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Monday, August 24, 2009

Krugman's One Man Reagan Assault Continues

Paul Krugman appears to be determined to try and rewrite the history of the Reagan years all on his own. He continues with this piece.




Let’s talk for a moment about why the age of Reagan should be over.

First of all, even before the current crisis Reaganomics had failed to deliver what it promised. Remember how lower taxes on high incomes and deregulation that unleashed the “magic of the marketplace” were supposed to lead to dramatically better outcomes for everyone? Well, it didn’t happen.

To be sure, the wealthy benefited enormously: the real incomes of the top .01 percent of Americans rose sevenfold between 1980 and 2007. But the real income of the median family rose only 22 percent, less than a third its growth over the previous 27 years.

Moreover, most of whatever gains ordinary Americans achieved came during the Clinton years. President George W. Bush, who had the distinction of being the first Reaganite president to also have a fully Republican Congress, also had the distinction of presiding over the first administration since Herbert Hoover in which the typical family failed to see any significant income gains.


Only Paul Krugman would think that the years 1981-2007 were bad for all Americans. Furthermore, he seems to blame Reagan for the Bush years even though Reagan had been out o office for 16 years by then. First, comparing the year 1953-1980 to 1981-2007 is totally misleading. We were still only ten years removed from the Great depression at the beginning of that era. Much of the gains were making up for years and years of enormous economic losses. Furthermore, the "income" gained in most of the seventies were due mostly to inflation. None of this Krugman puts into context.



More than that, here's a very inconvenient fact that Krugman also doesn't mention about the Reagan years. The last two years of the Carter Presidency produced stagflation which continued into the Reagan presidency. A recession was created largely because Paul Volcker raised interest rates in order to beat the inflation that was occurring after Carter's reign. So, poverty, which began rising in 1978, didn't stop rising until 1983. From there, it continued to drop steadily until it reached levels of 1978.



All of this is simply economic nonsense. No one doubts that the years 1983-2007 were 25 years of near uninterrupted growth. So, some, like Krugman, will isolate misleading statistics in order to make it seem as though Reagan's policies didn't benefit all. Frankly, I'm sure they didn't. It isn't the president's job to see to it that each and every American succeeds. That's up to each individual. The president is supposed to create an economic environment most conducive for success. That's exactly what Reagan did with his tax cuts and deregulation. The rest was up to the individual.



Worse than that, Krugman continues to blame the era of "deregulation" on the mortgage crisis and he furthermore blames Reagan for all of this.




There’s a lot to be said about the financial disaster of the last two years, but the short version is simple: politicians in the thrall of Reaganite ideology dismantled the New Deal regulations that had prevented banking crises for half a century, believing that financial markets could take care of themselves. The effect was to make the financial system vulnerable to a 1930s-style crisis — and the crisis came.

“We have always known that heedless self-interest was bad morals,” said Franklin Delano Roosevelt in 1937. “We know now that it is bad economics.” And last year we learned that lesson all over again.

Or did we? The astonishing thing about the current political scene is the extent to which nothing has changed.




This is the standard liberal line, deregulation caused the crisis. Krugman, like most liberals, can't actually point to a specific piece of deregulation which shows you just how weak the case is. I'll say the same thing that I say each and every time this argument is advanced. Fraud, more than anything, contributed to the crisis. Fraud is not now, was not then, nor will ever be legal. No one deregulated fraud out of our regulatory handbook. As such, most of the problematic loans, and the financial instruments they created, were not done legally. That isn't a lack of regulation but enforcement, and that's a totally different problem. It's not Ronald Reagan's fault that regulators looked the other way while teachers, plumbers, and janitors systematically ballooned their incomes on application in order to qualify for loans.



All of this Krugman uses to make an absurd argument for the public option.




The debate over the public option has, as I said, been depressing in its inanity. Opponents of the option — not just Republicans, but Democrats like Senator Kent Conrad and Senator Ben Nelson — have offered no coherent arguments against it. Mr. Nelson has warned ominously that if the option were available, Americans would choose it over private insurance — which he treats as a self-evidently bad thing, rather than as what should happen if the government plan was, in fact, better than what private insurers offer.

But it’s much the same on other fronts. Efforts to strengthen bank regulation appear to be losing steam, as opponents of reform declare that more regulation would lead to less financial innovation — this just months after the wonders of innovation brought our financial system to the edge of collapse, a collapse that was averted only with huge infusions of taxpayer funds.

Krugman goes on to quote Upton Sinclair in saying "It is difficult to get a man to understand something, when his salary depends upon his not understanding it.” The implication being that opponents of the public option are simply tools of the health insurance industry. The irony here is that the charge would apply to Krugman himself. He's made quite a living espousing Keynesian style economics and bigger government. In that respect, the "public option" is near a fantasy. There are plenty of good arguments against it but Krugman would never hear of them since his entire paycheck depends on believing something different.

4 comments:

Kingfish said...

Can't point to a single piece of de-regulation?

Try the 2004 SEC decision removing leverage limits. Fannie, Lehman, and others went from 10:1 to 20,30, and even 80 to 1. Responsible for alot of the meltdown when these companies crashed.

mike volpe said...

There's no question that was a major contributing factor however I said that Krugman couldn't point to one. That said, leverage would have been fine if there wasn't any fraud. In fact, no one would have wanted to deleverage if there wasn't any fraud because it was the fraud that created the crisis.

Kingfish said...

80:1 leverage ratios are not fine. Its a high-wire act and when something goes wrong, and it always does, then that highly-leveraged firm takes many other companies down with it.

The leverage ratios are what took a fire that would've just taken out a block or two into burning down the whole city. That and the fraud committed by the ratings agencies are probably the two biggest culprits.

mike volpe said...

Yes, but if they were all buying a set of loans that were solid we wouldn't have gone off the cliff.

Why were banks so insistent on extending leverage? It's because they all wanted to get in on the speculative market. The leverage didn't create the speculative market. The leverage was in response to the speculative market.

The fraud wasn' in the ratings agencies but in the loans themselves. The ratings agencies were incompetent not fraudulent.

Again, what started the fire was the speculative market. That was started, in my opinion, by loose monetary policy.