Krugman, Wells: The Slump Goes On: Why?

[Jim__]

Paul Krugman and Robin Wells review 3 books for the NYRB:

Fault Lines: How Hidden Fractures Still Threaten the World Economy
by Raghuram G. Rajan

Crisis Economics: A Crash Course in the Future of Finance
by Nouriel Roubini and Stephen Mihm


The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession
by Richard C. Koo

As part of the review, they also talk about the origins of the 2008 financial crisis:

In what follows, we’ll provide a relatively brief discussion of a much-belabored but still controversial subject: the origins of the 2008 crisis. We’ll then turn to the ongoing policy debates about the response to the crisis and its aftermath. Not to keep readers in suspense: we believe that the relative absence of proposals to deal with mass unemployment is a case of “self-induced paralysis”—a phrase that Federal Reserve Chairman Ben Bernanke used a decade ago, when he was a researcher criticizing policymakers from the outside. There is room for action, both monetary and fiscal. But politicians, government officials, and economists alike have suffered a failure of nerve—a failure for which millions of workers will pay a heavy price.


Call it the great North Atlantic real estate bubble: in the first decade of the third millennium, prices of both housing and commercial real estate soared in parts of Europe and North America. From 1997 to 2007, housing prices rose 175 percent in the United States, 180 percent in Spain, 210 percent in Britain, and 240 percent in Ireland.

Why did real estate prices rise so much, in so many places? Broadly speaking, there are four popular explanations (which aren’t mutually exclusive): the low interest rate policy of the Federal Reserve after the 2001 recession; the “global savings glut”; financial innovations that disguised risk; and government programs that created moral hazard.

more ...

Note the full article is currently available. I'm not sure if the NYRB leaves it available.

[DoctorK]

1. You called for the housing bubble, Prof!

"To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."

http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html?scp=4&sq=krugman%20mcculley%20bubble&st=cse
PAUL KRUGMAN - August 2, 2002

I'm sure he'd like everyone to forget about this...

[eridani]

2. That read a lot more like criticism of that particular policy to me n/t

[Jim__]

3. Please, not the favorite misrepresentation of the sillier conservative economists.

It would indeed be rare indeed for an economist to advocate for a housing bubble. Krugman's response.

One of the funny aspects of being a somewhat, um, forceful writer is that I’m regularly accused of all sorts of villainy. I was personally responsible for the demise of Enron; my nonexistent son worked for Hillary; etc.. The latest seems to be that I called for the creation of a housing bubble — in fact, the bubble is my fault! The claim seems to be based on this piece.

Guys, read it again. It wasn’t a piece of policy advocacy, it was just economic analysis. What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened.

And as economist and Cato Institute scholar Arnold Kling acknowledges:

In 2002, he passed along a joke that the economy needed a housing bubble. Krugman is controversial, so the post generated comments on this blog and elsewhere, some of which are overly "gotcha" in character.

Read the article. If you think he is advocating for a housing bubble, the problem is yours, not Krugman's.

[DoctorK]

4. sorry, his record is clear

an his efforts to obfuscate now cannot erase the record he wrote then:

May 2, 2001
"I’ve always favored the let-bygones-be-bygones view over the crime-and-punishment view. That is, I’ve always believed that a speculative bubble need not lead to a recession, as long as interest rates are cut quickly enough to stimulate alternative investments. But I had to face the fact that speculative bubbles usually are followed by recessions. My excuse has been that this was because the policy makers moved too slowly — that central banks were typically too slow to cut interest rates in the face of a burst bubble, giving the downturn time to build up a lot of momentum. That was why I, like many others, was frustrated at the smallish cut at the last Federal Open Market Committee meeting: I was pretty sure that Alan Greenspan had the tools to prevent a disastrous recession, but worried that he might be getting behind the curve.
However, let’s give credit where credit is due: Mr. Greenspan has cut rates since then. And while some of us may have been urging him to move even faster, the Fed’s four interest-rate cuts since the slowdown became apparent represent an unusually aggressive response by historical standards. It’s still not clear that Mr. Greenspan has caught up with the curve — let’s have at least one more rate cut, please — but the interest-rate cuts do, cross your fingers, seem to be having an effect.
If we succeed in avoiding recession, this will mark a big win for let- bygones-be-bygones, and a big loss for crime-and-punishment. And that will be very good news not just for this business cycle, but for business cycles to come."


