Krugman Demolishes Rubio

[_Kevin Graham]

The State of the Union address was not, I’m sorry to say, very interesting. True, the president offered many good ideas. But we already know that almost none of those ideas will make it past a hostile House of Representatives.

In case you’re wondering, a zombie idea is a proposition that has been thoroughly refuted by analysis and evidence, and should be dead — but won’t stay dead because it serves a political purpose, appeals to prejudices, or both. The classic zombie idea in U.S. political discourse is the notion that tax cuts for the wealthy pay for themselves, but there are many more. And, as I said, when it comes to economics it appears that Mr. Rubio’s mind is zombie-infested.

Start with the big question: How did we get into the mess we’re in?

The financial crisis of 2008 and its painful aftermath, which we’re still dealing with, were a huge slap in the face for free-market fundamentalists. Circa 2005, the usual suspects — conservative publications, analysts at right-wing think tanks like the American Enterprise Institute and the Cato Institute, and so on — insisted that deregulated financial markets were doing just fine, and dismissed warnings about a housing bubble as liberal whining. Then the nonexistent bubble burst, and the financial system proved dangerously fragile; only huge government bailouts prevented a total collapse.

Instead of learning from this experience, however, many on the right have chosen to rewrite history. Back then, they thought things were great, and their only complaint was that the government was getting in the way of even more mortgage lending; now they claim that government policies, somehow dictated by liberals even though the G.O.P. controlled both Congress and the White House, were promoting excessive borrowing and causing all the problems.

Every piece of this revisionist history has been refuted in detail. No, the government didn’t force banks to lend to Those People; no, Fannie Mae and Freddie Mac didn’t cause the housing bubble (they were doing relatively little lending during the peak bubble years); no, government-sponsored lenders weren’t responsible for the surge in risky mortgages (private mortgage issuers accounted for the vast majority of the riskiest loans).

But the zombie keeps shambling on — and here’s Mr. Rubio Tuesday night: “This idea — that our problems were caused by a government that was too small — it’s just not true. In fact, a major cause of our recent downturn was a housing crisis created by reckless government policies.” Yep, it’s the full zombie.

What about responding to the crisis? Four years ago, right-wing economic analysts insisted that deficit spending would destroy jobs, because government borrowing would divert funds that would otherwise have gone into business investment, and also insisted that this borrowing would send interest rates soaring. The right thing, they claimed, was to balance the budget, even in a depressed economy.

Now, this argument was obviously fallacious from the beginning. As people like me tried to point out, the whole reason our economy was depressed was that businesses weren’t willing to invest as much as consumers were trying to save. So government borrowing would not, in fact, drive up interest rates — and trying to balance the budget would simply deepen the depression.

Sure enough, interest rates, far from soaring, are at historic lows — and countries that slashed spending have also seen sharp job losses. You rarely get this clear a test of competing economic ideas, and the right’s ideas failed.

But the zombie still shambles on. And here’s Mr. Rubio: “Every dollar our government borrows is money that isn’t being invested to create jobs. And the uncertainty created by the debt is one reason why many businesses aren’t hiring.” Zombies 2, Reality 0.

In fairness to Mr. Rubio, what he’s saying isn’t any different from what everyone else in his party is saying. But that, of course, is what’s so scary.

For here we are, more than five years into the worst economic slump since the Great Depression, and one of our two great political parties has seen its economic doctrine crash and burn twice: first in the run-up to crisis, then again in the aftermath. Yet that party has learned nothing; it apparently believes that all will be well if it just keeps repeating the old slogans, but louder.

It’s a disturbing picture, and one that bodes ill for our nation’s future.

[_cinepro]

Circa 2005, the usual suspects — conservative publications, analysts at right-wing think tanks like the American Enterprise Institute and the Cato Institute, and so on — insisted that deregulated financial markets were doing just fine, and dismissed warnings about a housing bubble as liberal whining.

While there were certainly liberals who saw the housing bubble (Paul Krugman) and conservatives who didn't (Alan Reynolds for the Cato Institute), the list of people who publicly warned of the bubble isn't so clear cut along ideological lines.

http://investorhome.com/predicted.htm

Many, many conservative investors and economists warned of the bubble. And there were plenty of liberals who missed it as well.

[_Kevin Graham]

But what can be determined along ideological lines was this part of Krugman's statement: "...insisted that deregulated financial markets were doing just fine." We hear this all the time from the Right.

Conservatives constantly whine about regulations and insist they do nothing but hinder economic progress. No amount of evidence will sway them. Republicans won't learn their lessons. Now they have chosen Rubio as their new ring leader; a guy who is essentially just another Romney/Cantor/Paul/Bachmann/O'Donnell etc... who can speak Spanish.

[_Gadianton]

"..and dismissed warnings about a housing bubble as liberal whining.."

It's not a right or left phenemona. Robert Schiller is sophisticated example from the left who supposidly saw a bubble. But then, a long list of uber right-wing Austrians, further right than Droopy, also went on record as having predicted the bubble. That's because the Austrian business cycle theory is essentially a theory about the creation of bubbles. I'd wager that a larger percentage of Austrians predicted the bubble than liberals, as there are a very small number of Austrians and a very large number number of liberals, and bubbles are explicit doctrine for Austrians. Austrians have gained some respect since the crisis with the media because of their convictions about bubbles and have a pretty viral campaign going on the internet. But then there's the lingering question, did these people predict the bubble, or did the bubble naturally select those who believed in it?

The investment community obviously missed the bubble in aggregate. But is that because investors are guided by the great Chicago myth that the market is rational? Investors tend not to buy into the myth of the rational market because if they did, they would not be investors. Warren Buffet (who is liberal) missed the bubble and admitted it. Why? One could cite his roots in value investing as a first approximation. Value investors and value hedge funds typically did poorly both during the tech bubble and the housing bubble. Value investors also believe the market is irrational, but that irrationality doesn't translate easy to bubbles. All in all, value investors have made far more money than trend surfers who watch for bubbles; they've unquestionably been right more often than trend-watchers. There were a few investors who made huge money during the bubble, of course, but their faith was also tried along the way.

We may not even have the right story for the crises. It might have been the financial crises was a beach house built on toothpicks that crumbled when hit by a tidal wave rather than the match that lit a forest fire -- the causality could have been the other direction. Precisely what went wrong to cause the financial instability isn't obvious. there is a lot of blame to go around, some deregulation and policy both are on the table. Well, there are always those out there who knew what was happening every step along the way and have yet to be wrong about anything.

[_Gadianton]

. wrong thread.