City Journal Summer 2014

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Summer 2014
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Guy Sorman
The Plot Against Krugman « Back to Story

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Jack, I agree it is difficult and probably not possible. The issue is we have a situation where we are facing a growing difficit and an ageing population, with politicains just buying votes with more debt.
In Australia the Liberals (Republicans) are actually talking about running surpluses and making long term strategic investments. I live here now and think it is necessary, as I see more and flat screen upgraded needlessly, while the road disintergrate.
We have for too long "banged the drum" of the people know best how to spend their money. Of course they do in the main, but the expenditure is mainly on short lived and imported consumer items, not long term roads, irrigation and such like with 50 - 100 year life expectancies.
I would argue Y=C+I+G+NX is an easy measure to see we are not putting enough into the "I" bit and the NX are just to out of whack.
Entrepreneurs think long term. Bad long term policy is better than good short term policy. Therefore entrepreneurs would conduct themselves in accordance with bad policy? That may be wise but is it better? Sounds like the case for crony capitalism.
What if the country lucks in and gets good long term economic policy? Would it be recognisable after decades of bad policy? Would the interests created thereby even allow good policy? Sounds like the situation we're in.
Stuart, much as I admire your commonsense advice, I wonder whether it is politically feasible. You say a government, like a household, should "save for a rainy day". Yet, even in boom times it is always raining on somebody. Wouldn't that person expect a government running a surplus to spend some of it on him? And, wouldn't taxpayers who pay for that surplus feel overcharged? Keynes argued that governments should restrain inflation with tax increases. When the USA tried that with automatic income tax increases during the inflation of the 1970's, the consequence was a political tax revolt. How can a legislator who wants to get re-elected tell his constituents that the government must take more of their money, thus lowering their standard of living while they struggle to pay rising expenses? Aside from the political practicality of this, is it even just?
The one thing that is annoying about Krugman and his fellow Keynesians is that the repeated failure of massive fiscal and monetary stimulus will never be evidence to them that the strategy is not effective. It is *always* the case that it was not effective because the stimulus was not big enough. They can never be proven wrong.
Two Nobels should lose their awards--Paul Krugman for his failed prognostications and President Obama for his failure to bring peace.
I continue to be amazed at the range of topics Mr Sorman covers well. Keep it up
Perhaps it is time to look at both the Neo-Classical and Keynesians theories.

De-regulation of banks allowed banks to lend recklessly and then bundle the junk up and sell it on. Traditional banks that hold debt on the books lend more wisely. This keeps house price growth and "potential" defaults to a more realistic rate. Government surpluses should not be given away as tax cuts or used to boost public employment beyond what the system actually requires. That is that the public job creates a value at least equal to the cost of employment.

In this way we could return to a simpler economic system, in the good times the government saves money for the inevitable "rainy day". Banks must hold debt on their books, yes in the good times they would lend less, but in the bad times they would be bailed out less. If investors want "spicy" plays they go to investment banks, if they want "vanilla" they save with retail banks that act as traditional intermediaries.

All these new mathamatical models are excessively complex. Regulate in areas of market failure or for measurable social good (pollution or educational outcomes). Cut taxes to the minimum to maintain a stable economy and nation, save in the good times and raid the larder in the hard times, not at election times to buy votes -either side of politics.

I have an economics degree and taught economics, but as I age I have found that the market and all the financial industry involves a huge number of know nothing talking heads and "jock" gamblers of other people's money.

To work in something that, as Henry Ford said "makes more than money" should be where the majority of us are employed. To save each week or month, invest this money in stable long term companies or bank accounts. To let the money accumulate, dipping into it in life's "winters". This is what we need to get back to.

In a cold winter, if you turn the heating down too low and cut the calories in-take down too much, you won't keep going. The rich will just buy up even more houses, stock and assets. It is winter and it is cold, the question is not heating or not, but what temperature and how long should the government pay the bill, then how can the bill be repaid. Next spring we must then learn, winters comes and it is always the same, it is never "different this time" no matter how fancy the financial instruments. If you invest/ plant well in spring, then summer and autumn are bountiful and the reserves are there for the next winter. Much simpler than a Nobel prize essay, but I believe holds more water.









It's worth noting that 2 other major ratings agencies have downgraded France under Hollande.

http://online.wsj.com/news/articles/SB10001424052702303309504579184984164551794
"Krugman is a Nobel Prize-winning economist, which forces us to pay attention to his pronouncements."

Really? Maybe we should pay a little more attention to why so many obvious duds have gotten the prize. Paul Krugman, Yassar Arafat, Jimmie Carter, Al Gore, and Jose Saramago come immediately to mind.

There is nothing holy about a Nobel prize.
This article is riddled with errors and doesn't fully define Krugman's reasoning. It in fact proposing several 'straw man' arguments. Mr. Sorman writes "Government spending is the highest in the Eurozone, even as growth is stagnant and unemployment is high"

Well yes, that is called Keynesianism. The author tries to make it sound as if it is recklessness when it is a result of policy inherent in the ideas proposed for just such a situation after a financial and credit crises. To not mention that is disingenous at best, deceiving at worst.

Guy Sorman says the French are the only ones doing such a thing, Yes, in the eurozone. But the Americans did do something similar, although modestly. As did Canada, as did more recently the Japanese under Abe. That is a glaring omission. And economists can point to a particular state in the US doing spending as a proxy for the eurozone experience - not an exact duplicate, but technically interesting.

In summary, this article has very little evidence - technical models and analysis -underpinning its conclusion that the 'bond vigalentes' are going to punish France. It's all rhetoric.