July 18, 2001
“KRUGMAN: I think frankly it’s got to be — business investment is not going to be the driving force in this recovery. It has to come from things like housing, things that have not been (UNINTELLIGIBLE).
DOBBS: We see, Paul, housing at near record levels, we see automobile purchases near record levels. The consumer is still very much in this economy. Can he or she — or I should say he and she, can they bring back this economy?
KRUGMAN: Well, as far as the arithmetic goes, yes, it is possible. Will the Fed cut interest rates enough? Will long-term rates fall enough to get the consumer, get the housing sector there in time? We don’t know”


August 8, 2001
“Consumers, who already have low savings and high debt, probably can’t contribute much. But housing, which is highly sensitive to interest rates, could help lead a recovery…. But there has been a peculiar disconnect between Fed policy and the financial variables that affect housing and trade. Housing demand depends on long-term rather than short-term interest rates — and though the Fed has cut short rates from 6.5 to 3.75 percent since the beginning of the year, the 10-year rate is slightly higher than it was on Jan. 1…. Sooner or later, of course, investors will realize that 2001 isn’t 1998. When they do, mortgage rates and the dollar will come way down, and the conditions for a recovery led by housing and exports will be in place.

October 7, 2001
“Post-terror nerves aside, what mainly ails the U.S. economy is too much of a good thing. During the bubble years businesses overspent on capital equipment; the resulting overhang of excess capacity is a drag on investment, and hence a drag on the economy as a whole.
In time this overhang will be worked off. Meanwhile, economic policy should encourage other spending to offset the temporary slump in business investment. Low interest rates, which promote spending on housing and other durable goods, are the main answer. But it seems inevitable that there will also be a fiscal stimulus package”

Dec 28, 2001
“The good news about the U.S. economy is that it fell into recession, but it didn’t fall off a cliff. Most of the credit probably goes to the dogged optimism of American consumers, but the Fed’s dramatic interest rate cuts helped keep housing strong even as business investment plunged.”

[Jim__]

5. Please cite an American economist who favors a weak housing market.

Krugman makes no secret of the fact that he believes in government stimulus during times of recession. However, favoring a strong housing market is not the same thing as favoring a housing bubble.

Sorry, you'll have to do better than that.

[DoctorK]

6. not weak, not 'booming' - balanced

"Krugman makes no secret of the fact that he believes in government stimulus during times of recession. However, favoring a strong housing market is not the same thing as favoring a housing bubble."

BS
"To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."

Well, Greenspan did it. And what did we get? A housing boom and then the bust (which Krugman couldn't foresee, but plenty of other economists did). Krugman thinks that rapid responses by the Fed can 'fix it', but they can just create more bubbles.

We need interest rates set by supply and demand of savings, not by ivory towered bureaucrats.
Money from 'thin air' won't fix the problem, it will only further distort the economy and misdirect savings and investment.

"Sorry, you'll have to do better than that."

I don't have to do anything, because I wasn't a proponent of this insane interest rate policy (punishing savings and resulting in over investment housing and the generation of massive debt).
Krugman called for a housing bubble. It can't be denied given his own promotion of it, no matter how much he tries to obfuscate now. He wanted the Federal Reserve to manipulate interest rates and induce housing investment. We got the boom, and then we got the bust he just can't fit into his paradigm.

[Jim__]

7. To again cite Arnold Kling "... he passed along a joke that the economy needed a housing bubble."

Sorry if it went over your head.

[DoctorK]

8. I might buy that if

he didn't call for the rate cuts to stimulate housing over and over and over and over and over in 2001

You can try to say it was all a 'joke' when he said it, but why did he say it 5 different times in 5 different contexts before the 'joke' in 2002? Each time calling for the policy measure of lower rates to stimulate a housing boom?

"HA HA HA HA HA! - I didn't mean it."

I'll quote them again, and challenge you to show me where he is 'joking', 'cause I don't see it. I see advocacy for the policy that has millions of Americans suffering:

May 2, 2001
"I’ve always favored the let-bygones-be-bygones view over the crime-and-punishment view. That is, I’ve always believed that a speculative bubble need not lead to a recession, as long as interest rates are cut quickly enough to stimulate alternative investments. But I had to face the fact that speculative bubbles usually are followed by recessions. My excuse has been that this was because the policy makers moved too slowly — that central banks were typically too slow to cut interest rates in the face of a burst bubble, giving the downturn time to build up a lot of momentum. That was why I, like many others, was frustrated at the smallish cut at the last Federal Open Market Committee meeting: I was pretty sure that Alan Greenspan had the tools to prevent a disastrous recession, but worried that he might be getting behind the curve.
However, let’s give credit where credit is due: Mr. Greenspan has cut rates since then. And while some of us may have been urging him to move even faster, the Fed’s four interest-rate cuts since the slowdown became apparent represent an unusually aggressive response by historical standards. It’s still not clear that Mr. Greenspan has caught up with the curve — let’s have at least one more rate cut, please — but the interest-rate cuts do, cross your fingers, seem to be having an effect.
If we succeed in avoiding recession, this will mark a big win for let- bygones-be-bygones, and a big loss for crime-and-punishment. And that will be very good news not just for this business cycle, but for business cycles to come."


