Dan Alpert's Two Cents

Earth to Paul Krugman

This past Sunday, Paul Krugman penned a screed in the New York Times Magazine (entitled, somewhat unflatteringly in my opinion, “Earth to Ben Bernanke”) that expanded on the content of an ongoing debate in the economics blogosphere over the contents of the mind of Federal Reserve Board Chairman Ben Bernanke.

Professor Krugman has posited for months now that Bernanke has come up short in failing to follow his own prescription for post-bubble, debt-deflationary economies (namely, that of Japan, which the Chairman wrote about as an academic a dozen years ago). In essence, Professor Bernanke’s view was to push both monetary and fiscal stimulus to the point at which it would generate above-natural rates of inflation for a period of time sufficient for such economies to reflate and discount the indebtedness accumulated during credit bubbles.

In the course of Krugman’s commentary he has pushed the notion that Bernanke is either politically intimidated by the right, fearful of uncontrolled inflation, or possessed of a shy personality that is vulnerable to peer pressure within the FOMC (Paul…seriously?).

While some of what is in Ben Bernanke’s mind may be made more clear with tomorrow’s FOMC meeting announcement, in the meantime allow me to rise to Chairman Bernanke’s defense and suggest to Professor Krugman, as I have in the past, a different – yet still quite Keynesian – explanation for our Fed chairman’s current point of view (and in doing so give Paul a piece of my own mind, as I doubt Ben will rise to the bait himself).

Ben Bernanke is neither overly “shy” nor out of touch with the world, as Professor Krugman would have us believe.  To the contrary, I believe the Chairman has correctly assessed the limitations of extraordinary monetary intervention at the zero-bound (short term interest rates at or near zero) and comprehends a present inability of the U.S. economy to generate the sustainable inflation that the professor correctly notes would help us out of our debt-deflationary slump.

I am sure that Professor Krugman agrees that the Great Recession and its sluggish aftermath saw a mammoth decline in aggregate demand.  But if present levels of aggregate demand are insufficient to revive our economy, such demand must be insufficient relative to something else. And in this case – seen from a global perspective – that something else is the global aggregate supply of labor, productive capacity and, yes, even capital.  Much of this excess supply can be traced to the historically sudden emergence of the post-socialist nations into the global market economy – which nations are characterized by extremely low wages relative to those of the developed world.

As a result of the foregoing, wages in the U.S. and other areas of the developed world are unable to “track” (that is, to follow along with, even on a lagging basis) the type of inflation resulting from the ocean of liquidity that quantitative and credit easing policy of the Fed, the ECB and the Bank of Japan has produced – generally speaking, inflation in highly tradable commodities and financial assets.  No wage growth (because of the dampening effect of excess emerging market labor, always standing by to work cheaply where it can compete with endogenous U.S., European or Japanese labor)…no sustainable inflation.  As a result, high levels of inflation tend to collapse economic activity, as limited per capita wages are shunted to oil and food, rather than to more expansionary forms of consumption.

Extraordinary monetary measures will remain a critical weapon in fighting the deflationary pressures that result from our continuing debt overhang and global wage imbalances. But I am afraid – as I believe Chairman Bernanke may well be – that attempts at “reflating-to-recover” are, in the end, somewhat counterproductive under present circumstances.

37 Responses to “Earth to Paul Krugman”

Reuben EspinosaApril 25th, 2012 at 4:08 am

Globally, we have a limitless supply of labor but a limited supply of hard commodities, food and clean water. Hyperinflation and rationing could be in the cards. I think we're starting to see this with high oil and food prices. This is why R&D is so critical to a new technological breakthrough in the production process.

Xavier GladstoneMay 1st, 2012 at 2:46 am

Rueben you and Fernando both suffer from extremely dangerous delusions. The idea the resources are scarce and getting scarcer, and that soon, very soon, we will have so many people we will consume everything and wipe ourselves out.

