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Krugman and the real economic problem

September 28, 2012

Here are some official unemployment rates: Spain 25.1%; Greece 23.1%; Ireland 14.9%; Italy 10.7%; Portugal 15.7%; France 10.3%; UK 8%; Germany 5.5%; US 8.1%; European Union as a whole 11.1%.  Actual levels of hardship are of course much higher.

Meanwhile, the International Labor Organization in its 2012 World of Work Report informs us that the global employment rate is just 60.3%.  Informal employment is over 40% of nonagricultural employment in two-thirds of the “developing” countries where data is available and even in “successful” countries like Chile, Brazil, and India, it’s at 36%, 47%, and 83%, respectively.

Unemployment, or more specifically, the lack of a secure source of income is one of the top historical problems in the global political economy and it’s not at all unique to our current crisis.

“What is the real economic problem”?  Paul Krugman asks this crucial question today in an article written specifically about Spain.  I find his answer quite frustrating in that he completely misses what I consider the central dynamic of our world while accepting the idea that pain (albeit not as much as is taking place today) is necessary.

“Basically, Spain is suffering the hangover from a huge housing bubble, which caused both an economic boom and a period of inflation that left Spanish industry uncompetitive with the rest of Europe. When the bubble burst, Spain was left with the difficult problem of regaining competitiveness, a painful process that will take years. Unless Spain leaves the euro — a step nobody wants to take — it is condemned to years of high unemployment.  But this arguably inevitable suffering is being greatly magnified by harsh spending cuts” … In other words, the straight economics of the situation suggests that Spain doesn’t need more austerity. It shouldn’t throw a party, and, in fact, it probably has no alternative (short of euro exit) to a protracted period of hard times.”

This widely held Housing Bubble Theory is, IMO, completely inadequate.  It overlooks the real and focuses completely on the artificial.  In the world of the real, we have extraordinarily high productive capacity; so high, in fact, we simply don’t need that many workers to do the job.  We know this to be true as the fundamental political issue almost everywhere is the lack of jobs.  The “expert” “solution” for this is little more than an endless competition among workers and nations for the limited jobs that do exist.

High productivity would be a tremendous thing of course if the fruits were widely shared, but not so when they’re tightly controlled by a tiny number of private owners.  The result is, by logical necessity, a never ending condition of insecurity and unemployment.  This, then, is the “real economic problem”.

Krugman says “Spain is suffering the hangover from a huge housing bubble” but on what rational basis should we expect a “hangover” from simply building too many homes?  What should the Spaniards have been doing rather than building homes?  If it weren’t for the employment created in the “housing bubble”, wouldn’t there instead have been massive unemployment?  The central problem isn’t this bubble or that bubble, it’s that only in a bubble can full employment exist.  By not addressing this fundamental truth, Krugman is serving us a highly distorted version of reality.  The Krugmanian choice, it seems, is either a bubble world followed by “a protracted period of hard times” or a non-bubble world in which times are always pretty crumby.  This despite our extraordinary productivity.

What of Germany?  It’s common to see the European problem as being that of a current account crisis.  But this view not only hides far more than it reveals, it’s leading us to a dangerously ugly nationalism.   One of the central laws of global capitalism is economy of scale and we’d expect therefore large industry to be concentrated in specific geographical locations; and such has happened in Germany.

We can see that the real problem isn’t truly about current accounts if we consider what would likely happen if German manufacturing were divided up in the various peripheral countries.  Unemployment would drop in Spain, Ireland, et al but would rise in Germany.  Nothing, it would seem, would really change if we consider Europe as a whole as the fundamental reality would remain – there isn’t enough work for everyone.  What would Krugman say then?  That the unemployed throughout Europe need “a protracted period of hard times”?  That they need to get more competitive?  This is nonsense.  On what possible basis should people be forced into hard times when the “production problem” a la Galbraith has been solved?

Krugman does offer Spain the option of leaving the euro but there’s nothing truly inherent in the euro itself that enforces pain.  The real economic problem isn’t remotely one of a Krugmanian Housing Bubble or a current account crisis or a particular currency.  It’s that a privately controlled system of massive productivity cannot, by its nature, provide widespread prosperity.

From → Dynamics, Suppression

8 Comments
  1. We know this to be true as the fundamental political issue almost everywhere is the lack of jobs. The “expert” “solution” for this is little more than an endless competition among workers and nations for the limited jobs that do exist. Right.

    The central problem isn’t this bubble or that bubble, it’s that only in a bubble can full employment exist. Right.