July 18, 2001
“KRUGMAN: I think frankly it’s got to be — business investment is not going to be the driving force in this recovery. It has to come from things like housing, things that have not been (UNINTELLIGIBLE).
DOBBS: We see, Paul, housing at near record levels, we see automobile purchases near record levels. The consumer is still very much in this economy. Can he or she — or I should say he and she, can they bring back this economy?
KRUGMAN: Well, as far as the arithmetic goes, yes, it is possible. Will the Fed cut interest rates enough? Will long-term rates fall enough to get the consumer, get the housing sector there in time? We don’t know”


August 8, 2001
“Consumers, who already have low savings and high debt, probably can’t contribute much. But housing, which is highly sensitive to interest rates, could help lead a recovery…. But there has been a peculiar disconnect between Fed policy and the financial variables that affect housing and trade. Housing demand depends on long-term rather than short-term interest rates — and though the Fed has cut short rates from 6.5 to 3.75 percent since the beginning of the year, the 10-year rate is slightly higher than it was on Jan. 1…. Sooner or later, of course, investors will realize that 2001 isn’t 1998. When they do, mortgage rates and the dollar will come way down, and the conditions for a recovery led by housing and exports will be in place.

October 7, 2001
“Post-terror nerves aside, what mainly ails the U.S. economy is too much of a good thing. During the bubble years businesses overspent on capital equipment; the resulting overhang of excess capacity is a drag on investment, and hence a drag on the economy as a whole.
In time this overhang will be worked off. Meanwhile, economic policy should encourage other spending to offset the temporary slump in business investment. Low interest rates, which promote spending on housing and other durable goods, are the main answer. But it seems inevitable that there will also be a fiscal stimulus package”

Dec 28, 2001
“The good news about the U.S. economy is that it fell into recession, but it didn’t fall off a cliff. Most of the credit probably goes to the dogged optimism of American consumers, but the Fed’s dramatic interest rate cuts helped keep housing strong even as business investment plunged.”


Krugman got the policy response he advocated from the Fed, and as result the largest bubble in American history was fostered. Congrats, Prof! Your theories met reality, and blew up the American economy.
Krugman refuses to accept that he is wrong, speculative bubbles fostered by market manipulation do cause recessions. We've run out of bubbles to blow, unless you think the government can generate unlimited debt without repercussions (history has your answer on that 'policy' too, if you care to look).
Krugman doesn't grasp that interest rates aren't 'policy levers', to make recalcitrant little consumers hop as high as economists want, they are market prices. And when you distort them you distort the real economy that relies on them to encourage and direct savings to profitable activities. When you promote investment that the market can't bear, and that the underlying reality of supply and demand can't support, you foster a recession. Printing dollar bills can't change this, it can only transfer wealth from whatever savings remain to whoever gets their hands on the new money first.

[Jim__]

10. He called for rate cuts because he wanted rate cuts.

The joke was not in calling for rate cuts. The joke was in saying we need a "housing bubble." The distinction is not exactly subtle.

[DoctorK]

11. rate cuts not for the sake of rate cuts

but to induce consumers to increase their leverage and spending on housing.
"Mission Accomplished!"

If you'd read what he wrote, you could see that. Find for the 'joke theory' in these statements from Krugman, or the notion of calling for rate for the sake of rate cuts:

"Will the Fed cut interest rates enough? Will long-term rates fall enough to get the consumer, get the housing sector there in time?" -July 18, 2001

"But housing, which is highly sensitive to interest rates, could help lead a recovery..." - August 8, 2001

"economic policy should encourage other spending to offset the temporary slump in business investment. Low interest rates, which promote spending on housing..." - October 7, 2001

"the Fed’s dramatic interest rate cuts helped keep housing strong" - Dec 28, 2001

Krugman takes the view that individuals are marionettes and the economy should be stage for theorists like him and Bernanke to push and pull people into doing what they think is best. Well, he got what he wanted, and the result is undeniable misery for millions. He seeks to substitute the judgment and wisdom of literally hundreds of millions of people for the conclusions of a few.
Apologists for him can try and evade the fact that the Federal Reserve did what he suggested, and brought the American economy to its knees with trillions in new consumer debt, and the loss of trillions in funds invested in the housing sector, but the record is clear.

