A (Minor) Criticism of Paul Krugman

I wrote this as a comment on an interview with Paul Krugman.  I tend to agree with almost all he says, but I think he concentrates too much on the financial aspect of economics and not enough on production and the relationship that this has on international trade.  And I think that international trade, and whether it’s balanced or whether it is in the positive (more sales than purchases) or negative state, is the key to a nation’s prosperity.  With a positive balance of trade, all of a nation’s excess labor is put to production; with negative trade balances, the nation moves toward unemployment.  It’s a fact that nations possess excess labor; it takes only a relative small number of people, with machines and efficient fabrication and production of commodities, to produce all the goods and services a nation needs.  If the excess is forced into this production of domestic necessities, competition forces prices to fall, so overall there’s no benefit for the domestic economy.  More people, but less domestic wealth.
Here’s my reply to the Krugman interview: 

Good discussion, and it’s probably a good book. But I think I need to argue with Mr Krugman about some of what he’s said. He’s only got a Nobel and writes textbooks for economics classes; what does he know?  😉
I’ve thought, and have written a couple of times, that we in the USA are actually in a state of economic depression and have been for years. Recession and depression are, as Krugman says, essentially the same except for degree and duration. I’ve concluded that we entered a depression before the recent Great Recession but managed to make it seem less severe by borrowing and spending. Deficit spending by government, supported by borrowing, has been continuous. Even during the Clinton presidency, when the economy ran a ‘surplus’, borrowing increased; some of that went into the space program, a lot of it went to payouts to people through social support programs, some went to the military for weaponry and two wars. There were also a number of natural disasters that soaked up money. All of this was paid for with money that the nation didn’t have.
The non-government-based economy during this time was shrinking. A lot of industries went overseas; mining of such commodities as copper and iron went to South America and other places. Oil production nearly ceased here; what oil was left was too expensive to extract. Asia began to supply steel as well as manufactured products. American production workers lost their jobs. This loss of jobs wasn’t solely the result of Recession, but was a much longer process as finance became the dominant consideration in business. Finance doesn’t care where the products come from; production, and workers, was marginalized. Workers lost jobs, and except for government spending to prop up the economy, that economy would have shrunk much more.
Economic activity that produces products that can be traded internationally is sustainable. Economic activity based on continuous borrowing is not. It’s as simple as that.
If you’re selling internationally, money comes into the nation as well as going out. If you’re borrowing, money comes in, international goods come in, and money for those flows out; but nations who profit from selling us oil and copper and steel and manufactured goods can turn their profits around, buy US Treasury bonds, and then collect interest. Double whammy; even more money is now flowing out, the debt is rising constantly, the interest money to service that debt keeps getting larger, and so the whole house of cards begins to shake. We can no longer avoid facing the danger.
That much the people who favor reduction of the debt get right.
But a nation in depression or severe long-term recession can’t afford to stop paying out money. They can’t afford to stop borrowing. Lenders stop lending at some point. Nations, even the US, may be forced to default…or print money without the economic activity to back that money.
We’re the default backer of world trade, because the dollar is the international currency. If the US hits that wall, world trade collapses. In time, a new currency or basket of currencies can take the place of the dollar. But in the short term, the yuan and the yen and the euro and the pound all have problems of their own. There is no easy short term solution.
The bailout had to happen in some form, as did the Fed’s quantitative easing. But the bleeding sore remains under the bandaid: there aren’t enough good jobs to support the middle class, only very profitable jobs for the financials at the top and very poor jobs for those at the bottom. That latter class is growing, but it cannot possibly generate the economic surplus to fund the consumer economy. That lower class can’t afford to buy a house, or a new car, or a new TV; they have to keep the old ones. Many of them also had their own debt crises from credit cards; in effect, credit card companies provided their own ‘quantitative easiing’. People spend this year’s discretionary income last year or the year before. They’re still paying that off.
So the borrowing must continue for a while. But this time, to end the depression/recession, it must go to the real job creators in the form of middle class jobs to people who will buy things and pay taxes. People who are rebuilding infrastructure, roads and bridges and buildings and solar systems and power distribution nets; those are the ones who will really create jobs by creating demand for products. And most of those products need to be made here in the USA.
Do that, and the depression/recession will truly end.


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