The ‘paradox of thrift’ is where everyone cuts back their spending and increases their savings at the same time, resulting in the ‘paradox’ of everyone losing income and increasing debt.  This results invariably and always in a recession or worse, a depression.  The reason it does is because the cutback of spending reduces demand for product and services which reduces the need for employment, which in turn further reduces spending, which in turn further reduces the demand for product and services—well, you get the picture.

It would not be a ‘paradox’ for long if the public actually did ‘get the picture.’   If they did they’d support a huge increases in public investment and spending which, in turn, would increase demand which would, in turn, increase employment, which would in turn, increase spending–etc. etc.  The cycle of declining income and increasing debt would be stopped or even reversed into a positive cycle of increasing income and declining debt.  The recession or depression would end.  Unfortunately the public, or at least a sufficient  number of the public, do not ‘get’ the paradox.   As a result they are in a muddle, not knowing what needs to be done nationally.

Well, if the average Joe on the street doesn’t understand the paradox, surely the political leadership would and they would enact policies of increasing government spending and public investment.  Nope.  Political leaders in Europe, for example, did exactly the opposite.  They forced countries to decrease spending as a percentage of Gross Domestic Product (GDP), which of course resulted in GDP precipitously declining (the paradox kicking in) and national incomes plunging through the floor, while unemployment rose through the ceiling.   And guess what?  Debt as a percentage of income actually increased!  Got to love that paradox.

In the United States, it took a couple years for the forces of austerity to gain the upper hand.   The delay occurred because the recession came during a presidential election year in 2008 and the majority voted into office a Democrat for President, Barack Obama, and they voted in Democrat majorities in both the Senate and the House of Representatives.  Because of that election year,  Democrats were able to pass modest stimulus over Republican opposition.   But the amount was far too small in absolute terms to do much more than avoid a Great Depression.  In addition, the Republicans were so much opposed to the new President, they forced most of the stimulus to come in the form of inefficient tax cuts instead of funding programs that would have directly helped alleviate unemployment by hiring corporations and labor to rebuild public infrastructures.   Because the stimulus took this form, hiring was subdued compared to what would have happened had  national infrastructure programs been funded.

Even that modest effort ended when Republicans gained a majority in the House during the mid term elections of 2010.  At that point, austerity policies began to be forced by the Republican House majority.  After that the United States became just like Europe in terms of austerity, with the major difference being timing in that the US did implement some stimulus for two years.

The results of austerity in Europe are just as the ‘paradox of thrift’ predicts:   Debt has become more burdensome, both in the public as well as the private sectors; incomes have plunged; unemployment has soared; economies have grown at a snail’s pace at best but most have dropped back into recession.    In the US the recovery is modest and hiring is too slow, but the austerity policies implemented beginning in 2010 are just beginning to have effect, so it is at this point unknown to what degree they will slow the recovery further–or even stop it altogether and reverse the growth as has been the case in Europe.

From the perspective of anyone who does understand the paradox of thrift, there is the puzzle of why austerity ends up being the policy of choice in these circumstances.  Surely leadership must understand that trimming government spending should be applied when economies are robust, not when they are in the dumps.  Why would leadership not understand?  The answer may come from understanding that the wealthy are the owners of debt whereas the majority of the creditors are not the wealthy.  If the wealthy are to be protected, then creditors must be forced to pay.  If they cannot, then their assets must be seized at tremendous discount–a situation painful to the creditor, but an opportunity for the wealthy to increase their ownership of assets at heavily discounted prices.   As for sovereign debt, the wealthy will gain control of the political process and require that any income generated must first be applied to paying that public debt.

There is also another major victory within the grasp of the wealthy:  The elimination of social programs from which the wealthy do not benefit but have to pay for in proportion.

The ground is already being laid for this elimination of programs.  The GOP controlled House has submitted legislation that allows for the federal government to prioritize what creditors get paid first.  That legislation (the Orwellian labeled ‘full faith and credit act’  HR 807) puts first the assets owned by the wealthy, and allows for non payment of social programs which are further down the list of priorities.

So the application of austerity right now, seen in this light of transferring more wealth to the already wealthy, makes perfect sense.   For the wealthy.

Economist Paul Krugman is one of those who have been 100% correct in explaining our current economic malaise and, as a result of that understanding, has been 100% accurate in predicting how the economy will perform in the future  depending upon government policy.   Unlike any other economist, Krugman also is the voice of the New York Times in things economic, and therefore he has a huge platform upon which to be seen and heard across the globe.  His face is on transit buses and trains in Europe because of his criticism of the austerity policies applied in the European Union.

