In his recent column The Opposite of Stagflation Paul Krugman says that:
"One of the truly amazing (and disheartening) things about the Great Recession and its aftermath has been the continuing insistence of many economists that it’s somehow a supply-side slump, driven by the evils of Obamacare or something. This tends to come from people who view stagflation in the 1970s as having permanently refuted all things Keynes.So I guess it’s worth pointing out repeatedly that the recent slump shows all the hallmarks of a demand-side shock; in particular, rising unemployment has been associated with falling inflation — the opposite of stagflation."
So I guess its also worth pointing out that the opposite of stagflation is not economic stagnation with declining inflation, but steady growth with very modest inflation. But given it is Paul K. we'll grant that he is assuming inflation as a reference point in this. And in focusing in on the model battles, he is saying that we are indeed seeing stagnation, but there is deflation as his form of the Keynes model would predict. Huzzah!
I will put aside for now his assertion that we are seeing declining inflation. I think it might be said we are seeing little inflation growth overall, but with inflation appearing in certain product segments and assets. But this is, I believe, an artifact of the way in which the Fed is pursuing very significant, top down monetary stimulus in a system that is still distorted and corrupted by the financial sector and its moneyed interests. A few at the top are taking the greatest part of the monetary growth, and their demand is not for common goods but for luxuries, and monopolies, and more financial assets.
And so Paul Krugman is triumphant, because he would then go on to say, as he often does, that all we have to do is pour massive stimulation in to the economy from the fiscal side, and the demand side of the economy would recover as consumers could use their wages to purchase more goods. Problem solved.
And its a good piece of intellectual land to stake out, because no matter what the actual outcome in the real world, Paul will be able to argue that he was right if there is a favorable outcome. Or if not, then it would have been favorable except that the government did not provide enough stimulus. I would be inclined to believe that even if stagflation does eventually show up, he will argue that it was some other anomaly that does not affect his model. A model that is too narrowly focused, and yet with too many degrees of freedom, to be useful.
This works for Paul because his focus is sufficiently narrow and circumscribed, which is the failure of most economic models to provide any actual benefit for the real world, and are unsuited for the purposes of making policy decisions except at the most advisory level. It allows him to almost completely ignore the facts on the ground, what really happened to cause the financial crisis, and what forces exist to keep it stubbornly at work despite massive top down monetary stimulus by the Fed.
But like the housing bubble, when reality throws an economist a curveball, I have no doubt he will search his many hundreds of columns and find that he mentioned it, once. And I suppose he may have mentioned reform once or twice as well.
His heart may be closer to the solution than the Austerians, but his mind is still carrying water for a system of learning, a method of distributing the benefits of productivity, and a political mindset that is more of an impediment to progress that an aid to it.. This is what happens when a vibrant set of theories from an original mind like John Maynard Keynes suffer from the arteriosclerosis of political dogmatism. And after all, economics is a disgraced profession.
It is the hallmark of what Chris Hedges has called 'the death of the liberal class,' and along with it, the death of its conscience and sacrifice of moral principles to expediency in the service of power. Few better representatives of this than the Clintons and Obama, and their acolytes in the status quo. But they are presented as the alternative to an opposing political point of view so base as to almost redefine hypocrisy and greed.
The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustainable recovery.
h/t Yves Smith, et al.
