David Brooks vs The Liberal Technicians; i.e. Paul Krugman is Wrong

In his recent Op-Ed piece, The Two Cultures, David Brooks takes a look at a new economic study of stimuluses’, which comes to the conclusion that they work best with countries that have low debt, fixed exchange rates and closed economies and not countries “like the U.S. with high debt and floating exchange rates.” Unlike Germany, the United States economy is intimately tied to it’s trading partners by overseas manufacturing of US products. Therefore while an $800 billion stimulus might seem to leave a “large footprint” considering the US $14 trillion GDP, “it is hard to find in a $70 trillion global economy.”

Another observation by Brooks parrots my article The Immaturity of Obamanomics. Here Brooks points out the futility of trying to scientifically quantify human behavior and spending habits, “The liberal technicians have an impressive certainty about them. They have amputated those things that can’t be contained in models, like emotional contagions, cultural particularities and webs of relationships. As a result, everything is explainable and predictable. They can stand on the platform of science and dismiss the poor souls down below.” The issue of course is adhering to Keynesian dogma, such as “liberal technician” Paul Krugman. Keynesian models and projections are simply speculative fairy tales, but the likes of Paul Krugman refuses to take his head out of the ground to look around at the real world. Brooks writes, “If the government borrows trillions of dollars, this will increase public anxiety and uncertainty, the conservatives worry. The liberal technicians brush aside this soft-headed mush. These psychological concerns are mythological, they say. That’s gaseous blathering from those who lack quantitative rigor;” this statements pretty much defines every Paul Krugman article I have ever read, or I’m sure he has ever written.

So what is the answer? Well it’s pretty much the opposite of anything Paul Krugman espouses. In the real world you don’t borrow money to reduce the debt. Only in the fantasy of Keynesian macroeconomics, is this considered “a brilliant and aggressive stimulus (model).” It’s what you think it should be. Government cannot create jobs nor will it ever make a profit. In order for the government to receive higher tax revenues, it needs to promote job creation, not raise taxes. This means drastically cutting government expenses and leaving as much capital in the private sector as possible. If there is one area that government can improve is to rein in the naked derivatives market. Since the repeal of Glass-Steagle, the money that was traditionally used to buy stocks and bonds has been invested in these made up instruments, leaving American business grossly under funded; in Germany they have already been outlawed; “When you look around the world at the countries that have come through the recession best, it’s not the countries with the brilliant and aggressive stimulus models. It’s the ones like Germany that had the best economic fundamentals beforehand.”

On might remember that it was Paul Krugman who loudly denounced Germany’s conservative stimulus and austerity, which subsequently boosted their economy to the most robust in all of Europe, contrary to Krugman’s statement, “The key point is that while the advocates of austerity pose as hardheaded realists, doing what has to be done, they can’t and won’t justify their stance with actual numbers — because the numbers do not, in fact, support their position (the numbers Krugman talks about are made up Keynesian numbers).” As I said in Germany Proves the Keynesians Wrong, they were indeed right and Krugman was indeed wrong, just as he is always wrong.

In the final analysis we are left with the obvious, that as much as it was been advertised, you can’t reduce human behavior to a Newtonian equation; human reaction is much closer to Chaos Theory, which produces a pattern but is not necessary predictable. Brooks observed that liberal technicians view “psychological factors like uncertainty and anxiety really are a mirage. The first time a business leader tells you she is holding off on investing because she is scared about the future, you dismiss it as anecdote. But over the past few years, I’ve had hundreds of such conversations.”

As I have said so many times before, Keynesian theory is accepted by those who view government as the answer to society’s problems. Rather than accept the fact, that limited government with reasonable regulations allows the free market to find it’s own level and prosper, Keynesians want constant government influence, unwilling to accept that the economy would work better without it’s interference. Brooks ends with this; “It all makes one doubt the wizardry of the economic surgeons and appreciate the old wisdom of common sense: simple regulations, low debt, high savings, hard work, few distortions. You don’t have to be a genius to come up with an economic policy like that.” It’s like the law of supply and demand; as with gravity, it would exist whether you recognized it or not and is not so easily manipulated.

