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.

Nobel Laureate economist Paul Krugman, in a New York Times column, laments that even though conventional wisdom has been proven wrong for the past 5 years, it still remains powerful enough to influence public policy.

Back in the 1950s three social psychologists joined a cult that was predicting the imminent end of the world. Their purpose was to observe the cultists’ response when the world did not, in fact, end on schedule. What they discovered, and described in their classic book, “When Prophecy Fails,” is that the irrefutable failure of a prophecy does not cause true believers — people who have committed themselves to a belief both emotionally and by their life choices — to reconsider. On the contrary, they become even more fervent, and proselytize even harder.

This insight seems highly relevant as 2012 draws to a close. After all, a lot of people came to believe that we were on the brink of catastrophe — and these views were given extraordinary reach by the mass media. As it turned out, of course, the predicted catastrophe failed to materialize. But we can be sure that the cultists won’t admit to having been wrong. No, the people who told us that a fiscal crisis was imminent will just keep at it, more convinced than ever. ..

Seriously, at every stage of our ongoing economic crisis — and in particular, every time anyone has suggested actually trying to do something about mass unemployment — a chorus of voices has warned that unless we bring down budget deficits now now now, financial markets will turn on America, driving interest rates sky-high. And these prophecies of doom have had a powerful effect on our economic discourse….

Regular readers know that I and other economists argued from the beginning that these dire warnings of fiscal catastrophe were all wrong, that budget deficits won’t cause soaring interest rates as long as the economy is depressed — and that the biggest risk to the economy is that we might try to slash the deficit too soon. And surely that point of view has been strongly validated by events.

The key thing we need to understand, however, is that the prophets of fiscal disaster, no matter how respectable they may seem, are at this point effectively members of a doomsday cult. They are emotionally and professionally committed to the belief that fiscal crisis lurks just around the corner, and they will hold to their belief no matter how many corners we turn without encountering that crisis.

So we cannot and will not persuade these people to reconsider their views in the light of the evidence. All we can do is stop paying attention. It’s going to be difficult, because many members of the deficit cult seem highly respectable. But they’ve been hugely, absurdly wrong for years on end, and it’s time to stop taking them seriously.

Beezer here. In his seminal book The General Theory of Employment, Interest, and Money economist John Maynard Keynes made a similar argument regarding Ricardian economics, that it had ‘conquered England as completely as the Holy Inquisition conquered Spain.’ He then went on the write this iconic paragraph:

“That it (Ricardian economics) reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose to its intellectual prestige. That its teaching translated into practice, was austere, and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it would explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.”

Beezer again.  As Keynes did 76 years ago, Krugman pushes back against the Ricardian view that it is impossible for effective demand to be deficient.  Fortunately when Keynes wrote the then President, Franklin Delano Roosevelt, listened and used the power of the state to hire more than 8 million people during his first two terms, clipping more than 10% off the unemployment rate.  Unfortunately today this President, Barack Obama, has not listened to Krugman as FDR listened to Keynes.  And that is why unemployment remains too high and comes down grudgingly.

The 2012 re-election of President Obama indicates that the majority of voters simply no longer believe Republicans.   Only those most invested in being Republican, and the ultra-wealthy, sustain the party.  The recent election is a clear sign that those groups, no matter how much money they can afford to pour into Republican campaigns, are on the wrong side of the future.  The political coalition Obama took into his victory is going to become stronger going forward, not weaker.

But this isn’t all about ‘angry white men,’ the Republican mainstay.  The GOP has a more serious problem:  The majority no longer believes Republicans really know what makes a robust economy, or how to restore a robust economy once it falters.   In fact the majority is pretty sure Republican policies created the  crash, and have kept the economy from recovery since the crash.    Jonathan Weiler,  Director of Undergraduate Studies in Global Studies at UNC Chapel Hill, explains why the public may distrust Republicans.  In a Huffington Post article entitled The Republican Party Should Have Zero Credibility on Deficits, Weiler lists some reasons why the public is turning away from the GOP.

…All of this is the necessary backdrop for discussions about the current budget negotiations. Remember that in 2011 (and again in 2012), House Republicans nearly unanimously approved Paul Ryan’s budget, which has more or less become the foundational expression of the Republican view of government. The original budget, since modified to some degree, called for eliminating capital gains taxes and dramatically cutting income taxes on the wealthy, to be financed by gutting Medicaid and other social programs. Ryan knew that this plan was not, in fact, a deficit reduction plan, though he tried to pass it off as one to an embarrassingly credulous media. Ryan also knows his proposals would not reduce the deficit, which is why he refused to submit the entire plan to the Congressional Budget Office (CBO) for scoring, asking instead that the CBO score a bizarro version of his budget.

