Tuesday, December 27, 2011

Paul Krugman's Relentless Optimism

Hey, it's wishful thinking I would prefer to share, but I still see it as wishful thinking. In something that's not quite a reply to David Brooks' standard emission of "What our country needs is a good, stiff dose of morality, which of course means stiffing the middle class and working poor", Krugman argues,
All around, right now, there are people declaring that our best days are behind us, that the economy has suffered a general loss of dynamism, that it’s unrealistic to expect a quick return to anything like full employment. There were people saying the same thing in the 1930s! Then came the approach of World War II, which finally induced an adequate-sized fiscal stimulus — and suddenly there were enough jobs, and all those unneeded and useless workers turned out to be quite productive, thank you.
That is a fair retort to those like Brooks who argue that human nature has been somehow transformed and that the nation's problems are of a moral and not an economic nature. It's not only reasonable to say that human nature is pretty much the same as it was back in the depression era, but that if you're going to blame the present economy on a shift in morality (one that, it would seem, pervades the entire developed world), you should explain why our present degenerate nature nonetheless led to a huge economic boom as recently as the 1990's, and what various people on the right were trying to tell us was a boom up to the point that the housing bubble burst in late 2006.

But I find myself taking issue with Krugman's extrapolation:
There is nothing — nothing — in what we see suggesting that this current depression is more than a problem of inadequate demand. This could be turned around in months with the right policies. Our problem isn’t, ultimately, economic; it’s political, brought on by an elite that would rather cling to its prejudices than turn the nation around.
World War II was not only a "fiscal stimulus", but was also a war. The U.S. did develop huge numbers of manufacturing jobs during the war, but the success of our nation's manufacturing sector after the war was buoyed not only by the newly created technologies and capacity, but by the fact that much of Europe and Japan had been reduced to rubble.

Right now we have an economic crisis in which the world's manufacturing capacity remains intact and underutilized. Low-skilled manufacturing labor that might have provided a middle class income after WWII has in no small part been outsourced to other nations, and the low-skilled jobs that remain tend not to pay well. Thanks to automation, over the past sixty years the number of workers required to produce a given quantity of manufactured goods has declined precipitously. Also, even before the bubble burst, the middle class was under obvious stress with a ridiculous percentage of families spending more each month than they earned in wages. Even if we could return to the status quo ante, it would not be sustainable. We might be able to engineer a slower collapse, but absent something to reinvigorate the nation's middle class it was inevitable that we would reach a point where middle class standards of living could no longer be sustained by increased household debt.

I'll agree, it's possible that something as cataclysmic (and I'm leaving open the possibility of a positive upheaval, not just a war or disaster) will occur and reinvigorate the middle class. But as Krugman would be happy to point out in many other contexts, merely saying that something has happened before or assuming that something will happen falls far short of drawing sound conclusions through the application of economic principles. Economic formulas do not predict such an upheaval or make it inevitable. That part is wishful thinking.

Let's say that we were to enact a stimulus following Krugman's model and that his projections are correct: six months from now we have turned the economy around. Krugman assumes that nothing material has changed, and thus that a recovery will recreate the jobs that were lost over the past five years, and that people whose job skills are presently found wanting will once again be "quite productive". Except that's not going to happen. First, jobs will continue to be outsourced to other nations. Second, many jobs that re-emerge will pay less than they did before the bubble burst. While wage stickiness may have prevailed through this recession, for decades we've experienced stagnant middle class wages and declining working class wages. I fully expect that workers, back on the job, will be as productive as ever, but that we'll continue to see the benefit of that productivity directed to the top.

My cynical side looks at human history and sees our large, robust middle class as an aberration. I see a trend toward wealth and income distribution that looks more and more like that of the 19th century (or earlier) than that of the modern era. And I'm left wondering, how much stress can you place on the modern middle class before it cracks? And once you break the middle class, what will it take to bring it back?

Krugman is the economist, and I'm merely a cynic. But in this context his assurance does not come across as a sound application of economic theory. It strikes me as wishful thinking. I can easily see how we could have a remarkable recovery that primiarily benefits the wealthy, results in modest job creation for the working classes, and does nothing to diminish the pressures upon or wage stagnation experienced by the middle class.

Update: I just came across an article in Esquire that shares my cynical view of the economic trends in this country:
There are some truths so hard to face, so ugly and so at odds with how we imagine the world should be, that nobody can accept them. Here's one: It is obvious that a class system has arrived in America — a recent study of the thirty-four countries in the Organization for Economic Cooperation and Development found that only Italy and Great Britain have less social mobility. But nobody wants to admit: If your daddy was rich, you're gonna stay rich, and if your daddy was poor, you're gonna stay poor. Every instinct in the American gut, every institution, every national symbol, runs on the idea that anybody can make it; the only limits are your own limits. Which is an amazing idea, a gift to the world — just no longer true. Culturally, and in their daily lives, Americans continue to glide through a ghostly land of opportunity they can't bear to tell themselves isn't real. It's the most dangerous lie the country tells itself.

Post-hope , it is hard to imagine even any temporary regression back to the days of the swelling American middle class. The forces of inequality are simply too powerful and the forces against inequality too weak. But at least we can end the hypocrisy. In ten years, the next generation will no longer have the faintest illusion that the United States is a country with equality of opportunity. The least they're entitled to is some honesty about why.
Again, I'll be very happy if "something happens" that reinvigorates the middle class, and I leave open the possibility that good fortune will smile upon us. But as I look to history, the absence of any objective reason to expect that level of good fortune, and a concerted effort by powerful interests and political leaders to squash what's left of the blue collar middle class and drive more wealth to those who are already the wealthiest, I remain skeptical that the present trends won't continue and, at some point, accelerate.

Update 2: Via LG&M, a cynical response to David Brooks, also from Esquire.

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