Germany Proves the Keynesians and Obama Wrong

Keynesian has been one of the predominant economic theories since the end of WWII. The United States is about 10 years behind Europe primarily because of the post WWII economic boom that occurred in the US, countering the Keynesian doom-sayers who predicted high unemployment and slow growth after the war. This delay has allowed economists in the US to look at Europe as kind of a crystal ball into the future. In March/April of this year there was a meeting of the G20 in England. There Obama was rebuffed for his Keynesian ways and was told Europe had had enough of high unemployment and low GDP, and rather than spend themselves into prosperity, they were going to tighten there belts and cut spending toward a path of austerity.

Paul Krugman, one of the loudest voices for Keynesian economics was beside himself. In a now infamous OP-Ed named “That ‘30s Feeling”, Krugman lambasted the Germans. “What’s the economic logic behind the government’s moves? The answer, as far as I can tell, is that there isn’t any. Press German officials to explain why they need to impose austerity on a depressed economy, and you get rationales that don’t add up. Point this out, and they come up with different rationales, which also don’t add up.” The reason Krugman was so adamant against austerity is one of Keynesian’s primary pillars is stimulus or perish; but he saw all this cheap money available to the Germans, “The key point is that while the advocates of austerity pose as hardheaded realists, doing what has to be done, they can’t and won’t justify their stance with actual numbers — because the numbers do not, in fact, support their position. Nor can they claim that markets are demanding austerity. On the contrary, the German government remains able to borrow at rock-bottom interest rates.” Krugman went on to forecast,“There will, of course, be a price for this posturing. Only part of that price will fall on Germany: German austerity will worsen the crisis in the euro area, making it that much harder for Spain and other troubled economies to recover.”

David Brooks wrote in his Op-ed piece “The Parent Model”, the German financial minister countered the Keynesians with, “Governments should not be addicted to borrowing as a quick fix to stimulate demand”. (No wonder Krugman hit the ceiling!). The Germans instead were looking reduce debt, balance budgets and increase confidence. Well it’s been 5 months and what has happened? The US is still mired in a recession with 9% employment and a flat GDP. Germany on the other hand has seen 9% growth in one quarter and unemployment has fallen. Brooks went on to say, “The results do underline one essential truth: Stimulus size is not the key factor in determining how quickly a country emerges from recession. The US tried big, but is emerging slowly, The Germans tried small and are emerging quite nicely." Obviously this is only one quarter and as Brooks mentioned, 9% is not a sustainable level of growth, but I'm sure Obama would rather have seen similar results prior to the upcoming November elections.

Since the Keynesians and Paul Krugman have been tone deaf to current economic trends, economists have been looking in other directions. One Global Investment company that has been gaining a lot of respect is PIMCO and their New Normal. "The result is a prolonged pause, or in some cases, a violent reversal in certain concepts that markets had taken for granted. We referred to it as the demise of the “great age” of private leverage, asset- and credit-based entitlements, self-regulation, policy moderation, and shrinking direct government involvement. Not surprisingly given the extent of the gains that were privatized and the losses that are now being socialized, the demise is occurring in the context of popular anger, confusion and what one of our speakers called “a morality play” in parliaments around the world." PIMCO describes this economic world view as a result of what they termed the Keynesian "end point;" from Bloomberg , “Time, devaluations, and debt restructurings might be the only way out for many nations,” Crescenzi wrote in an e-mailed note titled “Keynesian Endpoint” that referenced the Great Depression era economist John Maynard Keynes. Debt-fueled spending programs aimed at combating the global financial crisis of 2008 are among policy tools now “being seen as a magic elixir that has morphed into poison.”

To be fair to John Maynard Keynes, there is little doubt that we would consider it laughable that Paul Krugman is a self described neo-Keynesian. Keynes was a pragmatist and was continually reconstructing his theories and determining exactly how much control the government need take to steer the economy. He did not believe in any absolutes and was not the political harlequin Paul Krugman has become. Perhaps Krugman should listen to Keynes when he said, "When the facts change, I change my mind. What do you do, sir?"