Both notions are ignorant of the facts. Julian Simon eloquently articulated the debunking of these ideas two decades ago and freaks like Krugman still think they have to argue against them.

The mere nature of free market pricing creates the mechanism by which innovation (not necessarily technology) creates better and more available resources at a cost affordable to all. The only remaining problem in the world is helping people understand that the government they THINK is the solution to resource distribution, is but a more concentrated form of the ACTUAL problem.

EEBMay 2nd, 2012 at 6:38 am

If only this were true! Then, all debts would be liquidated overnight! Unfortunately, things are not so easy. Inflation is unsustainable in a depression economy; any spike in inflation caused by excessive speculation or money printing will quickly collapse because the incomes to support it are simply not there. The inflation is followed by deflation and the real value of the debt is left as great as or even greater than before. Under current conditions, only a new WPA could revive the real economy, but the bourgeoisie is unable to comprehend this. Thus, as a revolutionary socialist, I anticipate a Bolshevik- style revolution when social conditions get to be desperate enough, as by then, a new Lenin or Trotsky is sure to emerge. Until then, look on the bright side: as Karl Marx said, the bourgeoisie will be t heir own gravediggers!

Jonah CraneApril 25th, 2012 at 4:23 am

i would agree and the global labor glut thesis is an interesting one i hadn't contemplated previously. i would also add 2 more thoughts here. first, it is somewhat unfair for krugman and others to say, on the one hand, that fiscal policy needs to do the work because monetary policy has essentially run out of ammo at ZLB, and on the other hand that bernanke is being recklessly reticent. second, i wouldn't rule out that bernanke is trying to keep some powder dry because he knows he's all alone – he's getting no help from the fiscal side, and is worried about further shocks (not least the "fiscal cliff" at the end of the year).

Pat in MassachusettsApril 25th, 2012 at 10:09 am

I do believe you know what you are talking about, Johah, and your sentences are very well constructed, but not capitalizing where needed (except to abbrieviate economics lingo) makes your whole post look childish.

Just a thought from a cranky old bitch 🙂

boupinelApril 25th, 2012 at 2:40 pm

I suppose that Prof Krugman would reply to this article, if he so chooses, by highlighting the statement "wages in the U.S. are unable to “track” the type of inflation resulting from the ocean of liquidity that quantitative and credit easing policy of the Fed". I am certain he would notice that the defining property of the said inflation is nonexistence.

ChangeusApril 25th, 2012 at 3:52 pm

Anyone who has bought groceries, cars, furniture and other items knows that inflation is already with us, despite government statistics. We are all wringing our hands because we have a deadlocked Congress caught up in ideology and looking backward rather than forward. Bernanke truly is alone in this fight.

I also do not understand how inflating the economy is going to help people who are already too strapped to spend now. Instead, much of the spending is going into financial assets rather than capital investments.

At the end of the day economists and politicians dither while we continue to drift.

burkbraunApril 25th, 2012 at 4:18 pm

"But if present levels of aggregate demand are insufficient to revive our economy, such demand must be insufficient relative to something else."

That something else is very much domestic unemployment. Blaming all this on trade and external floods is beside the point. Indeed, if it is hard to generate the inflation that is needed, then the Fed should be trying harder, shouldn't it? That would mean advising the fiscal arm specifically to spend more.

JanApril 25th, 2012 at 8:01 pm

Excellent column. Gradually but inexorably, old Malthus is coming home (to the "developed world") and no amount of liquidity or fiscal deficits can stop him.

barfApril 26th, 2012 at 1:49 am

how many wars are we fighting currently? six? ten? no one is talking austerity…even the Fed Chairman chimed in today vis a vis "the fiscal cliff." basically he said "let's go over it" rather than allow all the tax cuts to expire. I'm unclear what Paul Krugman's view on this is…but it does jibe with his overall view of "keep cranking out the trillion dollar deficits." Frankly (or is it Shirley?) i don't see what changes need to be made right now. The approach taken by the Fed…born of necessity…has morphed into something surprisingly pragmatic. I'm not sure what more could be asked…or delivered for that matter.

