Thursday, November 14, 2013

"economics is not a morality play"


Krugman, 25 October 2010:

What can be done? One answer is inflation, if you can get it, which will do two things: it will make it possible to have a negative real interest rate, and it will in itself erode the debt of the Sams. Yes, that will in a way be rewarding their past excesses – but economics is not a morality play.

Incorrect.

Do you see the assumption in the excerpt? Here:

Yes, that will in a way be rewarding their past excesses...

The assumption is that people have debt because of "past excesses". And Krugman doesn't offer this as simple arithmetic, but as "morality". He's not saying spending in excess of income is what creates debt; he's saying people spending more than they should is what creates debt.

That's not how I see things.

To enhance economic growth, our economic policies encourage spending. When spending leads to inflation, our policies restrict the quantity of money. Yeah, yeah, they raise interest rates to fight inflation. But they raise interest rates by restricting the quantity of money.

To encourage growth, we encourage spending; then to fight inflation we restrict money. Do you see how this works? It's not symmetrical. To encourage growth we encourage new borrowing and spending; when all that borrowing and spending leads to inflation we suddenly cut off funding for further expansion.

We have no policy that encourages people to repay their existing debt a little faster, thus draining money from circulation and fighting inflation with a symmetrical response to the borrowing and spending that ended up causing inflation in the first place.

No. Instead we cut off new borrowing and new spending, and create a recession. Meanwhile, all the money we borrowed -- the money that was causing inflation -- continues to circulate! We have no policy to address it.

//

We don't have debt because of moral excess. We have debt because our economic policies conflict with each other. We encourage spending, which means we encourage borrowing, always; then we jack up interest rates so that the things we encourage are more expensive. But we never encourage the repayment of debt.

Policy is the reason we have so much debt. Not morality.

1 comment:

Jazzbumpa said...

I'll suggest yet a different interpretation.

First off, if there is a relationship between money supply and inflation, I have yet to find it. Correlation might actually be negative, which is very hard to rationalize.

http://jazzbumpa.blogspot.com/2013/11/inflationary-derp.html

Second, I'll posit that excessive personal debt occurs because of wealth and income disparity. Real median income has been static for 4 decades. At the low end it's far, far worse.

And this century, it's been worse still as real People borrow because they can't make ends meet from payday to payday.

Come to think of it, there is a moral aspect, but not, IMHO, in the way either you or PK intend.

Cheers!
JzB