    Nothing, it would seem, would really change if we consider Europe as a whole as the fundamental reality would remain – there isn’t enough work for everyone. Very wrong. There’s always productive work to be done. The elites, seeing that only a smaller workforce is necessary to provide for subsistence for the masses, prevent anyone else not under their thumb from working.

    Krugman does offer Spain the option of leaving the euro but there’s nothing truly inherent in the euro itself that enforces pain. Quite wrong. The problem is inherent in the euro. A system where the only central institution is a central bank which is supposed to only do monetary policy & not cooperate with governments cannot work, is intrinsically unstable, cannot sustain Europeans with the same lifestyle they have had, let alone grow. The Euro is an automatic destabilizer that makes every problem worse, enlarges whatever inequalities exist, makes all debts less & less sustainable. Of course the ECB does break its charter & support the various governments – if they attack themselves and make their problems worse. The natural outcome is what we see – only one economy (at most), Germany left standing, which becomes the effective sovereign, because it created the most problems, the most externalities, by its Euro hoarding.

    • “Nothing, it would seem, would really change if we consider Europe as a whole as the fundamental reality would remain – there isn’t enough work for everyone. Very wrong”

      Certainly there’s not enough “profitable” work for everyone. I agree there’s productive work that needs to be done but with reasonably full employment, I’d strongly doubt it would come anywhere near an 8 hour day.

      As far as the euro, I disagree – I don’t think the problem is inherent in a particular currency. The problem is the class interests that enforce certain policies – such as non cooperation, etc. The ECB charter is indicative of the problem, not the euro per se which is just a currency. Monetary policy is a tool that can be used for good or ill, but the tool itself cannot be the fundamental problem. I’ll stick to my conclusion that the fundamental problem is a privately controlled system of massive productivity. Suppose Spain brought back the peseta but instituted an extremely conservative monetary system that favored only wealthy interests. The problem wouldn’t be the peseta, which is just a currency; it would be the undemocratic power that’s running the show.

    • sylvia permalink

      What should the Spaniards have been done rather than building homes?

      What should the Spaniards have been doing rather than building homes?

      Hope you take this in the spirit in which it is given.

      I read and learn. I do not see where I can really contribute so I do not.

      But I thought you might want to consider the above.

      From: a fan.

  2. Certainly there’s not enough “profitable” work for everyone. NO! This is certainly, emphatically wrong. It simply doesn’t make sense. It shows how deeply embedded neoclassical quasi-assumptions are that reasonable people can conceive this, the idea that “not enough profitable work for everyone” could be a true fact about the nature of things. And it verges on “lump of labor fallacies” (Dean Baker does too.)

    There’s always a lot of productive work to be done. It isn’t being done in Europe, because of austerity. 40 years of it, followed by brutal austerity now, aimed at killing the healthy sectors of the economy, in order to save the cancers.The fact that the productive work is not being done, because of insane government underspending makes there a lot less monetarily profitable work to be done by the “private sector”. But these countries are so rich that they can enforce idleness on their most productive workers & still survive after a fashion, with opulence for their depraved, demented elites.

    With reasonably full employment, which can only be maintained by governments, but which is a very easy thing to do, that every country in Europe had no real problem in maintaining for decades after the war, there would be as much private sector work as anyone would want to have 8 hours or more if they wanted to save up & get rich slowly. This pernicious “not enough work” idea, that there is some mystical barrier, that it is not a human decision, is one reason that Europe has had worse economies than the USA for the last 40 years, while it had grown much quicker in the postwar golden age. The USA has grown quicker recently because of it is more Keynesian, more government-led than Europe, although the mythology is the reverse. See James Galbraith’s WHAT IS THE AMERICAN MODEL REALLY ABOUT? Soft Budgets and the Keynesian Devolution

    I’ll stick to my conclusion that the fundamental problem is a privately controlled system of massive productivity. I agree wholeheartedly. But how is this control exercised? How is it disguised, so that it looks like a force of nature, of arithmetic? The design of the Euro.is integral to this. It makes the powerless national governments the whipping boys of their suffering people, while the madmen at the ECB & the Bundesbank, the “economists” and Eurocrats are hidden from blame. And a belief in the natural limitation of either productive or profitable work is an enormous victory for the bad guys.

    Suppose Spain brought back the peseta but instituted an extremely conservative monetary system that favored only wealthy interests.

    A national monetary system cannot be as insanely “conservative” as the Euro. Its design has been traced back to people who thought the old gold standard was too liberal! It is “conservative” as England’s potato famine policies were toward Ireland. You just can’t do it to your own country for very long. Preferably, you need a body of water or a mountain range in between the policy inflictors and the victims. Heinrich Bruning tried, making Hitler plausibly look like the savior of Germany, but he only could last for a couple of years, and the crisis has gone on much longer already.

