Saturday, January 19, 2013

Paul Krugman: Honorary Trotskyist

The incessant racket that my Trotskyist friends don't make on the federal deficit is driving me to distraction. The noise is almost as loud as one hand clapping--and that's precisely the problem. For apart from labeling the deficit as just another "contradiction" of capitalism (whatever the hell that is), they have absolutely nothing to say. Their silence is a problem.

So in lieu of an actual Trotskyist adversary, I hereby appoint Paul Krugman as the honorary Trotskyist of the day (an ill-fitting choice, to be sure), and respond to his recent essay. I have picked a difficult assignment, because I mostly agree with what Mr. Krugman writes. As with real Trotskyists, it's what he doesn't write that is the issue.

He says:
The budget deficit isn’t our biggest problem, by a long shot. Furthermore, it’s a problem that is already, to a large degree, solved. The medium-term budget outlook isn’t great, but it’s not terrible either — and the long-term outlook gets much more attention than it should.
That last sentence, especially, is absolutely correct, and puts paid to the arguments from some that we're putting our grandchildren in debt. Our grandchildren will have to solve their own problems (be they financial, climatic, environmental, or anything else)--thank you very much.

The long-term consequences of our deficit is not the issue. A hundred years out all our current debts will be forgotten. The principals will be 50 years deceased, their estates long since dissipated, and indeed, history will have moved on. Imagine Sears Roebuck trying to collect on accounts receivable from 1913--good luck with that. Like everything else, debts decay. The fact that our national debt will never be repaid is probably not an important issue.

The problem with debt is not the long-term consequence, but rather the short-term problem, and on this Mr. Krugman is simply mum. He dismisses the financial crisis as so much chin wagging. He has a point: it is a professional hazard of pundits to exaggerate all phenomena into "crises." Hence a category one hurricane morphs into "Superstorm Sandy," routine highway maintenance becomes an "infrastructure crisis," and any test result turns into an "education crisis." Trotskyists trot out so many crises that I think they have a crisis crisis. So I'm sympathetic to Mr. Krugman's financial downgrade.

Still, maybe our current financial problems do rise above the normal, or even above the new normal. How, for example, can the government borrow $1.2 trillion annually, but keep interest rates at near zero? Given that China is no longer able to lend us unlimited amounts of money, the Fed is reduced to printing money, i.e., paying off social security with little bits of colored green paper. 

And what about the rehypothecated debt--debt incurred using (uncollectable) accounts receivable as collateral? That's what really makes too big to fail to big to fail. If one bank goes down, then all the other hypothecated securities go down with it. Instead of the bankruptcy of a single bank, we're faced with the potential collapse of the entire financial system.

Finance is supposed to allocate capital to its most effective use. As long as that purpose is paramount, then there's nothing wrong with all the complex derivatives, algos, hedge funds, and other animals that I simply can't recognize in the wild. But our financial institutions have taken on a life of their own, and no longer serve the larger economy. In a word, they've failed at their true purpose. The reasons for this failure surely include government hijacking institutions to fund government, the Fed putting a thick finger on the scales in misguided efforts to save the system, technology enabling tools which consequences are poorly understood, and a whole bunch of completely misguided regulation. The result, in a word, is a crisis.

Now I'm very bullish on the long-term prospects for the American and world economies. Abundant energy, additive manufacturing, driverless cars, trucks, and airplanes, huge potential savings due to automation in medicine, education, and every other industry, means that my grandchildren (should I be so lucky) will be much richer than I am. I think Mr. Krugman agrees with me on that (not sure), but my Trotskyist friends definitely do not. They conflate "finance" with "capitalism," and assume that the collapse of one implies the collapse of the other. They're wrong.

But finance is important. The persistent misallocation of capital will make us poorer. The financial crisis--for that is what it is--will wipe out trillions of dollars in wealth and impoverish hundreds of millions around the world. I see no way around this,

On a personal note, Mr. Krugman let me know that our mutual friend, Wile E. Coyote, has finally got his life put back together. He's doing fine and looks to do better. Indeed, on his current trajectory his long-term prospects are excellent.

Until he looks down.

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