Open thread for night owls: What Krugman & Stiglitz can tell us

Even if you are, like me, well to the left of Paul Krugman and even Joseph Stiglitz, you should read Jacob Hacker and Paul Pierson's piece at The New York Review of Books titled What Krugman & Stiglitz Can Tell Us.

What you will find in their mega-review (and in the books themselves) are not particularly new critiques. That's in great part because in Gilded Age II, what's new is old in the designs and machinations of hoi oligoi in dealing with the rest of us. But these highly readable, if lengthy explanations, provide a much clearer picture of what's going on in the economy today than a thousand op-eds. The descriptions are bullseye. It's when they get down to prescriptions that they run into trouble.

I can only give you a taste to whet your appetite for the entire article or the books themselves:

[N]o book could be more timely than Paul Krugman's End This Depression Now! Since the crisis began, Krugman has argued with consistency and increasing frustration that the United States has become caught not in a normal recession, but in a 'liquidity trap.' Since interest rates are already at rock bottom, normal measures, such as easy credit, won't work, and expanded government expenditures must play a central part in boosting anemic demand. Otherwise, the efforts of private citizens to pay down debts laid bare by the financial crisis will continue to hold the economy back.

To Krugman, this is all the more regrettable because it is almost wholly preventable. We know what to do, he argues: increase public spending and make it clear that monetary expansion will continue until the economy fully recovers. Krugman advocates greater federal aid to state and local governments, as well as an aggressive effort to relieve private mortgage debts. He also argues that the Fed has been too timid in setting higher inflation targets to restore expectations of growth. 'Unfortunately,' Krugman writes,

we're not using the knowledge we have, because too many people who matter'politicians, public officials, and the broader class of writers and talkers who define the conventional wisdom'have, for a variety of reasons, chosen to forget the lessons of history and the conclusions of several generations' worth of economic analysis, replacing that hard-won knowledge with ideologically and politically convenient prejudices.

Krugman is at once ruthless and humorous in taking on these prejudices. Early in the crisis, he started writing about a 'Confidence Fairy' invoked by deficit hawks'the notion that credibly tackling the deficit would lead to increased investor confidence and thereby economic expansion. He was equally dismissive of the notion that 'bond vigilantes,' a staple of the Wall Street Journal editorial page, would go after the United States by demanding higher interest rates on loans if the US didn't immediately slash its deficits. He reserved his greatest scorn, however, for those who predicted that expansionary policies would unleash crippling inflation. This, he insisted, was a 'phantom menace.' Weak demand and rock-bottom interest rates have made banks reluctant to lend even with looser money; without such lending and the resulting expansion, Krugman argued, underlying inflation couldn't and wouldn't escalate.

A few years later, Krugman has been entirely vindicated in these judgments. [...]

In an argument that dovetails with those of Occupy Wall Street protesters, