March 13, 2012

Political Academia: The Speech that Left me Speechless!

The speech has left me speechless (read: dumbfounded). And just one comment on one part of it was not enough. It is so full of holes and sleight of hands.

I have been a fan of this economist in the past, and also do not have anything fundamentally against Keynesian spending. But things and tools have a context, situation-specific potential for application, and their limits. Prof Krugman does not recognize any of these. His outward position is that, “Keynesian spending did not fail in the United States because it was not tried.” To begin with, that is itself false. The entire Bush years were Keynesian spending, of trickle down variety, just it was done without a crisis, and not labeled Keynesian. But now with a hugely bloated deficit, and broken flow of money that Dr. Krugman described as “importing defective goods and exporting defective securities”, it has reached its limit, or let’s just say, very likely might have, and we just cannot intend to find out the hard way.

Government austerity is a compulsion today and not a choice. Nor is continuing with Keynesian spending a choice in present budget situation - though Dr. Krugman continues to assert that it is. At best, the Govt of the day can rebalance its budget to priorities, and cut what are non priorities. Especially, it needs to cut what is not the Government’s job, such as ensuring businesses are profitable and will hire workers if only Gov can improve their bottomlines. That is putting the horse before the cart. If social security and unemployment assistance has to be rationalized and made prudent, it needs to be done, not continued on the pretext that it can shrink the size of the economy in the immediate run. A Gov underwritten economy cannot be run forever, indeed that is one big aspect of the economic crisis of 2008 and of the collapse of the USSR. The problem with not bringing the Gov expenditure under control at crisis time is that if more spending were to actually bring the economy back to health that would become "the proof" for “deficits don’t matter”. If it worsens the crisis instead or creates a new, bigger one, "it's not the time to tighten!" So in actuality, the deficit simply bloats until the currency snaps. And even the Professor believes that deficits do have an end game.

Professor Krugman’s “freshwater” counterparts made the political-academic mistake of stating that austerity will be expansionary, or at least not clarifying that it will surely not be expansionary in the immediate run of events. When an aircraft needs a refueling, landing it to do so will surely cause loss of altitude. It does not imply that it was a matter of choice between continuing to fly ever higher v/s landing to refuel. And it is entirely possible that the freshwater economists that asserted that austerity will be expansionary, and immediately expansionary at that, got forced to do so because Krugman was selling the opposite as the panacea for economic woes, and would have won people onto that dangerous, smoke-and-mirrors path of “tackle deficit another day”. The deficit already was too big to defer to another day for taking control. But the Prof now pounces on that mistake (or whatever it was) to now make a speech full of mischaracterizations:

1. Austerity in present circumstances is a choice (not a compulsion).

2. Freshwater guys sold it as a choice.

3. More spending was the other choice.

4. If austerity is shrinking economies in Europe in its immediate aftermath, it means it was wrong to do that.

5. If only his spending is adopted, economies will become healthy. (So all of Bush years and Greenspania, that he brickbats, were correct?)

6. Economists can take back their lost prestige and respect by jumping on to his bandwagon that more Keynesianism through 2010-2012 would have made the economy healthy - because “austerity failed”, and Krugman can offer the abracadabra to us that economists are really built for times of crisis, their inferior analyses in normal times over self decisioning of regular people does not mean anything, while in the crisis of 2008, only the freshwater “austerians” have failed. And they can now redeem themselves by walking into his arms!

As such nobody in the real World cares who wins the politics of importance in academic circles. Except that, if the academics are able to force their internal realpolitik-arrived "consensus" onto the real World, we are all hosed.

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