 years the Keynesian professoriate has been falsely blaming the severity and duration of the Great Depression on Herbert Hoover’s balanced budget policies during 1930-1932. But none has ever charged that paying down the WW1 debt had actually caused the Great Depression. Nor have the Keynesian economic doctors ever claimed that had Mellon not paid down the peak WWI debt ratio of about 45% of GDP that the Roaring Twenties would have roared even more mightily!

Likewise, the national debt did soar from less than 50% of GDP in 1939, notwithstanding the chronic New Deal deficits, to nearly 120% at the 1945 WWII peak. But this was not your Krugman’s beneficent debt ratio, either. Nor is it proof, as per his current diatribe, that the recent surge to $18 trillion of national debt has been done before and has proven helpful to economic growth.

Instead, the 1945 ratio was a temporary and complete artifact of a command and control war economy. Indeed, the total mobilization of economic life by agencies of the state during WWII was so complete that Washington had essentially banished civilian goods including new cars, houses and most consumer durables, and had also tightly rationed everything else including sugar, butter, meat, tires, shoes, shirts, bicycles, peanut brittle and candied yams.

With retail shelves empty the household savings rate soared from 4% of disposable income in 1938-1939 to an astounding 35% by the end of the war.

“Consequently, the Keynesians have never acknowledged the single most salient statistic about the war debt: namely, that the debt burden actually fell during the war, with the ratio of total credit market debt to GDP declining from 210 percent in 1938 to 190 percent at the 1945 peak!”

This obviously happened because household and business debt was virtually eliminated by the wartime savings spree, dropping from 150 percent of GDP in 1938 to barely 60 percent by 1945, and thereby making vast headroom for the temporary surge of public debt.

In short, the nation did not borrow its way to victory via a Keynesian miracle.  Measured GDP did rise smartly because half of it was non-recurring war expenditure. But even then, the truth is that the American economy “regimented” and “saved” its way through the war.

Once the war mobilization was over Washington quickly reduced it massive wartime borrowing, and set upon a 35 year path of drastically reducing the government debt burden relative to national output. Looking at the chart’s veritable ski-slope from 120% of GDP in 1945 to barely 30% of GDP when Reagan took office in 1980 you would think that the US economy should have been buried in depression during that period if Professor Krugman silly syllogisms are to be given any credit.

Of course, just the opposite is true.  The greatest sustained period of post-war real GDP growth occurred between 1955 and 1973, with real output growth averaging nearly 3.8% per annum. But after that, as shown by the relative growth rates of real final sales in the chart below, the trend rate of growth steadily eroded. Thus, economic prosperity actually reached its highest level precisely when the national debt ratio was speeding down that ski-slope.

Indeed, during the very period when the fiscal deficit got out of control during the early 1980’s owing to the Reagan Administration’s impossible budget equation of soaring defense, deep tax cuts and tepid restraint on domestic spending, young professor Krugman was toiling away in the White House as a staff member of the Council of Economic Advisors.

During the dark days of the 1981-1982 recession when the economy was collapsing and the deficit was soaring I heard some pretty whacky ideas from the White House economists on how to reverse the tide. But never once did I hear professor Krugman argue that with the GDP at about $3.5 trillion while the public debt stood at less than $1.5 trillion or about 40% of GDP that it was time to turn on the deficit spending after-burners and get the national debt up to 100% of GDP forthwith.

No, this whole case for mega-public debt has emerged since 2008. For crying out loud,  before the great financial crisis Krugman was one of the noisiest voices in the chorus denouncing George Bush’s massive tax cuts on the grounds that they would add to the national debt, which was then $6 trillion, not $18 trillion.

The fact is, the financial crisis was caused by the massive money printing campaigns of the Fed in the years after Greenspan assumed the helm in 1987. The resulting falsification of money market interest rates and distortion of prices and yields in the capital markets gave rise to serial booms and busts on Wall Street. But these financial market deformations had virtually nothing to do with fiscal policy and most certainly did not reflect an insufficiency of public debt.

These destructive busts——the dotcom crash, the 2008 mortgage bust and Wall Street meltdown and the stock market plunge just now getting underway——-are owing to the fact that Wall Street has been turned into a gambling casino by the Federal Reserve and the other major central banks.