[AdHocSolver]

9. The stock market boom-bust, and the real estate boom-bust were both...

...the result of the Ponzi schemes run by the banks, Wall Street, and the Federal Reserve.

The main reason the economy is tanking is the offshoring of jobs, so that almost everything we buy is made in other countries.

Offshoring jobs is also the main reason government revenues are low, and government deficits (borrowing) are so high. The government is living off its credit card because its income is so low.

Manipulating the money supply to increase spending won't do any good. If people are out of work or are afraid of losing their jobs, they won't spend money, no matter how low the interest rates.

Moreover, the interest rates that are meaningful to increase spending by people, namely, the interest rates charged on credit card debt, are still very high, in fact they approach usury.

Government spending to stimulate the economy won't by itself do any good so long as everything we buy is imported, and most of the stimulus money flows to the Far East.

The idea of increasing exports to offset imports won't help as we can never increase exports enough to offset the money spent on imports when the trade deficit is already so huge.

You want to prevent a depression and revive the U.S. economy? There is only one way to do that. This country has to impose import quotas and import duties on everyday goods imported from slave-wage countries (such goods as clothes, shoes, electronics, tools, hardware, dinnerware, appliances, and more) so that those companies who want to produce goods in the U.S. with American labor can do so profitably.

The tax code needs to be changed to prevent corporations that do business in the U.S. from evading taxes.

All the discussions about monetary and fiscal policy being "solutions" to U.S. economic problems is pure bovine manure.

The major cause of our economic problems is loss of jobs, especially manufacturing jobs, and the only solution is to enact policy measures that will bring those jobs back to the U.S. by taking the profit out of offshoring.

[DoctorK]

12. too much spending, too little revenue

the problem is on both sides of the equation.

_http://en.wikipedia.org/wiki/File:Revenue_and_Expense_to_GDP_Chart_1993_-_2008.png_

We've increased spending tremendously while revenues have fallen.
Our federal government is spending practically a quarter of the economic output as measured by GDP. This is higher than any point outside of full mobilization for WW2.

"The major cause of our economic problems is loss of jobs, especially manufacturing jobs, and the only solution is to enact policy measures that will bring those jobs back to the U.S. by taking the profit out of offshoring."

This is a misunderstanding of the situation. Off-shoring keeps goods affordable to American consumers, and frees labor for other purposes.
Manufacturing is declining everywhere, and has been for a long time, and it's not coming back. Just as farming used to be over 90% of jobs and is now ~2%, manufacturing is in decline.

This article is years old, but the trend is intact:
http://www.automationworld.com/webonly-320
December 9th, 2003
"Over the past decade, U.S. manufacturing jobs have declined by more than 11 percent, Miklovic noted. But at the same time, Japan’s manufacturing employment base has dropped by 16 percent, while the number of manufacturing jobs in countries including Brazil have declined by some 20 percent, he pointed out. “And one of the largest losers of manufacturing jobs has been China,” Miklovic added. “We like to pick on China and say that all of these jobs are going to China, but they’re losing jobs in manufacturing as well.”
The reason for the job losses? Miklovic summed it up in one word: automation. Through automation, he said, “we are really doing a good job of improving the productivity of people.”"

Here's, more recent, article that explains the situation well:
http://www.controldesign.com/articles/2008/131.html
06/30/2008

"We automation professionals first laid waste to employment in the agricultural sector worldwide through automation, and we now have manufacturing in our cross hairs.
From the entry, “A History of American Agriculture,” at inventors.about.com, we see that in 1850 it took about 75 labor hours to produce 100 bushels of corn with a walking plow, a harrow and hand planting. Fast forward 137 years, and we find it now takes about three labor hours to produce 100 bushels of corn with a tractor, a five-bottom plow, a 25-ft tandem disk, a planter, a 25-ft herbicide applicator, a 15-ft self-propelled combine and trucks.
Engineers, machines and automation go in and workers go out, to the tune of a 25-fold reduction in required labor hours over little more than a century. It’s much the same story in manufacturing.
Looking at some more recent numbers in the manufacturing sector, we see that U.S. real value added manufacturing output—good proxy for the amount of stuff made—advanced from about $1.1 trillion to about $1.4 trillion from 1995 to 2002. During that same period, the U.S. lost 2 million manufacturing jobs.
Perhaps these manufacturing jobs are moving to China? No. China lost 15 million manufacturing jobs during that span. Mexican manufacturing employment also declined, and Indian manufacturing employment was flat at best."



Unless we're going back to the hand plow and hand lathe, these trends won't change anytime soon.

[AdHocSolver]

13. Your post is typical apologetics for capitalist monopoly.

Offshoring is NOT done to lower costs for consumers. Offshoring to slave-wage economies is done to reduce labor costs and evade paying U.S. taxes, with the sole intent of increasing profits.