Krugman is first a teacher, a professor of economics at Princeton University.  He brings that approach to his writings in the NYT and the impact of these writings increases because he is teaching the public as he writes.  As a journalist explains a news event, Krugman explains why the economy is behaving as it does, in real time.   Because he understands his subject so well, because he can teach it so well, and because of his NYT platform, Krugman is arguably the most influential economist on the planet.

All that said, here’s a recent Krugman post with all his skills displayed in force.  It’s a brief rundown of the economy, how he understands it, and what it all means in terms of policy.

Those of us who have spent years arguing against premature fiscal austerity have just had a good two weeks. Academic studies that supposedly justified austerity have lost credibility; hard-liners in the European Commission and elsewhere have softened their rhetoric. The tone of the conversation has definitely changed.

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My sense, however, is that many people still don’t understand what this is all about. So this seems like a good time to offer a sort of refresher on the nature of our economic woes, and why this remains a very bad time for spending cuts.

Let’s start with what may be the most crucial thing to understand: the economy is not like an individual family.

Families earn what they can, and spend as much as they think prudent; spending and earning opportunities are two different things. In the economy as a whole, however, income and spending are interdependent: my spending is your income, and your spending is my income. If both of us slash spending at the same time, both of our incomes will fall too.

And that’s what happened after the financial crisis of 2008. Many people suddenly cut spending, either because they chose to or because their creditors forced them to; meanwhile, not many people were able or willing to spend more. The result was a plunge in incomes that also caused a plunge in employment, creating the depression that persists to this day.

Why did spending plunge? Mainly because of a burst housing bubble and an overhang of private-sector debt — but if you ask me, people talk too much about what went wrong during the boom years and not enough about what we should be doing now. For no matter how lurid the excesses of the past, there’s no good reason that we should pay for them with year after year of mass unemployment.

So what could we do to reduce unemployment? The answer is, this is a time for above-normal government spending, to sustain the economy until the private sector is willing to spend again. The crucial point is that under current conditions, the government is not, repeat not, in competition with the private sector. Government spending doesn’t divert resources away from private uses; it puts unemployed resources to work. Government borrowing doesn’t crowd out private investment; it mobilizes funds that would otherwise go unused.

Now, just to be clear, this is not a case for more government spending and larger budget deficits under all circumstances — and the claim that people like me always want bigger deficits is just false. For the economy isn’t always like this — in fact, situations like the one we’re in are fairly rare. By all means let’s try to reduce deficits and bring down government indebtedness once normal conditions return and the economy is no longer depressed. But right now we’re still dealing with the aftermath of a once-in-three-generations financial crisis. This is no time for austerity.

O.K., I’ve just given you a story, but why should you believe it? There are, after all, people who insist that the real problem is on the economy’s supply side: that workers lack the skills they need, or that unemployment insurance has destroyed the incentive to work, or that the looming menace of universal health care is preventing hiring, or whatever. How do we know that they’re wrong?

Well, I could go on at length on this topic, but just look at the predictions the two sides in this debate have made. People like me predicted right from the start that large budget deficits would have little effect on interest rates, that large-scale “money printing” by the Fed (not a good description of actual Fed policy, but never mind) wouldn’t be inflationary, that austerity policies would lead to terrible economic downturns. The other side jeered, insisting that interest rates would skyrocket and that austerity would actually lead to economic expansion. Ask bond traders, or the suffering populations of Spain, Portugal and so on, how it actually turned out.

Is the story really that simple, and would it really be that easy to end the scourge of unemployment? Yes — but powerful people don’t want to believe it. Some of them have a visceral sense that suffering is good, that we must pay a price for past sins (even if the sinners then and the sufferers now are very different groups of people). Some of them see the crisis as an opportunity to dismantle the social safety net. And just about everyone in the policy elite takes cues from a wealthy minority that isn’t actually feeling much pain.

What has happened now, however, is that the drive for austerity has lost its intellectual fig leaf, and stands exposed as the expression of prejudice, opportunism and class interest it always was. And maybe, just maybe, that sudden exposure will give us a chance to start doing something about the depression we’re in.

From an article in Fortune written by journalist Tim Lee that points out Friedman’s economics is not in line with today’s Republican Party, even though the party still considers Friedman their economics prophet.  As evidence Lee quotes Friedman in his book Two Lucky People:

“The intellectual climate at Chicago had been wholly different. My teachers regarded the depression as largely the product of misguided policy—or at least as greatly intensified by such policies. They blamed the monetary and fiscal authorities for permitting banks to fail and the quantity of deposits to decline. Far from preaching the need to let deflation and bankruptcy run their course, they issued repeated pronunciamentos calling for governmental action to stem the deflation—as J. Rennie Davis put it, “Frank H. Knight, Henry Simons, Jacob Viner, and their Chicago colleagues argued throughout the early 1930′s for the use of large and continuous deficit budgets to combat the mass unemployment and deflation of the times.”