But rather than acknowledge that obvious reality, Krugman actually manages to turn it upside-down. To wit, he argues that repairing the nation’s busted financial markets after September 2008 required the creation of  “safe assets” in the form of government debt so that investors would presumably have a place to hide from Wall Street’s toxic waste:

“Beyond that, those very low interest rates are telling us something about what markets want. I’ve already mentioned that having at least some government debt outstanding helps the economy function better. How so? The answer, according to M.I.T.’s Ricardo Caballero and others, is that the debt of stable, reliable governments provides “safe assets” that help investors manage risks, make transactions easier and avoid a destructive scramble for cash.”

Now that puts you squarely in mind of the young boy who killed his parents and then threw himself on the mercy of the courts on the grounds that he was an orphan. That is, having experienced a runaway financial bubble owing to excessive monetization of the public debt during the Greenspan era, the nation’s economy now needed even more public debt in order to subdue the very Wall Street gamblers that the Fed’s printing presses had unleashed.

Every phrase in the above quoted passage is nuts, even if it is attributable to an MIT rocket scientist, who is apparently handsomely paid for publishing pure drivel. After all, investors on the free market have known how to manage genuine financial risk from time immemorial; they didn’t need today’s vast emissions of public debt to help them.

In fact, treasury notes and bonds have no logical relationship to honest hedging in the first place. The most salient case of treasury based hedging was the spectacular blow-up of Long Term Capital in 1998. In that particular instance, the gamblers who ran a trillion dollar book of speculative assets including tens of billions of high yield Russian debt blew themselves up shorting the treasuring market to hedge their interest rate risk: During the panicked investor flight to safety in August 1998, their giant losses on risky assets were compounded by even larger losses on their short treasury hedge.

In fact, the real point about the government debt market in today’s central bank rigged financial system is that it has become a venue for state sponsored thievery. That is to say, when the Fed pegs the front end of the curve at zero for 80 months running and then pours $3.5 trillion of fiat purchasing power into buying the rest of the treasury curve including mortgage-backed agency securities in order to boost bonds prices and lower yields, it is creating a  virtually risk free arbitrage for Wall Street gamblers that serves no purpose except to transfer massive windfall profits to the most adept gamblers.

Professors Krugman and Caballero  actually think this helps?

The problem is that like all Keynesians they do not know the difference between fiat credit, which is manufactured out of thin air by fractional reserve commercial banks or money-printing central banks, and honest debt that is funded out of genuine savings from current income by households and business.

Allocating genuine savings to public versus private capital investment almost always results in a diminution of productivity and efficiency, thereby reducing society’s wealth and living standards, not raising them. That’s because government’s are invariably controlled by squeaky wheel special interest groups and lobbies which succeed in gaining in the halls of Congress what they cannot justify in the private market. Amtrak, subsidized mass transit and bus services, corps of engineers water projects and financial subsidies to Boeing and GE are only cases in point.

But are Keynesian professors have no sense of allocative efficiency because they think that any spending—-including having the unemployed dig holes with tablespoons and fill them up with teaspoons adds to GDP:

One answer is that “issuing debt is a way to pay for useful things, and we should do more of that when the price is right.” The United States suffers from obvious deficiencies in roads, rails, water systems and more; meanwhile, the federal government can borrow at historically low interest rates. So this is a very good time to be borrowing and investing in the future, and a very bad time for what has actually happened: an unprecedented decline in public construction spending adjusted for population growth and inflation.

You can’t make this stuff up. And here’s the rest of it for the purpose of any remaining doubt.

http://www.nytimes.com/2015/08/21/opinion/paul-krugman-debt-is-good-for-the-economy.html?_r=0

http://davidstockmanscontracorner.com/krugmans-dopey-diatribe-deifying-public-debt/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+Sunday+10+AM

Paul Krugman is wrong when he states that …”governments aren’t deep enough in debt.” The United States national debt is nearly 20 trillion dollars based on the promise that American taxpayers will eventually pay the debt.

Krugman needs to read the article “A New Look at Prices and Money: The Kelsonian Model for Achieving Rapid Growth Without Inflation.” at http://www.cesj.org/wp-content/uploads/2013/11/pricesandmoney.pdf. In this paper a case is made for a major transformation of any nation’s monetary system so that in the future new money would be created in ways that would unharness the full productive potential of society, while closing the growing wealth gap between the richest 10 percent and the rest of society — and to do so voluntarily without the need to redistribute existing wealth. Prices, wages and interest rates would be controlled under the proposed model of development completely by competitive market forces, not by the whim of central bankers, politicians or organized power blocs.