Amidst a series of bad faith proposals and arguments, none has more clearly illustrated the GOP’s intentions than their approach to Medicare. Republicans have long insisted that in order to reduce our long-term spending, we must get entitlements under control. This is a bogus argument (one shared by many non-Republicans, of course) on many levels, one of which is that Social Security, as President Ronald Reagan explained clearly, does not add one cent to our deficits. Concerning Medicare, it has long been clear that the program’s financial challenges are largely due to rising health care costs in general. And the GOP has repeatedly opposed serious attempts to control those costs. For example, the Affordable Care Act (ACA) included some significant cuts in Medicare spending by reducing, for example, overpayments to the Medicare privatization experiment known as Medicare Advantage. Those spending reductions, originally estimated at about half a trillion dollars over ten years, became the focal point of GOP attack ads during the 2010 mid-term election cycle. In other words, despite repeatedly insisting that entitlements must be reined in, the GOP’s response to a plausible effort to do so was to pillory Democrats for supposedly attacking seniors.

The Ryan budgets have included the same reductions to Medicare included in the ACA. But the benefits of those cuts, which in the ACA were slated to help seniors by, for example, closing the prescription drug benefit doughnut hole, were re-purposed by Ryan to pay for his tax cuts for the rich. And incredibly, once he joined the Romney ticket, Ryan’s Medicare cuts were forgotten, and Romney/Ryan relentlessly attacked Obama for cutting Medicare and hurting seniors. So, to sum up: 1) the GOP repeatedly insists that we cut entitlements; 2) at the same time, it bashed Democrats in 2010 when they actually took steps toward doing so; 3) it then embraced, dollar for dollar, the cuts for which it had just bashed Democrats, while approving shifting the savings from those cuts away from benefiting the seniors it claimed Democrats were hurting; 4) it then resumed bashing Democrats in 2012 for cutting Medicare, pretending it hadn’t already approved the same cuts 5) and now, having lost the election, it insists that Democrats aren’t serious about reducing the deficit unless they agree to cut entitlements, including Medicare….

Paul Krugman, in a New York Times editorial, says Republicans can no longer propose reality based policies because when it comes to economics ‘there is no there, there.’

No, really. While there has been a lot of bluster from the G.O.P. about how we should reduce the deficit with spending cuts, not tax increases, no leading figures on the Republican side have been able or willing to specify what, exactly, they want to cut.

And there’s a reason for this reticence. The fact is that Republican posturing on the deficit has always been a con game, a play on the innumeracy of voters and reporters. Now Mr. Obama has demanded that the G.O.P. put up or shut up — and the response is an aggrieved mumble.

Here’s where we are right now: As his opening bid in negotiations, Mr. Obama has proposed raising about $1.6 trillion in additional revenue over the next decade, with the majority coming from letting the high-end Bush tax cuts expire and the rest from measures to limit tax deductions. He would also cut spending by about $400 billion, through such measures as giving Medicare the ability to bargain for lower drug prices.

Republicans have howled in outrage. Senator Orrin Hatch, delivering the G.O.P. reply to the president’s weekly address, denounced the offer as a case of “bait and switch,” bearing no relationship to what Mr. Obama ran on in the election. In fact, however, the offer is more or less the same as Mr. Obama’s original 2013 budget proposal and also closely tracks his campaign literature.

So what are Republicans offering as an alternative? They say they want to rely mainly on spending cuts instead. Which spending cuts? Ah, that’s a mystery. In fact, until late last week, as far as I can tell, no leading Republican had been willing to say anything specific at all about how spending should be cut.

The veil lifted a bit when Senator Mitch McConnell, in an interview with The Wall Street Journal, finally mentioned a few things — raising the Medicare eligibility age, increasing Medicare premiums for high-income beneficiaries and changing the inflation adjustment for Social Security. But it’s not clear whether these represent an official negotiating position — and in any case, the arithmetic just doesn’t work.

Start with raising the Medicare age. This is, as I’ve argued in the past, a terrible policy idea. But even aside from that, it’s just not a big money saver, largely because 65- and 66-year-olds have much lower health costs than the average Medicare recipient. When the Congressional Budget Office analyzed the likely fiscal effects of a rise in the eligibility age, it found that it would save only $113 billion over the next decade and have little effect on the longer-run trajectory of Medicare costs.

Increasing premiums for the affluent would yield even less; a 2010 study by the budget office put the 10-year savings at only about $20 billion.