Beezer here.  So Friedman here sounds a lot like Keynes, who also recommended increased government spending in the face of a recession.  My problem with the quote is that Friedman also wrote here that, according to his interpretation, Keynes would not have recommended the same approach?  Or at least the quote seems to suggest that.

‘We were affected very differently by the Keynesian revolution—Lerner becoming an enthusiastic convert and one of the most effective expositors and interpreters of Keynes, I remaining largely unaffected and if anything somewhat hostile…

Lerner was trained at the London School of Economics, where the dominant view was that the depression was an inevitable result of the prior boom, that it was deepened by the attempts to prevent prices and wages from falling and firms from going bankrupt, that the monetary authorities had brought on the depression by inflationary policies before the crash and had prolonged it by “easy money” policies thereafter; that the only sound policy was to let the depression run its course, bring down money costs, and eliminate weak and unsound firms.

By contrast with this dismal picture, the news seeping out of Cambridge (England) about Keynes’s interpretation of the depression and of the right policy to cure it must have come like a flash of light on a dark night… It is easy to see how a young, vigorous, and generous mind would have been attracted to it…”

Beezer again.  So you can see my confusion.  It may be that I’m not correctly interpreting the paragraphs above.  And the final graph does say ‘the news seeping out of Cambridge’ which suggests Friedman may not have had the whole picture at that time, because it certainly was incorrect.  When it comes to deficit government spending, what Friedman the monetarist recommended is exactly what Keynes did too.  The main difference is that Keynes went further and recommended direct hiring if purely monetary policies didn’t work fast enough.  Anyway, the point of the Fortune article is that today’s GOP would not approve of Friedman’s prescription.  Hat tip to Economist’s View which highlighted a Paul Krugman New York Times post calling attention to the Fortune article, which was written a year ago.  Krugman also thanks economist Brad DeLong for recalling Lee’s article.

One wonders what’s going on down in the District of Columbia.  A Democrat President has put on the table what amounts to a reduction in Social Security benefits, although none are necessary.   Purportedly the benefit reductions are needed as part of a ‘grand bargain’ the President seems determined to craft with Republicans, who want to eliminate SS but who are smart enough to never mention such a thing in public.  No doubt in the mid-terms, Republicans will run advertisements about how the Democrats want to reduce SS benefits!!!

Anyway, for my readers edification, if not that of the President, here’s an article by an expert explaining why SS benefit reductions are completely irrelevant to the nation’s economic future.

The People’s Choice for the People’s Pension

By NANCY FOLBRE

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst.

Social Security, the most transparently self-financed program of the federal government, is not increasing our budget deficit. The most recent trustees’ report shows sufficient funds to pay full benefits until 2033.

Today’s Economist

Perspectives from expert contributors.

No one is making out like a bandit: Social Security beneficiaries who retired in 2010 are expected to get back approximately what they paid in.

If we wanted to adopt a cautious policy measure that would eliminate the shortfalls predicted 20 years down the road, we could eliminate the cap on earned income subject to Social Security taxes, currently set at $113,700. Such a measure would lead to increased payments by about the top 5.2 percent of wage earners.

Legislation designed to “scrap the cap” has been introduced in Congress. Senator Mark Begich, Democrat of Alaska, and Representative Ted Deutch, Democrat of Florida, have drafted a law that would require all workers to pay the same overall Social Security tax rate, and Senator Bernie Sanders of Vermont, an independent, and Representative Peter DeFazio, Democrat of Oregon, recently proposed application of the tax to earnings over $250,000 (as well as under $113,700) creating a “doughnut hole” exemption for earners in between in order to win more votes.

President Obama has voiced support for cap elimination or modification proposals in the past.

But as Thomas B. Edsall pointed out in a recent commentary, “scrap the cap” has apparently been taken off the table, despite evidence of considerable public support for it.

Readers doubtful of that public support should read the new National Academy of Social Insurance report, “Strengthening Social Security: What Do Americans Want?,” based on an online survey asking respondents whether they favored or opposed 14 specific changes to Social Security. The analysis also draws on findings from focus groups to add qualitative texture to the quantitative results.