This paper also shows that Say’s Law of Markets — that supply can create its own demand and demand its own supply — can be made to work if capital credit is universally accessible to all. This new paradigm, first developed by Louis Kelso and later refined by Robert Ashford and Rodney Shakespeare (“Binary Economics: The New Paradigm”) would result in an asset-backed money supply that would provide sufficient liquidity to banks and other financial institutions for financing all or most of the new productive assets which are added each year to grow the economy.

Krugman does not address the structural problems of the system but instead proposes to simply buy more time by borrowing more at low interest rates. Buying more time is his solution, followed by pretending that this will result in forward-looking growth. Yet national public debt has become harder to service because pretend-and-extend policy making has created a depression in real, capital asset investment and consumption (not the gambling casino stock market trading second-hand (owned) stock, because the extent of all productive capital asset OWNERSHIP is concentrated.

In concentrated capital ownership terms, roughly 1 percent own 50 percent of the corporate wealth with 10 percent owning 90 percent. This leaves 90 percent of the people scrambling for the last 10 percent, with them dependent on their labor worker wages to purchase capital assets. Thus, we have the great bulk of the people providing a mere 10 percent or less of the productive input. Contrast that to the less than 5 percent who own all the productive capital providing 90 percent or more of the productive input, and who initiate and oversee most of the technological advances that replace labor work by workers with capital work by the owners of productive capital assets. As a result, the trend has been to diminish the importance of employment with productive capital ownership concentrating faster than ever, while technological change makes physical capital ever more productive. Corporate decision makers know this, whether in the United States or China, or anywhere organized assemblies of people engage in production. Technology is an easier and faster way to get a job done. Because technology increases the profitability of companies throughout the world, technology always has the advantage over human labor when the costs of them are the same. But because this is not well understood, what we as a society have been doing is to continually shift the work burden from people labor to real physical capital while distributing the earning capacity of physical capital’s work (via capital ownership of stock in corporations) to non-owners through make-work job creation, minimum wage requirements, and welfare programs. Such policies do not function effectively.

Even with historically low interest rates when the federal government borrows, say to repair obvious deficiencies in roads, rails, water systems and more and to upgrade such or finances the military-industrial complex, which perpetuates continuous war, only the people who already own productive capital are the beneficiaries of debt through contract work sold in the name of job creation, but in reality systematically concentrates more and more capital ownership in their stationary 1 percent ranks. Yet the 1 percent are not the people who do the overwhelming consuming, and instead “re-invest” to further accumulate ever more capital wealth ownership. The result is the consumer populous is not able to earn the money to buy the products and services produced as a result of substituting machines for people. And yet you can’t have mass production without mass human consumption made possible by “customers with money.” It is the exponential disassociation of production and consumption that is the problem in the United States economy, and the reason that ordinary citizens must gain access to productive capital ownership to improve their economic well-being.

The ever-growing trillions of dollar debt liability will come due on the heirs of today’s Americans.

Austerity is not a solution, however, but a way of buying time until a solution can be implemented. The only way out of the hole is not to cut spending (consumption), especially since there is a level below which you cannot go, but to increase income (production).

This is “Say’s Law of Markets.” It is based on Adam Smith’s first principle of economics, articulated in The Wealth of Nations: “Consumption is the sole end and purpose of all production.” The obvious corollary, of course, is that you can’t consume what hasn’t been produced — which is exactly the United States’ problem as well as other debt-ridden countries.

In short, you can mint, print, or borrow all the money you want, but if you’re not producing a marketable good or service for consumption, even if you have a mountain of gold, silver, or government debt paper backing your currency, you are trying to get out of a hole by digging it deeper.

If something doesn’t exist, you can’t consume it. the only thing that’s going to get the United States and other debt-ridden countries out of the hole they are in is to increase production dramatically, not just cut consumption, however essential austerity is in the short run.

The whole discussion on reforming the money and credit system leads right into this, as does tax reform. Let’s take taxes first.

Four principles must guide the tax reform. 1) Efficiency: the tax system raises enough money to run the government without giving too much disincentive to produce. 2) Understandability: people should be able to pay their taxes without having to become an expert. 3) Equitability: people must be taxed in accordance with their ability to pay. 4) Benefit: people who receive the benefit should pay for it.

