Krugman and the Rentiers

Sometimes, it's just better to quote.

The latest economic data have dashed any hope of a quick end to America’s job drought, which has already gone on so long that the average unemployed American has been out of work for almost 40 weeks. Yet there is no political will to do anything about the situation. Far from being ready to spend more on job creation, both parties agree that it’s time to slash spending — destroying jobs in the process — with the only difference being one of degree.

Nor is the Federal Reserve riding to the rescue. On Tuesday, Ben Bernanke, the Fed chairman, acknowledged the grimness of the economic picture but indicated that he will do nothing about it.

And debt relief for homeowners — which could have done a lot to promote overall economic recovery — has simply dropped off the agenda. The existing program for mortgage relief has been a bust, spending only a tiny fraction of the funds allocated, but there seems to be no interest in revamping and restarting the effort.

The situation is similar in Europe, but arguably even worse. In particular, the European Central Bank’s hard-money, anti-debt-relief rhetoric makes Mr. Bernanke sound like William Jennings Bryan.

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.

Of course, that’s not the way what I call the Pain Caucus makes its case. Instead, the argument against helping the unemployed is framed in terms of economic risks: Do anything to create jobs and interest rates will soar, runaway inflation will break out, and so on. But these risks keep not materializing. Interest rates remain near historic lows, while inflation outside the price of oil — which is determined by world markets and events, not U.S. policy — remains low.

And against these hypothetical risks one must set the reality of an economy that remains deeply depressed, at great cost both to today’s workers and to our nation’s future. After all, how can we expect to prosper two decades from now when millions of young graduates are, in effect, being denied the chance to get started on their careers?

Ask for a coherent theory behind the abandonment of the unemployed and you won’t get an answer. Instead, members of the Pain Caucus seem to be making it up as they go along, inventing ever-changing rationales for their never-changing policy prescriptions.

While the ostensible reasons for inflicting pain keep changing, however, the policy prescriptions of the Pain Caucus all have one thing in common: They protect the interests of creditors, no matter the cost. Deficit spending could put the unemployed to work — but it might hurt the interests of existing bondholders. More aggressive action by the Fed could help boost us out of this slump — in fact, even Republican economists have argued that a bit of inflation might be exactly what the doctor ordered — but deflation, not inflation, serves the interests of creditors. And, of course, there’s fierce opposition to anything smacking of debt relief.

Who are these creditors I’m talking about? Not hard-working, thrifty small business owners and workers, although it serves the interests of the big players to pretend that it’s all about protecting little guys who play by the rules. The reality is that both small businesses and workers are hurt far more by the weak economy than they would be by, say, modest inflation that helps promote recovery.

No, the only real beneficiaries of Pain Caucus policies (aside from the Chinese government) are the rentiers: bankers and wealthy individuals with lots of bonds in their portfolios.

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.

But the reality is just the opposite: creditor-friendly policies are crippling the economy. This is a negative-sum game, in which the attempt to protect the rentiers from any losses is inflicting much larger losses on everyone else. And the only way to get a real recovery is to stop playing that game.

All I can add to this at the moment is to remind people that when Republicans and their lot talk about "job creators" and "spurring investment" and the like, they're really talking about policies that benefit these Rentiers. The problem, as Krugman exhaustively showed, is that these people DON'T necessarily create jobs. They can plow money into investments that create jobs, yes, but they can also plow it into arcane financial instruments, real estate bubbles, and (now) food and commodities. That doesn't benefit anybody except them; and to the extent that it hurts the economy, it doesn't even benefit them, not really.

The other stunning thing about this article is that it shows just how radicalized basically-moderate economists like Prof. Krugman have become. He's not the only example of a scientist driven to radicalism in the face of the state's capture by its most short-sighted and least competent members—climatologists are becoming more radical by the day as well—but it's rather shocking when you compare it to his old "dismal science" articles. He's all but admitting that the old lines about economic self interest are falling apart in the face of classism and cronyism.

That doesn't invalidate him. Far from it. A bit of radicalism is the only sane response in these mad times. It shows, instead, just how far his compatriots have fallen. If they're going along with these apocalyptically stupid and destructive policies, what does it say about them

Edit: He also points to the solution: if you want to get sorted out, follow Iceland's lead and default, instead of following Ireland's lead of austerity.