That online survey, an opt-in model, is not based on a probability sample, but its findings echo other representative surveys, including this Quinnipiac University poll from 2011, which found that 56 percent of Americans favored raising the cap on taxable Social Security income.

Readers mystified by the yawning gulf between public opinion and current political discussion might benefit from the background provided in Eric Laursen’s magisterial history, “The People’s Pension: The Struggle to Defend Social Security Since Reagan.” The book offers more than 800 pages of fascinating if gory details about the lobbying efforts and misinformation campaigns aimed at bringing the program down.

It also reports on a series of surveys going back to 1977 in which most respondents said they would be willing to pay higher payroll taxes if that would shore Social Security up for the future.

Mr. Laursen effectively decodes much of the economic jargon that has obscured public understanding of these issues, and continues to blog regularly on this topic.

Readers feeling demoralized by the history of class warfare over social insurance might be cheered by two of the short videos recently entered in an online contest sponsored by the Peter G. Peterson Foundation on the theme of “I’m Ready” to fix the national debt.

In one entry, “Being Honest, Tough Choices,” a serious young man uses his webcam to explain in simple, direct terms why he supports Social Security and deplores the rhetoric of “makers versus takers, young versus old.”

Another entry, originally titled “Scrap the Cap” but currently labeled “Movin’ In, Kids,” has outpaced all others to date in terms of both viewings and ratings. It features some lovable oldsters in a hilarious rap performance warning their son that if their Social Security benefits are cut he better pull out the sofa bed and put out some fresh towels because they will be living together from now on.

Their song and dance goes on to explain why scrapping the cap would be better for everyone concerned.

Beezer here.  To be honest, we’ve often been a bit lost when it comes to understanding President Obama’s obsession over doing deals in Congress with Republicans.   As a former US Senator, maybe that’s the only way the President believes progress is possible.  Unfortunately, right now the Republican Party is so dysfunctional it has literally nothing positive to offer the nation, and doing deals with someone like that is a complete waste of effort.  They are anti-female, anti-minority, anti-immigrant, anti-climate change, anti-clean energy, anti-environmental, anti-education, anti-science and anti-anything government except Defense.  A party this far removed  from the nation’s citizenry needs simply to be ignored until it can be reformed by new blood from within.  Giving it any sustenance by way of compromise is simply prolonging the time needed for it to face the music.  

John Maynard Keynes, in his book ‘Essays in Persuasion, ‘ foresaw the importance of a united Europe and tried mightily to reduce the penalties that the post World War I negotiations placed on Germany.  He was unsuccessful, in the end, so the penalties imposed were far too large for the defeated Germany, the result of which was to plunge the country into a Depression, ushering in the ultra nationalist movement and its leader Hitler.

J. Bradford DeLong, economics professor at UCal Berkeley, writes briefly about the current European Union banking woes and points out the current leadership is apparently ignorant of the lessons learned in the 1920s negotiations after WW I.

The 1919-1939 interwar period taught us four lessons:

1. In order for the world economy to be prosperous, adjustment to macroeconomic disequilibrium needs to be undertaken by both “surplus” and “deficit” economies–not by “deficit” economies alone.
2. If the world economy is to have any chance of avoiding or limiting crises, an integrated banking system requires an integrated bank regulator and supervisor.
3. In order for crises to be successfully managed, the lender of last resort must truly be a lender of last resort: it must create whatever asset the market thinks is the safest in the economy, and must be able to do so in whatever quantity the market demands.
4. In order for any monetary union or fixed exchange rate system larger than an optimum currency area to survive, it must be willing to undertake large-scale fiscal transfers to compensate for the exchange rate movements to rapidly shift inter-regional terms of trade that it prohibits.

I, at least, thought that everybody–or everybody who mattered in governing the world economy–had learned these four lessons that 1919-1939 had so cruelly taught us. Now it turns out that the dukes and duchesses of Eurovia had, in fact, learned none of them. History taught the lesson. But while history was teaching the lesson, the princes and princesses of Eurovia and their advisors were looking out the window and gossiping on Facebook….

Beezer here.  So pundits and politicians over here refer to how the US is going to end up like Greece because they are, simply put, uneducated twits talking to each other in a bubble.  A vast elaborate circle jerk of people who never learned the lessons of 1919-1939.  And it’s quite apparent never will.

Five years ago I started writing this blog site because I figured energy dependence on fossil fuels would destroy America.  Nothing I’ve seen since then has changed my attitude in this regard, although initially I didn’t figure in the problems associated with climate change, nor did I fully appreciate the national security implications identified by the Joint Chiefs of Staff in 2012.  The Joint Chiefs basically said relying on fossil fuels is the greatest threat to our national security, and they also said ‘climate change’ essentially changes everything.