    People can vote their own bastards out. They can’t vote the bastard Eurocrats & ECB banksters out, who pretend that their insane actions are prudence dictated by law and arithmetic – and worst of all, I fear that many or most of them believe their own lies.

    Under the Euro Spain simply cannot run a full employment economy, or anything near. It can never pay its debts. This is a colossal waste of resources, a gigantic source of instability & flow of wealth from the poor to the rich, which is making Spaniards eat out of dumpsters. And the problems will ever get worse, as long as it uses the really-existing Euro.

    Alain Parguez’s 1999 The Expected Failure of the European Economic and Monetary Union: A False Money against the Real Economy is one of the best and accurate predictions, here and elsewhere he describes the politics better than anyone else, behind this “false money” destroying “real economies” and real lives.

    • Calgacus,

      I think you raise some excellent points. I believe we agree though that in a purely private economy with high productivity, absent massive government involvement, there will not be sufficient profitable work. That is the main point I was trying to convey in the post. We do have a massive amount of catch up work to be done to provide decent living standards for everyone, convert our economy to a sustainable path, etc, etc. But I do think that once that’s done our technological capability is such that we will be faced with a core philosophical question – what to do with our leisure. Recent books have come out arguing that computer technology and robotics will drastically reduce the amount of human work needed for many jobs that currently exist – I think they will be proven right. But regardless, under non-Keynesian capitalism, productivity will not be shared, collective work will not be provided, and there will therefore be a constant shortage of work.

      I agree that the lack of democracy in the EU is a critical problem – THE critical problem in the world, actually, since a privately controlled system of massive productivity couldn’t long exist in a real democracy. It’s not just the EU though – for a nation to become truly Keynesian, it would have to sharply attack the interests of its elites, break out of the WTO, close its borders to capital outflows, risk overthrow by its or foreign security forces, strictly regulate its domestic businesses, etc, etc.

      The US itself has its own constitutional structures which limit democracy and even though it has its own currency, it is still more conservative than the EU in most respects involving worker rights. But we do agree: the EU is a disaster. But let’s not forget that most of the “periphery” of the EU prior to the euro wasn’t doing that well either – they weren’t at all what I’d call functioning democracies and they aren’t today. Without fundamental changes I don’t think it would be reasonable to think they’d suddenly become so if they change currencies. That’s why I think it’s better to focus on what I think is more fundamental: concentrated power and lack of democracy.

  3. This notion of “productive” work is a difficult one. Anyone who works in insurance is doing a job that we could do without. Those doing work in or for the military could likely find themselves jobless with no great tragedies occurring. There are many other examples, but this isn’t the point.

    People don’t need much. People need food, clean water, some clothing, simple tools, shelter and in some locations, heat. Everything else is optional. Not really that long ago, simply providing these things for everyone took the work of most people. One can agree, I hope, that now we can provide these things with a very small percentage of the population working.

    Once the basics are satisfied, we have choice. But we haven’t really addressed this choice in any real way. We’ve simply gone on as before, assuming that everyone needs to be working to produce what we need. In fact, we still require everyone to work in order to gain access to the basics. But it need not be this way.

    People may choose to have more stuff, which creates jobs as people need to produce the stuff. But people may also choose NOT to have more stuff, which provides people more time to travel, visit, think, pursue hobbies, read…whatever. But the current economy doesn’t really provide this option. For most people, work is an all or nothing proposition. Some of this is structural: most employers simply want fewer employees each working more hours than more employees working fewer hours. But some of this is due to the fact that society has made it very expensive to live basically. One born into this country, anyway, has no claim at all to a piece of land on which to grow some food or build a small home and the government doesn’t provide the food or home — this seems a problem.

    The suggestion that we must all work a substantial amount in order to gain access to our basic needs is archaic. The government could provide choice — choice is the essence of freedom — by ensuring basics are available to all. There are many ways. Stipends could be provided. The work week could be shortened causing necessary work to be shared more equitably. Specific handouts of food or housing could be provided to all (as we now provide food and housing to the poor). There are many other options. But we don’t consider them. Instead, we go on…thoughtlessly.

    • Excellently said, Abellwordpress, I couldn’t agree more. But such sanity goes against every grain of our global Americanized capitalist system. Everyone just assumes the world must be a great competition and if we aren’t able to think up some great new invention, our living standards must sink to the stone ages. Everyone just knows that we can’t retire until we’re at least 70 or 80 and we can’t really afford to go to the doctor.

      The problem is that the logic you express just doesn’t compute within capitalism. You may as well be speaking some language from Pluto.

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