With all the mergers and buyouts in manufacturing, there is no longer any competition in the production of most goods. Banks aren't lending money to new technology startups because of a poor economy. These same banks are heavily invested in the "old" technology, and don't lend money to the new technology to prevent new technology from competing with, and displacing, the old technology in which they are heavily invested.

In other words, the investment banks are heavily invested in "buggy whip" manufacturing.

As for agriculture, the real reason farming as a means of making a living is disappearing is NOT due to automation. Companies such as Monsanto have bought up seed production and distribution, and with their "Roundup Ready" seed patents and so-called "Terminator" seeds, have priced the small independent farmers out of business in favor of the big agribusiness farmers. It is NOT automation that "inevitably" eliminates jobs. It is monopoly capitalists which use automation as a weapon to purposely eliminate jobs so as to increase their power and profits.

Technical advances have been subverted by the monopoly capitalists to remove options available to consumers. Technology has NOT inevitably eliminated jobs. The capitalists who control technology have developed it in such a way as to enable them to eliminate jobs.


What really pointed out where you are coming from is this statement:

"Off-shoring keeps goods affordable to American consumers, and frees labor for other purposes."

How does off-shoring "keep" goods affordable to Americans if those Americans are unemployed or underemployed and have no money to buy those imported goods?

As for freeing labor for other purposes, what other purposes did you have in mind? Panhandling? Going to a food pantry?

Most economists spout meaningless, irrelevant garbage, and the garbage they spout today is more bizarre than what I heard many years ago when I earned my economics degree.

[DoctorK]

14. oh boy...

Offshoring is NOT done to lower costs for consumers.

Yes, it is. Lower prices are a consequence of increased production and the competition for profits.
Look at the price of a TV and a refrigerator in 1960 as a percentage of median income and compare them to the cost of a TV and refrigerator in 2010 as a percentage of the median income.

With all the mergers and buyouts in manufacturing, there is no longer any competition in the production of most goods.

Nonsense. Just look at the market for mobile phones. Apple has their proprietary OS and hardware, and competes with several other manufacturers in that market. Apple charges a 60% mark-up on their hardware, and almost 25% of the smart phone market chooses to pay it because they prefer their device.
1/3rd of the market is split between the different makers of Android OS based phones, all of them competing in features and price to make the phones people want to have.
The only monopolies are the ones that can get the government to prevent competition, and they're relatively few in the entire market of goods and services available.

Banks aren't lending money to new technology startups because of a poor economy. These same banks are heavily invested in the "old" technology, and don't lend money to the new technology to prevent new technology from competing with, and displacing, the old technology in which they are heavily invested.

You're correct that banks aren't big on venture capital, but it's because the risk is so high. Instead, rich people tend to be the ones who risk their money in the venture capital market because they can afford to fund 9 projects that fail if the 10th project has a high enough return.
Big banks charge low interest for relatively safe investments with a history of paying back. I don't think you want the big banks to risk everyone's savings in the venture capital market, do you?

Technical advances have been subverted by the monopoly capitalists to remove options available to consumers.

Sir, have you been to a store lately? We have more options for goods than at any time in history.

Technology has NOT inevitably eliminated jobs. The capitalists who control technology have developed it in such a way as to enable them to eliminate jobs.

:facepalm:
If it takes 5 workers 1 week to create 100 axles on a foot powered lathe, and it takes 1 worker to create 1000 axles in a week with a CnC machine, do think the market for axles will increase 5000%? Or is it more likely that 4 workers are going to be put to work doing something else?
My cousin works for Briggs & Stratton in Poplar Bluff, Mo. He spends the first two hours of his eight hour night shift checking, calibrating, and repairing the robots that do much of the work that used to be performed by hand. He spends the next 6 hours of his shift reading, doing the crossword, and waiting for an alarm to sound if a drill bit has broken, or if the laser quality control reader detects a piston that is .002 inches out of spec, etc.
'Evil' capitalists have invested in the capital goods that enable him to turn out more parts, of higher quality, than his predecessors. But for some reason people still only buy one lawnmower at a time...

Offshoring to slave-wage economies is done to reduce labor costs and evade paying U.S. taxes, with the sole intent of increasing profits.

First, profits are not a bad thing. They represent the production of more wealth than society consumes, and enable investment to further increase production as well as savings to afford greater leisure and relatively new concepts in mankind's history like retirement.
Second, the wages in many other countries are lower than ours, but the wages at those firms represent some of the best opportunities available to those people. There's a reason people choose to work at the Apple factory in China over the rice paddy, and it's not because they're chattel. You would condemn them to live like our ancestors largely did 150 years ago, off the land, with very few capital goods to increase their productivity. You don't seem to grasp that this makes all of us poorer.