LCRApril 26th, 2012 at 2:25 am

Many bright (economic) minds are missing the inevitable truth: There is ongoing credit expansion (loans) into non-productive assets (markets, education, gold, silver) coupled with crushing debt obligations to social "welfare" programs which is being funded by "market facilitators" and will lead to massive collapse. ZIRP does not allow for proper deflation and spikes inflation and bubbles. When will it happen? I don't know. The new normal is causing "hopium" for the political elites who are the dumb ones running the social obligations and promising more than can ever be paid.

Aegean1972April 26th, 2012 at 7:35 am

well put

when nations and economies rely in the hands of corrupted and unskilled politicians, we cant expect anything serious to change. We are heading for stagnation, confusion, deleveraging and trying to re-write the rules of what makes an economy healthy and growing.

Its gonna take time until we sort out how to solve this mess and start the journey to a new "Golden age of Pericles".

Truth is, we know what changes need to be made in order to reach the "golden era" again. But leaving those changes to be made my polticians is plain dumb (since they dont have the knowhow to do these changes or they dont want to dissapoint their "sponsors") and is gonna take forever.

JmeDieManApril 26th, 2012 at 2:41 am

Economists rearranging the chairs on the deck of the Titanic. Everyone can choose how to spend their last minutes on board, np.

When the Fiat ponzi collapses, assets will be repriced. Banksters will be waiting tables, like everyone else. Reboot the Black Screens, get rid of the bogus digital money and maybe (if we don't all kill each other before hand) we can all evolve to a place where the hidden elite no longer pretend to know how to run the show and the planet. If not, see you all in heaven. Surely, your bonds will be cashed there and all your derivatives will be honored. God is the ultimate gambler. The rest of us are amatuers under the delusion of grandeur.

Perhaps this new Global Paradigmn will emerge: "How does it affect our children?" This should be the only thing that should matter in discussions of what is "profitable".

Right now, everyone has it ass backwards, no?

LCRApril 26th, 2012 at 2:52 am

Agree, ass backwards right now. The fact that this post has to do with funding a government which has already spent the SS money shows how entrenched the economists minds are in this crap (confiscation practice). The ideal of people thinking "how does this affect our children" could never catch on since the family unit has disintegrated over the past three decades. The average child per household falls (Japanese-style changes in the US) so there is no way someone can think this way in the US

JmeDieManApril 26th, 2012 at 3:03 am

Good point LCR.

The new definition of what is profitable: "How does it affect THE children". They are not ours. They are the gifts to be lifted up and honored.

How does $700 trillion of derivatives and a run away debt train honor them?

Some legacy for the adults to dump on the kids.

Only the folly of Fukushima trumps it.

Where I grew up, if there was a fox in the hen house, you went out with a shotgun and took care of business. The chickens settle down, and the other foxes stop coming around.

Ben doesn't know how to shoot a gun, but he did figure out how to run a printing press. That is a poor substitute.

Aegean1972April 26th, 2012 at 7:40 am

"How does it affect THE children". They are not ours. They are the gifts to be lifted up and honored.

Some great wisdom in your words JmeDieMan

looking fwd to more posts from you

Daniel Alpert DanAlpertApril 26th, 2012 at 3:34 am

Dear Paul – Respectfully, while the above remark may not be the most articulate thing the Chairman has ever said, I believe you are emphasizing the wrong end of the last sentence:
"To risk that asset, for, what I think would be quite tentative and, uh, perhaps doubtful gains, on the real side would be an unwise thing to do." Whatever he thinks is at risk (the Fed's reputation, other unexpected consequenses, etc.) the operative part of the above is the end, not the first four words. Bernanke believes that real gains are unlikely (and, frankly, the outcome of renewed liquidity-induced price inflation could be counterproductive). Here's why I believe he (and his fellow doves on the Board – since almost everyone else on the FOMC is a hawk) is concerned:

