Paul Krugman: When Basic Economic Theory Is Ignored, Disaster Will Follow

[marmar]

When Basic Economic Theory Is Ignored, Disaster Will Follow

Thursday, 16 May 2013 13:58
By Paul Krugman, Krugman & Co. | Op-Ed


As I have been writing a lot lately, the clean little secret of the global economic crisis is that standard economic theory actually performed pretty well.

It's true that few anticipated the severity of the 2008 crisis — but that wasn't a deep failure of theory, it was a failure of observation. We actually had a pretty good understanding of bank runs; we just failed to notice that traditional banks were a much smaller share of the system than before, and that unregulated, unguaranteed shadow banks had become so important. Once that realization hit, as the economist Gary Gorton has documented, standard bank-run theory made perfectly good sense of the story.

And the aftermath of the crisis — persistent low interest rates despite high deficits, impotence of monetary policy, major negative impacts of fiscal austerity — may not have been what most economists or government agencies predicted, but it's what they should have predicted. As I often point out, Macroeconomics 101 has worked pretty well.

The point is that radical new theories haven't been needed at all, since off-the-shelf economics tools we already had, provided plenty of guidance.

In that case, however, why are we doing so badly? And I mean really badly. ......................(more)

The complete piece is at: http://truth-out.org/opinion/item/16416-when-basic-economic-theory-is-ignored-disaster-will-follow

[MannyGoldstein]

1. "We're" doing badly because the folks with the power want the 99% to do badly

The 1% are doing fantastically - they've made trillions in our current depression, while the little people have lost hundreds of billions.

Virtually all powerful forces in the world have brought their might fully to bear on the task of completing the evisceration of the common man.

[abelenkpe]

8. Exactly. Nt

[reformist2]

2. He's making an odd argument - that stimulus works, but that we're still doing "really badly."

I think I get what he's saying, but he needs to make the dichotomy clearer: We passed *monetary* stimulus, and that worked to the extent it could - namely, in monetary and financial aggregates like money supply, GDP, the stock market, etc. What we did NOT do was real *fiscal* stimulus, and as a result, statistics like employment, median income, consumer confidence, etc. have been pretty lackluster.

[rhett o rick]

5. The amount of stimulus we have is insulting. It is works as well as a band-aide for a broken back.nm

[BootinUp]

6. this post is not complete without reading more of his posts

basically. The central issue is austerity in depressed economies when interest rates are at the lower bound. There has not been much stimulus for the last 2 1/2 years. It mostly ended 2010 when the very serious people told us we needed austerity.

[reformist2]

7. I've read enough to know that he's spending most of his time battling the austerians.

I guess I'm making a broader argument - that more economists need to get out there and make the case for fiscal stimulus. Too many Americans are still under the impression that what we did in 2008/09 was a huge stimulus, and that it didn't really work. I hate to say it, but Krugman alone cannot or is not swaying public opinion.

[xchrom]

3. Du rec. Nt

[rhett o rick]

4. The ruling Elite 1% have figured out how to transfer wealth directly from the 99% to themselves.

I would love to see a graph of wealth flow.

When we speak of "the economy" it doesnt mean much because there are two economies. One economy for the Elite 1% and another for the masses.

How long can this transfer of wealth continue before the middle class is destitute?

It will be interesting when the 1% have to pay for their own Defense.

When all the wealth of the 99% is in the hands of the 1%, then the transfer will have to change to from the 0.9% to the 0.1%. Isnt capitalism wonderful?

[Fire Walk With Me]

9. When will Mr. Krugman etc. GET that we are dealing with destroyers seeking to turn a profit through

destruction. "Disaster Capitalism". Look at W Bush's business efforts in life and you'll see a clear trend of profiting from destruction. Same with his brother Neil. Add in Wall Street and it's game over. "Debt is their business model." -The 99% Illuminator, a projection upon a Wells Fargo.

Now look at the Bush War debt. Trillions. This debt is a weapon which will be used to destroy this country, so that more power can be grabbed (by those who created this very emergency) and so resources can be grabbed and sold for personal profit. Look at the "emergency manager" smash-and-grab scam going on in Michigan via the Koch bros' own stealth "tea party" candidate, Michigan governor Rick Snyder. This is what awaits the entire country, and those who will profit wildly, unimaginably, from making this nation into a market, into a commodity to be sold off just like the vulture capitalists of the 80s did with failing corporations ala the film "Wall Street"...greed is good!

It is utterly unreasonable to project "our" ethics and sensibilities upon them. They are predators and destroyers, and highly effective ones at that. Does anyone else remember W Bush touring the nation for months on end saying social security was in imminent danger of collapse (echoes of post-9/11 Iraq propaganda) and must be turned over to Wall Street to survive? TO WALL STREET!?

This is the way of it.

[byeya]

12. That's what Prof Krugman won't talk about because he is an academic economist and

remains planted in the mainstream of capitalist Keynesian thought. He's correct as far as he goes but he will never get to the point where he says it's the system that is the problem and incrementalism cannot work to better the lot of the wage earners on a long term basis.

[BelgianMadCow]

14. Well, I thought so too. The I read this bit from him, about The Shock Doctrine

What Smith didn’t note, somewhat surprisingly, is that his argument is very close to Naomi Klein’s Shock Doctrine, with its argument that elites systematically exploit disasters to push through neoliberal policies even if these policies are essentially irrelevant to the sources of disaster. I have to admit that I was predisposed to dislike Klein’s book when it came out, probably out of professional turf-defending and whatever — but her thesis really helps explain a lot about what’s going on in Europe in particular.

From his blog.

[Fire Walk With Me]

16. So there's a chance he'll see when he eventually is forced to connect the dots

and overcome his predisposition

Thanks for both your replies.

[BelgianMadCow]

19. Well, the fact that he is at least willing to concede maybe having blinders on

gives hope. To him, not me, because I don't hope for salvation by any of the serious people (he makes fun of the "very serious people" advocating for austerity, but he's one of them in a couple ways) anymore. The revolution is in me, and you. Well, us.

[on point]

10. I wish I had a thousand recs! I see all the supplysiders mystified their theories aren't working

That's because their theories are garbage!

But rather than admit that, they continue to be mystified the economy just isn't working!!

[closeupready]

11. They are not mystified - they are simply thinking

for a new plausible excuse as to why their theories aren't working YET - they will ALWAYS need "just another six months".

Meanwhile, their wealth will continue growing exponentially while working people struggle on, and go broke.

[AndyA]

13. The focus should have been on creating jobs all along

That alone would have improved things more than anything else.

Still amazed that the Democrats haven't hung the deficit around the GOP's neck, as their policies alone created the deficit. A huge missed opportunity. Instead of making sure America knew the right was responsible for the deficit mess, the Dems allowed the GOP to rewrite history as if it were a bipartisan issue.

President Obama inherited a huge mess from Bush and the Republicans. Nothing has been done by the Republican majority in the House to create jobs. The GOP is a disgrace.

[HiPointDem]

15. winter is already here, paul.

[winter is coming]

17. The problem is that the people responsible for the disaster think they can ride it out.

They're in for a rude awakening.

[Electric Monk]

18. k&r

&u&g&m&a&n