As for agriculture, the real reason farming as a means of making a living is disappearing is NOT due to automation. Companies such as Monsanto have bought up seed production and distribution, and with their "Roundup Ready" seed patents and so-called "Terminator" seeds, have priced the small independent farmers out of business in favor of the big agribusiness farmers.

Why can't the farmers just do it the way they did in the 1850's, before Monsanto existed? Is it because you would refuse to pay him 75 hours worth of labor for 100 bushels of corn when his competitor will only charge you 3 hours of labor for the same amount?
People could still make 'a living' farming like it was 1850, but I suspect you wouldn't consider what they would earn working that way (sun up to sun down with no vacations) a 'living wage'.

How does off-shoring "keep" goods affordable to Americans if those Americans are unemployed or underemployed and have no money to buy those imported goods?

That would be a problem if it were true, but the vast majority of Americans are employed, and have money to buy more goods than ever before. There will always be 'frictional' unemployment as old industries die (whether by failing to compete, or losing consumer demand), but we only have massive unemployment when we suffer macroeconomic bubbles (fostered by manipulation of the interest rate by non-market forces like the Federal Reserve) or the government decrees minimum wages that price the least capable labor out of the market.
No one can afford to hire someone that cannot produce more than they earn wages. That's why unemployment is so high among high school drop outs and the young. The spike in teenage unemployment was easily predicted before the latest increases in minimum wage, and took place before the housing boom went bust.

As for freeing labor for other purposes, what other purposes did you have in mind?

I don't pretend to know the jobs that will exist in the future anymore than my grandfather, a farmer, could have anticipated his grandson would work in the IT industry (an industry that didn't even exist when he was my age), or that his other grandson would repair and manage a small army of robots. I spent enough summers on the farm to know what I'd prefer to do, and without automation of the processes my grandfather used to do by hand, labor never would have been freed up to create many of the industries we have now - such as the ones that enable you and I to communicate right now.
Can you fathom an internet based on human switch board operators? Automation not only eliminated that job, it allowed a more much amazing degree of connectivity. If you and I chose, we could even engage in a face to face conversation via video for free through websites fostered by 'Evil' capitalists trying to dirty profit by showing us a few ads at the same time.

I earned my economics degree.

If you earned it you would grasp comparative advantage, and how it raises living standards. Your arguments belie your claims. But given the state of education in this country, it's entirely conceivable to me that you were awarded a degree in economics without an understanding of these fundamental principles.

[AdHocSolver]

15. You sound like a professional economist or economics professor.

Your responses to my post are the same kind of distortion of reality that caused me to question my professors many years ago.

Your reference to farming is a case in which the cause-and-effect relationship that you expound is inaccurate and misleading. It wasn't automation that caused farmers initially to leave the land. One reason was that the railroads and the middlemen who bought and distributed grain and other farm products squeezed the farmers so badly that the farmers lost their land, and they and their descendants were forced to move to the cities to find work in the urban sweatshops.

Then in the 1930's, the "dust bowl" climate ruined many farmers forcing them off their farms.

Even if the farmers had stayed on their farms, there were large numbers of immigrants to the U.S. to man the sweatshops and factories in the cities.

A lot of farm work today is done by "illegal aliens" and migrant workers.

A lot of our pollution problems and widespread disease outbreaks are caused by food produced on automated factory farms.

I worked in IT for many years and that is a whole other can of worms.

Moreover, our current economic meltdown belies the theory of comparative advantage. If the theory of comparative advantage were actually valid, then our current economic problems of huge trade deficits and high unemployment wouldn't exist.

[DoctorK]

16. I'm patient

and willing to help you understand. But to do so, it would help if you responded in kind to my questions.
I've responded to each of your points (and will do so as long as you're willing to have the discussion), but part of me helping you understand is in the questions I ask.

If I've 'distorted reality', please show me where and I'll try to address the confusion.

Your reference to farming is a case in which the cause-and-effect relationship that you expound is inaccurate and misleading. It wasn't automation that caused farmers initially to leave the land. One reason was that the railroads and the middlemen who bought and distributed grain and other farm products squeezed the farmers so badly that the farmers lost their land, and they and their descendants were forced to move to the cities to find work in the urban sweatshops.

