Monday, November 21, 2011

In the wake of the Supercommittee fail, Paul Krugman isn't surprised to find the usual deficit-hawk fabulists roiling the noise machine


Oh look, children! It's the Confidence Fairy, come out to play now that the Supercommittee has, as forecast, officially whiffed on deficit reduction -- with the president reproving, "Ba-a-ad Congress!"

"Last year, for example, the [Central European Bank] affirmed its belief in the confidence fairy -- that is, the claim that budget cuts in a depressed economy will actually promote expansion, by raising business and consumer confidence. Strange to say, that hasn't happened anywhere."
-- Paul Krugman, in his NYT column "Boring Cruel Romantics"

by Ken

There must be someone somewhere who was surprised by today's official declaration of the Supercommittee's inability to come up with the mandated trillion-dollar spending-cut package, or by the president's pretty much throwing up his hands and saying, "Ba-a-a-d Congress, now you fix it!" ("Obama vows to veto efforts to gut automatic spending cuts").

Though there was never any hope for a sane deal, I suppose somewhere there's someone who's grieving. As E. J. Dionne Jr. put it the other day in his Washington Post column "How we can succeed through supercommittee's 'failure,'" given the political realities:
A balanced deal would be nice but it's now impossible --and not because of some vague congressional "dysfunction" the media like to talk about. Sane fiscal policies are blocked because one party refuses to accept the need to roll back the excesses of the 2001 and 2003 tax cuts. If Congress does nothing, those tax cuts go away. That's why a "failure" by the supercommittee to endorse a deeply flawed deal is actually a victory for sensible deficit reduction.

We can trust the usual suspects to tell the usual deficit-hawk "fairy tales," as Paul Krugman described them in the title of a blogpost this morning.
One repeated gripe I've had about news coverage in the Lesser Depression is the way deficit-hawk myths about markets are often reported as facts. Again and again, slight upticks in interest rates have been attributed -- in news stories, not opinion pieces -- to debt fears, despite the complete absence of any actual evidence to that effect.

Bloomberg today has an interesting twist: U.S. Futures Decline on Concern Supercommittee Won’t Agree on Budget Cuts. In reality, US rates are down, suggesting no increase in debt concerns whatsoever.

But if you read the Bloomberg piece carefully, what it actually says is that market players fear that the absence of a debt deal means no stimulus. So the actual fear is not that spending won't be cut enough, it is that it will be cut too much -- which actually makes sense, and is consistent with the action in stock and bond markets.

But how many readers will get that? The way it's presented reinforces the false notion that the deficit is the problem.

In other news, markets have greeted Spain's new government with a surge in borrowing costs; Spain and Italy are once again at near parity.

I don't suppose we can credit PK with being prophetic in asking how many readers would get that. By mid-afternoon he posted a follow-up, "Looking For Insight In All The Wrong Places":
One ongoing source of puzzlement for me -- something I've written about before -- is the continuing popularity of inflationista/deficit hawk views among many investors, on and off Wall Street, despite the fact that this world view has been disastrously wrong again and again for the past few years.

I got a sample of this mindset in my inbox today, with a correspondent deriding me as a totally out-of-touch academic for suggesting that what worries markets about the supercommittee superfail is the prospect of less, not more, stimulus (failure to extend unemployment benefits, payroll tax cut, etc.). Never mind, by the way, that this was what the Bloomberg article actually said. This struck the correspondent as self-evidently absurd, so much so that no actual argument against it was necessary.

OK, can we talk for a minute?
And he proceeds to ask what we would "expect to see if debt worries were roiling the markets": "interest rates and stock prices moving in opposite directions: debt worries should be sending US borrowing costs up and US equities down." But what's happened, he says, is the opposite. He presents a chart that "suggests that what's driving both asset prices is fluctuating optimism or pessimism about the economy, with fears of economic weakness driving both rates and stock prices down," and highlights "the big plunge in August, corresponding to the S&P downgrade."
This makes no sense if you believe markets actually believed S&P, and became more worried about US debt. It makes a lot of sense, however, if markets worried that politicians would believe S&P, and embark on even more premature austerity, depressing the economy further.

So it makes perfect sense to suppose that the superfail is having a similar if smaller effect.

"Obviously, I'm glad this particular correspondent isn't managing my money," PK writes. "But why do such wrong-headed, money-losing views retain their hold? Is it just affinity fraud?"

The "affinity fraud" link, by the way, is to a recent PK blogpost called "Madoff Explains Everything":
The Madoff affair, as you may know, was a classic case of "affinity fraud"; Madoff was able to gain the trust of wealthy Jews by persuading them that he was their kind of guy. Affinity fraud lies behind a lot of financial scams -- and it lies behind a lot of political scams too.

Right now, the campaign against OWS basically tries to get working Americans to turn on the movement, even though most people support the movement's goals, by trying to make it seem as if the protestors are people not like you -- whereas the plutocrats are. Hey, this has worked many times in the past; that's the whole point of "What's the matter with Kansas." And it can operate in many directions: OWS should be shunned because they're dirty hippies, Elizabeth Warren is not-like-you because, horrors, she's a Harvard professor.

And now that I think of it, the generalized theory of affinity fraud extends beyond politics to things like financial analysis. I've marveled now and then on this blog about the continued popularity on Wall Street of inflationistas, who have been wrong about everything. I suspect that a lot of it is that economists who issue dire warnings about deficits and money growth come across as the kind of people they'd like to hang out with at the golf course, whereas bearded professors don't.

So what to do? Within limits, one should try to allay unnecessary social dissonance. If you're going to have a demonstration on behalf of working Americans, can the drumming circles. The class warriors on the right want to convince people it's really a culture war, and you don't want to make their job easier.

But there are limits. No, I won't take up golf.


What I actually meant to write about tonight, as the quote at the top of this post may reflect, was his column today, "Boring Cruel Romantics," about the class of "technocrats" -- like the newly installed prime ministers of Greece and Italy, and the European Central Bank -- to whom the Austerity-Inflicting Elites have entrusted management of what Ian Welsh recently described as a plutocratic world-wide "buying spree" being carried at austerity-socked bargain prices, a tidy follow-up to my post on Ian's column. However, I got sidetracked by today's more immediate subject matter. I still want to come back to it. For now let me just offer this tease:
[T]hese people -- the people who bullied Europe into adopting a common currency, the people who are bullying both Europe and the United States into austerity -- aren't technocrats. They are, instead, deeply impractical romantics.

They are, to be sure, a peculiarly boring breed of romantic, speaking in turgid prose rather than poetry. And the things they demand on behalf of their romantic visions are often cruel, involving huge sacrifices from ordinary workers and families. But the fact remains that those visions are driven by dreams about the way things should be rather than by a cool assessment of the way things really are.

And to save the world economy we must topple these dangerous romantics from their pedestals.

For the substance, well, now that I've used up one of my precious NYT free clicks, you don't have to. Here's the column link again.


Is it my imagination, or is the Washington Post's finance dunderhead Robert J. "No Relation to Paul" Samuelson actually getting dumber ("Why there’s a debt stalemate")? No, you're right, that's really not possible. It must just be a punditoptical illusion.

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