Daniel Alpert DanAlpertApril 26th, 2012 at 3:35 am

Rather than bicker, the two of you ought to put your beards together and focus on what you agree about already – that direct fiscal spending to absorb excess domestic labor resources (and fix things "around the house") is the only dependable way to recover and reflate. Ben will provide all the money – he's implicitly offered it many times – either directly from the press or by enabling the Treasury to lock in rates at the bargain basement levels he's holding them to. Ben Bernanke is no foe of fiscalism. The economics field is divided enough. Additional easing purely out of desperation is not going to replace the spending that is truly needed.

sumitraMay 1st, 2012 at 1:05 am

The best line of the day – "The economics field is divided enough." And we call it science!

Fernando BetancorApril 26th, 2012 at 8:06 am

Reuben, your point is very well made, but we have to face the facts that technological innovation will only exacerbate the global supply imbalance, as it will continue to displace more and more workers with machines. We not only need to innovate, we need to rapidly expand the demand base to generate new jobs at home as well – this means bringing more people in Asia and Africa into the consuming middle class, with its consequent impact on limited supplies of raw materials. At the end, we must face the fact that there is a serious demographic problem (too many humans on this rock) that must be addressed – and that debate has barely even been broached!

XerxesApril 26th, 2012 at 9:15 am

The US has had over thirty years of crazy right wing economics which has created a coun try where your children get food bags from schools for the weekend and eat rodents when they run out (BBC Panorma Feb 2012), where you fight trillion dollar wars slaughtering brown people to teach Russia, China and the UN a lesson in power, where you allow soldiers to slaughter little children and civilians without any custodial penalties (Haditha), where 30,000 of you die every year from guns, where you torture prisoners, where you detain people without trial, where you lock up 35pc of black men between the ages of 15 and 40, where people live in your sewer systems in your major cities. Try sorting out your bigger problems and your tinkering with economic smart-assery might become a little more relevant…

PlaidsportcoatMay 2nd, 2012 at 3:03 am

Thank you for the link to reality. People say thumbs down to reality on this site. They believe like Gingrinch and Cain – Blame yo self

MartinMay 1st, 2012 at 7:42 am

If wages can't grow, then let's price fall and consumption will resume. The only result of the QE has been a bubble in financial assets.

gabriele pastrelloMay 1st, 2012 at 7:40 pm

Alpert wrote that global demand is weak relatively to an excess supply due to: "historically sudden emergence of the post-socialist nations into the global market economy". Post-socilaist economies emerged twenty years ago, while the emerging countries emerged ten years ago. Why, till 2009 no demand costraint was felt? The "historically sudden emergence of the post-socialist nations into the global market economy" may explain the stringencies o labour market in the developed nations, not demand failure which followed the crash of the global finance-driven demand of the first 2000. gabriele pastrello

Richard NenemanMay 1st, 2012 at 8:48 pm

It is profoundly sad that people who know least about economy, the__economists , are perceived by the crowd of insufficient light as a __rainmakers. Repulsive and hopeless.____Please start mega projects give employment for the people, use __engineers, not this intellectually defective profession of … you know __whom… They can be used only in secondary advisory position.__

ERISANationMay 2nd, 2012 at 3:25 pm

I subscribe to the view that declining birth rates in the developed world and China are spreading and that in fact, world population will decline. High end job seekers and low end jobs are out there. The blue collar and ones in the middle who are not tech savvy are left out.

LCRMay 5th, 2012 at 1:46 am

World population will not decline, the rate of growth will. The numbers of people servicing debt will increase at their own peril

psyllium husk powderMay 16th, 2012 at 5:40 pm

Rather than bicker, the two of you ought to put your beards together and focus on what you agree about already – that direct fiscal spending to absorb excess domestic labor resources (and fix things "around the house") is the only dependable way to recover and reflate.