And national politics, particularly those surrounding our first President of color, Barack Obama, overwhelmed my desire to explore the energy issues.

As it turns out, now that President Obama has been re-elected, the energy issues are resurfacing as important despite Republican obsessions over dismantling the social safety nets, including Social Security and Medicare that have been major distractions.

Most recently the President has proposed using $2 billion in gas and oil lease revenues to fund basic research and development to find ways to replace hydrocarbons as our primary transportation fuel.   In the larger scheme of things energy, according to a New York Times article, the President is striving to “to build as broad an energy portfolio as possible for the country, with expanded oil and gas development; favorable tax treatment for nonpolluting sources like wind, solar and geothermal energy; loan guarantees for new nuclear plants; increased emphasis on energy efficiency; and research into long-term alternatives to fossil fuels.”

OK fine.  I don’t think nuclear is going anywhere anytime soon, especially since the Japanese tsunami wiped out the Fukushima nuclear power plant in 2011.  And clean coal is a non starter too, although Texas has begun a $2.5 billion ‘test’ project for sequestering carbon dioxide gas from the use of coal for energy by burying it underground.    In both cases, the ideas are non-economic.  They are the most expensive ideas in the portfolio and they need the government to insure unintended consequences because the private markets simply won’t.

The simple fact is that the rest of the world, to the degree it can afford to right now, is moving away from fossil fuel dependence as  fast as it can.   From the Rocky Mountain Institute book “Reinventing Fire,” in 2010 four German states, totaling 10 million people, relied on windpower for 43-52% of their annual electricity needs.  Denmark gets on average 26% of its energy from windpower.  The Extramadura region of Spain gets 25% of its power from solar, while the entire country has 16% of its energy supplied  by windpower.  In the US, the Minnkota Power Cooperative supplied 38% of its retail sales from wind.  Texas, yes that Texas, generated 8% of its electricity from wind in 2010, making it sixth in the world among countries, after China, the entire rest of the US, Germany, Spain and India.

While a lot of public discussion has involved solar, wind, hydro, thermal–the clean sustainable energy sources–the reality is that innovations that create efficiencies will drive most of the movement away from using fossil fuels.   We’ll simply be using less energy to do more work by being efficient, not necessarily by building new power plants, whether they are sustainable and clean or not.  Carbon fiber plane and auto frames will drop airplane and ground transportation weights by as much as 35%, and would raise car MPG ratings well into the 80MPG or greater ranges just by weight reduction.  The newest airplanes are using 20% less fuel because they contain carbon fiber frames instead of steel or aluminum.  This trend is still in its infancy, but will no doubt reduce annual transportation costs by billions of dollars within the next 10 years.

A national direct current grid, capable of transporting energy much longer distances more efficiently, would produce a national marketplace where producers of sustainable and clean energy supplies, most of which are situated in rural areas, can competitively price their energy into urban markets where most energy is used.   And a movement towards energy ‘islands’ where neighborhoods or city districts contain smaller energy plants that can supply their customers even if the larger grid cannot for some reason, can raise energy security by several magnitudes.   These types of modernizations work no matter what the energy source, but they definitely do make sustainable energy cheaper upfront where the initial resistance lies, because once built sustainable energy plants are far less expensive than fossil fueled plants.

The real impediment to all this is political.  Fossil fuel incumbents are some of the most profitable and therefore politically powerful, corporations in the world.  So far they’ve been able to successfully mute the publicity surrounding alternative energy sources, to divert everyone’s attention away from the real, substantive progress that’s been already made in sustainable sources and in energy efficiencies.  Republicans will, no doubt, fight the President’s efforts to earmark $2 billion in gas and oil revenues (that’s over 10 years, so it’s very modest in the scheme of things) to support energy research and development.

But times are changing.  Inevitably the price of gas and diesel fuels, and oil for heating, will rise simply because the rest of the planet is growing and as a result demanding larger and larger shares of these energy sources.  These developing countries understand that the US model of fossil fuel dependent economic growth can no longer be duplicated, so they are aggressively building sustainable supplies.  Nevertheless, in the meantime they will use fossil fuels too, even if they think fossil is more of a transition fuel (which it will be shown to be) rather than the bedrock fuel of their economies.

It’s a global race, in other words, to see who will be the most efficient user of energy.   As the advertisement says, ‘the best way to save on gas is to buy gas less often.’   So it goes.  It’s not a matter of using less energy, because energy use is going to climb as the world demand for it climbs, it’s a matter of getting more work done per unit of energy.