Friday, June 10, 2011

Rule By Rentiers?

Today’s Paul Krugman column asks why governments, not only here but in Europe, can’t seem to respond rationally to our macro-economic predicament. Let’s stipulate to Krugman’s presumption that his diagnosis of that predicament is not only the best one out there, but is so obviously the best that acknowledging its superiority is a litmus test of governments' economic competence.

Roughly speaking, the Krugman diagnosis goes like this: since our economic problem is insufficient aggregate demand, there’s one, and only one, reasonable governmental response—a combination of lax monetary policy and stimulative fiscal policy. And when interest rates are already near zero and governments are already running large deficits, that means that central banks have at least to keep the supply of money from contracting and elected governments have to commandeer dollars that private households would otherwise save, either by borrowing them from willing creditors or taxing them away from people disposed to save them. Having secured control over those dollars, the government can either spend them directly in stimulative ways or put them in the hands of the people who are least likely to save them.  Doing anything else is self-defeating from the perspective of nearly every economic stakeholder.

To this non-economist, all of this makes sense. So why aren’t governments here and in Europe doing what Krugman would have them do? Instead, they’re raising, or making noises about raising, interest rates and cutting public spending. How do we explain such rank incompetence on the part of highly credentialed macro-economic managers?

The simplest answer would relax our stipulation about Krugman’s infallibility and acknowledge macro-economics is a subject as to which reasonable people can disagree. Some otherwise reasonable people think that Krugman's wrong in theory.  Others doubt that his prescriptions are sound in practice even if they're right in theory in light of the fact that Democrats couldn’t manage to apply them effectively in 2009 under the most politically propitious conditions we're ever likely to see--Democratic control of all the elected branches of government with a veto-proof majority in the Senate. So maybe governments aren’t doing what Krugman would have them do because sensible people with their hands on the levers of state power have decided that trying to do it is inadvisable.

Krugman, however, isn’t the sort of guy to whom such concessions come easily and, per stipulation, neither are we. So the fact that western governments are doing economically irrational things is another fact requiring a non-economic explanation.

Here’s Krugman’s:
“What lies behind this trans-Atlantic policy paralysis? I’m increasingly convinced that it’s a response to interest-group pressure. Consciously or not, policy makers are catering almost exclusively to the interests of rentiers — those who derive lots of income from assets, who lent large sums of money in the past, often unwisely, but are now being protected from loss at everyone else’s expense. . . .

“And that explains why creditor interests bulk so large in policy; not only is this the class that makes big campaign contributions, it’s the class that has personal access to policy makers — many of whom go to work for these people when they exit government through the revolving door. The process of influence doesn’t have to involve raw corruption (although that happens, too). All it requires is the tendency to assume that what’s good for the people you hang out with, the people who seem so impressive in meetings — hey, they’re rich, they’re smart, and they have great tailors — must be good for the economy as a whole.”
Krugman’s employing a tried and true technique of intellectual evasion. Having put down a huge psychological investment in a theory that obliges him to acknowledge an inconvenient fact—in this case, that otherwise rational people aren’t acting rationally by his lights—he asks himself cui bono, who benefits from this anomalous state of affairs. And having fastened on bondholders and other rentiers as the most obvious candidates, Krugman conjures up a causal mechanism that will account for their unrivaled influence over national affairs. Middle-aged people who studied political science and sociology in college might recognize his redeployment of the “Power Elite” thesis that C. Wright Mills proposed in the 1950s and mainstream political scientists and sociologists roundly rejected as empirically empty sloganeering.

I don't want to be unduly cynical.  So let's be charitable enough not to remember what happened to the Chrysler bondholders or ask why, if there's a stable rentier class calling the shots that's so strongly opposed to cheap money, it ever let interest rates get down close to zero in the first place.  If there's any empirical content to what Krugman’s saying, we at least ought to be able to answer this question: what would it take to convince us that he’s wrong about the rentier class calling the shots?

The answer doesn’t exactly jump out at you. Why are we not stimulating the economy now? The rentiers won’t let us. If rentiers are so powerful why did they let Democrats pass a huge stimulus bill in 2009 that added nearly a trillion dollars to the public debt? It’s a sign of their power that the stimulus wasn’t big enough to do the job. What if we ever managed to follow every one of Krugman's budgetary prescription? That would show, not that rentiers aren't calling the shots, but that they've suddenly gotten smart enough to see that Krugman’s right when he says that doing anything else is self-defeating even from their own perspective.

You can keep going if you'd like.  I give up.

No comments: