Krugman, Deficits, Deflation, and Unemployment
Paul Krugman, with his perch on the NYT, is probably the most prominent voice of the US liberal left. His views seem to define the furthest reach of responsible leftism and that goes a long way in explaining why this crisis is turning into a bonanza for the right.
Look at yesterday’s summary of his thoughts on the monetary and fiscal role of government (here).
“…the case for stimulus has always been highly conditional. Fiscal stimulus is what you do only if two conditions are satisfied: high unemployment, so that the proximate risk is deflation, not inflation; and monetary policy constrained by the zero lower bound.”
Krugman sees the case for fiscal stimulus as limited to the simultaneous existence of two conditions but we must recognize that his first condition has been met throughout virtually the entire history of industrial capitalism. Other than during bubble expansions, unemployment / under – employment has always been high (and much higher than the official statistics).
It seems clear that Krugman’s main concern is deflation rather than unemployment. Unemployment, the primary fear of the vast majority of people, is actually not too important in Krugman’s orthodox view. This can be seen by his ready acceptance of the obscene concept of NAIRU – the Non Accelerating Inflation Rate of Unemployment. The view is that capitalism needs a certain percentage of unemployed workers in order to keep wage demands down. Is this not identical to Marx’s reserve army of labor? Here is Krugman in a highlight section of his Macroeconomics textbook:
“Policies that keep the unemployment rate below the NAIRU will lead to accelerating inflation as inflationary expectations adjust to higher levels of actual inflation. The NAIRU is equal to the natural rate of unemployment.” …. “an unemployment rate below the NAIRU cannot be maintained in the long run. As a result, there are limits to expansionary policies.” (page 462)
The issue isn’t whether NAIRU and Marx are correct in their assessment of the logic of capitalism as it currently exists. The point is that a key spokesman on the left would accept the misery of unemployment as ‘natural’ rather than proposing a different logic. The silence is deafening!
The causes of inflation are complex and now is not the time to get into them. But how about oligopoly pricing power? Virtually every industry today is controlled by a handful of companies that clearly have pricing power. It is widely agreed that monopolies (utilities, etc.) need to be regulated – why not here? Why not propose a NAIRO (with the O standing for oligopoly)? Also, income could be distributed outside of the wage through direct government subsidies. These would have no wage – price effect. Instead, Krugman uses his perch to propose nothing more than a couple more years of budget deficits now, followed by austerity (See the 1st paragraph of my post here).
The sad truth is that Krugman is just another orthodox economist.