But if farmers could work the land before the railroads, why couldn't they just ignore the railroads and continue to work the land as they always had?
The fact is the railroads, and other innovations in the transportation network (don't get hung up on the word 'automation', what matters is technological productivity gains, regardless of their form as iron horse or robotic lathe), led to increased production, which drove down prices. Railroads opened up more acreage (and improved yield per acre from improved implements and practices) than ever to farming, and farmers took advantage of it. As the growth of supply outpaced the growth of demand prices fell further.
If people were satisfied with subsistence farming, railroads couldn't stop them from continuing to do it. But people want more in life, and so they left the farms for the cities, and provided labor to the industrial expansion that further increased living standards. The same process is underway today in China, as literally millions of Chinese are coming off the farm and heading the cities to engage in more productive work.

Moreover, our current economic meltdown belies the theory of comparative advantage. If the theory of comparative advantage were actually valid, then our current economic problems of huge trade deficits and high unemployment wouldn't exist.

Our current meltdown has nothing to do with comparative advantage (can you even describe what it is?).
Our current meltdown is the result of a fractional reserve monetary system that is pyramided on federal government debt.
Our Federal Reserve system, that allows the banking system to create money from 'thin air', is what makes possible the trillion dollar annual deficits, and makes possible hundreds of billions of dollars in cumulative trade deficits.
If the dollar was a hard currency prices would be forced to more quickly adjust to imbalances (deficits - whether Federal or trade flow), constrained by the reality of supply and demand. Instead, since 1971, we've been running a confidence game for a national currency. The ability to create money from 'thin air' is what makes it possible for us to shovel paper to China in exchange for TVs and other goods.

I encourage you to read Ben Bernanke's 2002 speech, Making Sure 'It' Doesn't Happen Here
http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm

"The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior).8 Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation."



Notice what has happened to the price of gold since he made that speech in 2002? In 8 years it has quadrupled measured in dollars as he has expanded the Fed's balance sheet by 'printing' Trillions of dollars in a desperate (and ultimately futile) bid to paper over imbalances in the economy. Our economic woes aren't rooted in the capitalist system that rewards expanding production, but in the manipulation of interest rates (one of the most important prices in any economy, because it encourages and directs the real pool of capital) by academics operating on incorrect theories.
Krugman got his wish, Greenspan lowered interest rates and fostered the housing boom as Krugman said he "should". Now that debt bubble has popped, and Bernanke has kept true to his word, and the theory he shares with Krugman - the belief that creating dollars (via a printing press) is the same as creating real demand (creating products and services) in the economy is still underway.
We can't change these men's minds, and given Krugman's obfuscations over the policy he repeatedly advocated we can't even expect he'll learn, but we can try to protect ourselves.
I started buying gold in 2001 as Greenspan slashed rates (saving 10% of my income, 5% in deferred comp and 5% in gold purchases every three months - even with the tax advantage gold has whupped the other half of my savings portfolio), before Bernanke gave this speech, and well before he ever was going to be Chairman of the Fed. I'll continue to protect the purchasing power of my savings with gold until Obama (or whoever comes next) appoints a Volcker-esque Chairman, willing to restore the strength of the dollar.

As pessimistic as many prognostications are, we may be in a stage similar to 1978-79. We all expect that the 'catfood commission' will cut SS benefits, raise the retirement age, and probably the payroll taxes that fund it. That will address a large part of the red ink we're facing. If we can get the other half, a Federal Reserve chairman willing to raise interest rates and curtail consumptive borrowing, I think the economy will rebound beyond anyone's dreams.
If we keep down this path of devaluing the dollar, distorting prices and misleading entrepreneurs and investors while robbing savers and pensioners purchasing power, then I think we haven't seen the worst yet.
What we don't want to do is repeat the biggest mistake of the 80's, huge government deficits. With the cumulative debt already such a high percentage of our economic output, we don't have the room to service the debt growing much larger. It would be criminal to keep up these trillion dollar deficits and saddle our future with the two terrible choices of default or trying to hyper-inflate the debt away.

When gold starts to go parabolic, that's when the call to raise interest rates will resume in earnest, and it will be time to trade out of gold and into other assets. For myself, that will probably be land, but not to farm. :)

[AdHocSolver]

17. Your misunderstanding of economics is surpassed only by your condescension toward...

...those who hold a different interpretation of the facts.

I wasn't trying to educate you, as you have so obviously been heavily indoctrinated in capitalist canon and are beyond reasoned debate.

My posts are for those who have not been heavily infected with capitalist dogma and need only a gentle assistance to correctly interpret what they can see for themselves.