Thus, the fairest tax given these principles is a single rate imposed equally on all income above an exemption sufficient to enable people to live in reasonable comfort. In addition, the tax laws must permit a tax deferral on income used to purchase capital assets, up to an amount sufficient to generate an adequate and secure income.

Thus, every citizen should have a Capital Homestead Account (CHA) or Economic Democracy Account in which he or she can accumulate a reasonable ownership stake of income-generating assets on a tax-deferred basis. A CHA (a super-IRA or asset tax-shelter for citizens) would be available at their local bank to purposely acquire a growing dividend-bearing stock portfolio to supplement their incomes from work and all other sources of income. Now — how do they buy the assets in the first place on which to defer the taxes?

That’s where the necessary money and credit reforms kick in. Obviously, if a rich person or a corporation can finance new capital without using past savings, so can everyone else — and it’s better for the economy. The fact is, the more people who are productive, the more income there is, and the more income there is, the more demand there is, and the more demand there is, the more people can produce and sell ad infinitum.

Thus, every child, woman, and man can open up a Capital Homestead Account or Economic Democracy Account in which every individual can accumulate up to, let’s say, $1 million on a tax-deferred basis.  And at a ROI (“Return On Investment”) of a conservative 20 percent (in direct new asset-based new stock issues), would generate taxable income of $200,000 every year.

Further, companies can be encouraged to pay out all earnings as dividends by making dividends tax-deductible by the corporation — and substantially raising the corporate tax rate to give more encouragement. That way a corporation has a choice: avoid all taxation of income by paying it out to the shareholders (who can pay taxes on their dividends the same as any other income), or pay even more taxes than they do now.

Besides, if they finance growth by selling new shares instead of retaining earnings, the new shareholders are going to need the full stream of profit attributable to their shares to pay for those shares. Issuing shares instead of retaining earnings to finance growth will create a lot of new shareholders, and create a lot of new demand to justify more growth and jobs.

Thus, if everybody has the right to borrow money to purchase new shares that pay for themselves out of future dividends — and all profits are paid out as dividends — ordinary people can become capital owners without risking anything they might have at present, which for most people in the United States is not a risk because they don’t have anything to lose at present as it is. If the money is created using interest-free capital credit, there will always be enough money for new capital formation — and for creating new owners without taking anything from anybody else.

What about security for the capital credit loans? What if the borrower defaults, i.e., doesn’t make the loan payments?

There’s an entire industry that already exists to help people handle risk. It’s called “insurance.” Using the risk premium on all loans as an actual insurance premium (ala the Federal Housing Administration concept), a borrower or lender can take out a capital credit insurance policy that pays off in the event of default.

Instead of tax, monetary and inheritance policies favoring the top 1 percent at the expense of the 99 percent, these comprehensive policy and program reforms should become national policy as a necessary solution to correct the systemic injustices of monopoly capitalism. The current system perpetuates budget deficits and unsustainable government debt, underutilized workers, a lack of financing for financing advanced energy and green technologies, and outsourcing of U.S. industrial jobs to low-wage countries, trade deficits, shrinking consumption incomes among the poor and middle class, and conventional methods for financing productive growth that increase the ownership and power gaps between the top 1 percent and the 90 percent whose combined ownership accumulations are already less than the elite whose money power is widely known as the source of political corruption and the breakdown of political democracy.

The unworkability of the traditional market economy is evidenced by the diverse and growing deficits––federal budget deficit, trade deficit, city, county and state budget deficits––which are making it increasingly impossible for governments at every level to function. The increasing deficit burden is the result of the growing numbers of people who cannot earn, from legitimate participation in production, enough income to support themselves and their families. Thus government is obliged to “redistribute” to starve off economic collapse. The key means of redistribution is taxation––taking from the legitimate producers and giving to the non- or under-producers––to make up the economy’s ever wider income and purchasing power shortfalls.

The fact is that political democracy is impossible without economic democracy. Those who control money control the laws that foster wage slavery, welfare slavery, debt slavery and charity slavery. These laws can and should be changed by the 99 percent and those among the 1 percent who are committed to a just and economically classless market economy, true equality of opportunity, and a level playing field in the future for 100 percent of Americans. By adopting economic policies and programs that acknowledge every citizen’s right to contribute productively to the economy as a capital owner as well as a labor worker, the result will be an end to perpetual labor servitude and the liberation of people from progressive increments of subsistence toil and compulsive poverty as the 99 percent benefits from the rewards of productive capital-sourced income.