Paul Krugman, as in the final sentence of this week’s Op-Ed, is forever quick to call those who don’t agree with his economic assertions clueless. Well, if a Nobel laureate economist wants to call someone economically-clueless, I suppose he’s been awarded that privilege. However, in last week’s article, he ventures into areas (the market, and corporate budget management) that, clearly, lie beyond the bounds of his expertise—as his displayed cluelessness attests.
The interest-rate story is fairly simple . As some of us have been trying to explain for four years and more, the financial crisis and the bursting of the housing bubble created a situation in which almost all of the economy’s major players are simultaneously trying to pay down debt by spending less than their income. Since my spending is your income and your spending is my income, this means a deeply depressed economy. It also means low interest rates, because another way to look at our situation is, to put it loosely, that right now everyone wants to save and nobody wants to invest. So we’re awash in desired savings with no place to go, and those excess savings are driving down borrowing costs.
Under these conditions, of course, the government should ignore its short-run deficit and ramp up spending to support the economy. Unfortunately, policy makers have been intimidated by those false priests, who have convinced them that they must pursue austerity or face the wrath of the invisible market gods.
Meanwhile, about the stock market: Stocks are high, in part, because bond yields are so low, and investors have to put their money somewhere. It’s also true, however, that while the economy remains deeply depressed, corporate profits have staged a strong recovery. And that’s a bad thing! Not only are workers failing to share in the fruits of their own rising productivity, hundreds of billions of dollars are piling up in the treasuries of corporations that, facing weak consumer demand, see no reason to put those dollars to work.
Oh my, where to begin? I guess I’ll start at the start: The interest-rate story, I concede, is indeed fairly simple. Rates do decline during recessions (although we’re no longer in a recession) because, of course (leaving out the Fed for the moment), demand for loans declines, while, as Krugman points out, liquidity rises. I’ll add that bonds are considered safe, and investors tend to want safe during recessions (although we’re no longer in a recession)—the heightened demand for bonds drives up their prices and down their yields.
He says “everyone wants to save and nobody wants to invest.” Now hmm…I thought the Dow just hit an all-time high. And nobody’s investing?? Perhaps he’s referring only to corporations not investing their cash, which they’re not, much.
He says that “corporate profits have staged a strong recovery.” But I thought “my spending is your income and your spending is my income.” And that since the (he states in pure Keynesian fashion) “players” are “spending less than their income” (God forbid), “this means a deeply depressed economy”. But if nobody’s spending (which, as you’ll see in a second, is pure bunk), how is it that “corporate profits have staged a strong recovery”? Hmm… I wonder if the overall weak economy hasn’t had more to do with lack of business investment, than it has lack of spending—particularly since, so contrary to his claim, consumer spending hit an all-time in 2012. And his comment that recovering corporate profits is a “bad thing” literally blows my mind! Like workers would somehow be better off if corporate profits weren’t recovering? Ludicrous!
Again, he says that the “economy’s major players are simultaneously trying to pay down debt while spending less of their income”. I wonder if “major players” includes corporations? I assume so. Yet, I repeat, “corporate profits have staged a strong recovery.” Hmm… Sounds like, since “corporate profits have staged a strong recovery”, paying down debt and spending less income are okay things to do. Of course that’s not what Washington, a no doubt “major player”, is doing, right? I mean it’s borrowing a $trillion extra a year (and he mentions “austerity”??). And that’s a $trillion a year that all economic players are going to have pay back. Hmm…And why is that good for the economy? Oh that’s right, it’s current spending…
He says corporations see no reason to put dollars to work because of weak consumer demand (???? again, record consumer spending last year). Hmm…That’s not what I’m seeing. Corporations, those who run them that is, would enthusiastically put dollars to work in all manner of R&D (creating all sorts of jobs) if they felt certain that some new reg or tax hike wasn’t lurking around the next economic bend. Of course, navigating bends in the economic cycle they can do—they’ve proved it of late. But the prospects of paying the bills of thriftless politicians, and paying the price of clueless committees, urged on by clueless economists, attempting to reengineer the world with new sets of rules (as they tend to do in their efforts to deflect attention during downturns) inspires the utmost corporate prudence.
As for why stocks have been rising; yeah, low bond yields don’t hurt. But, believe you me, without those corporate profits, buyers wouldn’t be a coming to bid those share prices higher for those shareholders who, without those corporate profits, wouldn’t be so reluctant to sell. And back to why interest rates remain so low; any actor who would proffer an explanation without the slightest mention of the Fed buying $85 billion a month worth of bonds, is either just that, an actor, or one profoundly clueless character.