[DoctorK]

18. You made patently absurd claims, such as:

Technology has NOT inevitably eliminated jobs

"In 1970, the telecommunications industry employed 421,000 workers in good-paying jobs as switchboard operators. Today, the telecommunications industry employs only 78,000 operators. That's a tremendous 80 percent job loss. What happened to all those... switchboard operator jobs? Were they exported to China and India by rapacious businessmen?
...There have also been spectacular advances in telecommunications. In 1970, those 421,000 switchboard operators annually handled 9.8 billion long-distance calls. Now 100 billion long-distance calls a year require only 78,000 switchboard operators. What's more is, the cost of making a long-distance call is a fraction of what it was in 1970.
Here's my question to you: Should Congress do something to restore all of those jobs lost..."

I rebutted them and you have refused to engage in 'reasoned debate'.
Please don't pretend otherwise.

But it's ok, I understand your type:
http://news.firedoglake.com/2010/07/12/exposed-to-facts-the-misinformed-believe-lies-more-strongly/

In a series of studies in 2005 and 2006, researchers at the University of Michigan found that when misinformed people, particularly political partisans, were exposed to corrected facts in news stories, they rarely changed their minds. In fact, they often became even more strongly set in their beliefs. Facts, they found, were not curing misinformation. Like an underpowered antibiotic, facts could actually make misinformation even stronger.

This bodes ill for a democracy, because most voters — the people making decisions about how the country runs — aren’t blank slates. They already have beliefs, and a set of facts lodged in their minds. The problem is that sometimes the things they think they know are objectively, provably false. And in the presence of the correct information, such people react very, very differently than the merely uninformed. Instead of changing their minds to reflect the correct information, they can entrench themselves even deeper.

“The general idea is that it’s absolutely threatening to admit you’re wrong,” says political scientist Brendan Nyhan, the lead researcher on the Michigan study. The phenomenon — known as “backfire” — is “a natural defense mechanism to avoid that cognitive dissonance.”

[tama]

19. Cognitive dissonance

Let's start from basics:

1) Unlimited growth in a limited environment is not possible
2) Capitalism as we know it (fiat currencies based on interest and debt) cannot function without continuous growth
3) Industrial farming is unsustainable and producess loss of fertile land due erosion etc. and ultimately leads to collapse of civilization, as unsustainable farming and civilizations based on that has allways done.

Keeping these facts in mind and drawing conclusions from these facts in regard of economic theory, what is the level of cognitive dissonance in current standard economic theory and society in general?

[DoctorK]

20. error in point 2)

Capitalism as we know it (fiat currencies based on interest and debt)

Fiat currencies are not a basis of capitalism, they are a creation of governments, they actually pervert capitalism by distorting prices and misdirecting capital. Capitalism can try to exist in them because it is an inherently self correcting process that will adjust prices, but entrepreneurial and investor errors will be enlarged by inaccurate price signals.

Fiat currencies and legal tender laws are a requirement for a government that wants to perpetually spend more than it taxes.

"Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. – As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

"Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." - John Maynard Keynes

[tama]

21. Pay notice

I was not talking about capitalism as an ideological construct in some ideal world (as right wing libertarians tend to do), but purely descriptively in real world terms: capitalism AS WE KNOW IT, feel it and suffer from.

Edit to add: I'm so old that I've lost interest in ideological speculation. I've been a CEO, a member of a revolutiony (trotter) socialist party and currently what can be described as an eco-hippie who is not shy of the anarchist label. This life style I'm living is not about any theoretical ideology, but real life practical anarchy, just because in my experience this is what works best. Listening to my voice of conscience and living accordingly.

PS: funnily enough, from what I hear and see, the medical and bureaucratic professions consider conscience a psychopathology that needs to be medicated with products of big pharmaceuticals. So who is most insane? :D

[DoctorK]

22. it's the conflation I dispute

Capitalism is not fractional reserve banking, nor is it a system that requires (or benefits) from fiat money (quite the opposite!).

When the manipulators (like Greenspan, Bernanke and their cheerleaders like Krugman) falsify interest rates and issue money from 'thin air' capitalism is mistakenly assigned the blame for the inevitably large scale errors in calculation that follow.

Essentially, fractional reserve banking and legal tender laws legalize counterfeiting for a small set of society, to the detriment of the rest.

[westerebus]

23. Free education.

In economics no less. Thank you.

I do have a few questions, if you don't mind.

Is it innovation that drives economies?

Can innovation flourish in systems other than capitalism?

Is commerce capitalism?

Does fiat currency, as an innovation, benefit economic systems?

As for the question of what the Congress should do to restore lost jobs?

I think the question is what should we do with Congress is more to the point?

[westerebus]

24. It appears I was late for class.

Or -B) The dog ate the professor.

Bad dog. Who's going to clean up this mess?

It's OK. Irrational numbers make me sick too.

Here's a cookie!

Good boy!:-)