Paul Krugman has a Nobel Prize in economics. I don’t. He writes for a wide audience in The New York Times. I write for a more select one in The Triangle. But I think I have something to tell Professor Krugman, because it seems to me that he is struggling to understand what should be quite obvious.
In a recent article, “Rock bottom economics,” Krugman confessed to a great puzzlement. The means to stimulate the economy, which continues to “perform” (to use a term economists have apparently borrowed from either the circus ring or a sex manual) at the so-called pre-recession level, are readily at hand.
The Federal Government needs to inject more money into the economy, since it alone can supply both capital and demand. The Federal Reserve Bank needs to raise interest rates, which at the 0.25 percent they have sat at for six years constitutes a liquidity trap, in sync with this. Hey presto: Happy days will be here again.
Krugman doesn’t understand why this hasn’t happened. Virtually all economists, he assures us, agree with his prescription; it is not only orthodox doctrine but it’s real-world tested. It works. It got us out of the Great Depression, and over assorted other bumps since. So, what’s the hang-up?
Krugman thinks economic policymakers and others whom he calls “Very Serious People” have been overly preoccupied with the fear of sparking inflation and reigniting the public debt. As he points out, though, inflation is a manageable concomitant of growth, and deflation — which Europe’s economy as a whole now teeters on — is much worse.
Even if America’s economy skirts that trap, approaching it, like dancing on the edge of a black hole, throttles any hope of a robust recovery. Jobs at best limp back; wages stagnate or decline. And both remain perilously vulnerable.
The point Krugman misses, however, is that the “Very Serious People” aren’t blinkered by their devotion to the memory of Herbert Hoover. They know exactly what they are doing, and why, and for whom. For Krugman, jobs are the number one priority in a recovery, because jobs create demand and demand fuels prosperity.
But a broad-based recovery is not, in fact, to everyone’s maximum advantage. Depression economics can be very, very good for some people, provided it’s rigged the right way. Those people are the rich.
Consider what happens under conditions of full-employment prosperity. Wages rise, because labor is at a premium. So do demands for job benefits and security. Profits rise, too, but they are cramped by inelastic labor costs. One solution for this is outsourcing, which is greatly facilitated by globalization.
Imperialism pioneered this practice; multinational corporations, the successors of empires have perfected it. Another solution, however, is to lower domestic labor costs by making jobs scarce. The way to do this is through what are now called recessions.
These are sometimes planned, as was the 1969 Nixon recession (whose goal was as much political as economic). Most often, they are the consequence of bubbles, as was the case in the crash of 2008.
Mild and short-term recessions don’t amount to much more than a haircut for labor, however painful they may be for those affected by them. To bring wages down for a satisfactory period if not indeed for good, you need something deep and sustained, a full-blown depression.
The United States entered such a depression six years ago. It has been deliberately prolonged with the objective of reducing compensation levels across the board in the manufacturing and service sectors. At the same time, productivity demands have been ratcheted up, most obviously in an ever-lengthening workweek, while job security has virtually disappeared except as a temporary bargaining chip to reduce wages and cut benefits even further.
Pensions, in particular, whose benefits once seemed secure, have been scuttled by strategic private sector bankruptcies, in which states and municipalities have now joined.
None of this could be achieved without a good long bout of hard times, and that is exactly what those at the controls of the American economy have given us. The result was graphically suggested by the recent story in Krugman’s own New York Times of a 49-year-old manufacturing worker who had been earning $18.50 an hour.
That seems like a fairly decent wage, until you reflect that a fast-food worker in Copenhagen earns $20 an hour — the minimum wage in Denmark, and what would be the minimum wage in the U.S. had wages kept pace with labor productivity in the last four decades.
Our worker lost his job, and with it the modest standard of living it had supported. Many such people, if they could get work at all in the past few years, have taken service jobs paying half what manufacturing employment once did.
But, as you may have heard, factory jobs, after decades of disastrous decline, have made a slight comeback of late. Our worker was able to get the equivalent of his old job back — except that it now paid $10.50 an hour. Instead of slinging hash, it’s ingots again for him. The problem is, the wages are still hash.
Depressions have other notable benefits, provided that interest rates are kept low enough for favored customers. Property can be bought for a song, as housing and real estate values plummet. This is called recapitalization. Monopolies form as merger rules are relaxed. Banks and businesses borrow at virtually zero rates from the friendly Fed, while charging premium rates to others and living off the spread without having to add a smidgen of value.
All of this, we’re told, staves off the dragon of inflation. Indeed it does, while facilitating an ever greater transfer of wealth from have-nots to haves. That is why the degree of economic inequality — and, as Colonel Jessep would say, is there any other kind? — has grown steadily during the Obama years.
The rich are making more, lots and lots more; corporate and financial profits are at record highs; international markets are again awash in excess capital. And almost everyone else is making less.
Paul Krugman can’t figure out why hireling bureaucrats and think tank operatives would want to succor the rich at the expense of the rest of us. Learned ignorance can be a contagious thing. And, though Krugman is, I have no doubt, a man of high and serious purpose, he’s probably making out pretty well himself.
Robert Zaller is a history professor at Drexel University. He can be contacted at [email protected].