Changing the inflation adjustment for Social Security would save a bit more — by my estimate, about $185 billion over the next decade. But put it all together, and the things Mr. McConnell was talking about would amount to only a bit over $300 billion in budget savings — a fifth of what Mr. Obama proposes in revenue gains.

The point is that when you put Republicans on the spot and demand specifics about how they’re going to make good on their posturing about spending and deficits, they come up empty. There’s no there there.

And there never was. Republicans claim to be for much smaller government, but as a political matter they have always attacked government spending in the abstract, never coming clean with voters about the reality that big cuts in government spending can happen only if we sharply curtail very popular programs. In fact, less than a month ago the Romney/Ryan campaign was attacking Mr. Obama for, yes, cutting Medicare.

Now Republicans find themselves boxed in. With taxes scheduled to rise on Jan. 1 in the absence of an agreement, they can’t play their usual game of just saying no to tax increases and pretending that they have a deficit reduction plan. And the president, by refusing to help them out by proposing G.O.P.-friendly spending cuts, has deprived them of political cover. If Republicans really want to slash popular programs, they will have to propose those cuts themselves.

So while the fiscal cliff — still a bad name for the looming austerity bomb, but I guess we’re stuck with it — is a bad thing from an economic point of view, it has had at least one salutary political effect. For it has finally laid bare the con that has always been at the core of the G.O.P.’s political strategy.

Beezer here.  If you don’t understand economics then the chances are great that your policies are not going to be successful.  For more than 30 years Republicans have built up an edifice based on nonsense economics.   In 2007 and 2008 these policies created the biggest economic crisis in America since the Great Depression.  Financial deregulation, low tax rates particularly on wealthy incomes, rampant defense spending, artificially low interest rates, regulatory forbearance across the board– all Republican economic mainstays–brought on an economic whirlwind of destruction.   Yet after all this destruction, after watching their politically motivated edifice crumble in public view, the GOP didn’t change a note.  And still don’t.  They still threaten blackmail over the debt limit if they don’t get their way–whatever their way is if they’d only tell us.   The GOP is about to collapse inward, representing a shrinking population and the uber wealthy.   The sooner this happens, the better off will be the nation.    

Republicans have floated the idea of a ‘bubble tax’ and in doing so reveal that above all, they protect the super rich, the 0.01%.  From Paul Krugman over at the New York Times.

The contortions Republicans are going through in an attempt to avoid raising tax rates are quite something, and they pose something of a puzzle: why are they making noises about raising revenue by limiting deductions, while still screaming bloody murder at any hint of a rise in tax rates?

One possible answer is that they’re still imagining that they can pull a fast one — that they can sell supposed revenue raisers that don’t actually raise much revenue, or that they can find a way to renege on whatever agreement might be reached by appealing to the various interests with a stake in particular deductions.

Another possible answer, which I guess I have to mention, is that they sincerely believe that letting the top rate go back up to Clinton-era levels would have a devastating effect on incentives. On second thought, never mind.

But there’s a third possibility, which Nate Silver and Josh Marshall both raise in slightly different ways: they may be trying to protect the players at the expense of the $400,000 a year working stiffs.

The terms, in case you’re wondering, come from the original Wall Street:

I’m not talking a $400,000 a year working Wall Street stiff flying first class and being comfortable, I’m talking about liquid. Rich enough to have your own jet. Rich enough not to waste time. Fifty, a hundred million dollars, buddy. A player, or nothing.

Nate has a chart:

Under this particular proposal, everyone making more than 250K would pay more — but as a percentage of income, it would be significant for those making 400K, trivial for the Masters of the Universe making $10 million or more. And this is basically going to be true of any proposal that doesn’t actually raise rates.

The point, as Josh says, is that when push comes to shove, the GOP seems ready to throw the bottom 90 percent of the top 1 percent overboard, in order to protect its real patrons, the superelite.

From the always reliable economist, Paul Krugman, at his blog in the New York Times.

For future reference. In a depressed economy, with the government able to borrow at very low interest rates, we should be increasing public investment — the true cost of the resources is negligible, so the rate of return is very high, not to mention the desirability of creating jobs.

Here’s what has actually happened, as measured by the sum of state, local, and federal nondefense investment:

Doing it wrong.

Beezer here.  Again to state what should be obvious:  Policies that do not directly create hires should be put on the back burner and replaced by those that do hire directly.  That leaves two fiscal tools.  Transfers down to cash strapped states and municipalities, and infrastructure programs.  The GOP won’t allow either.  They are the sole and direct cause of our slow recovery.  Period.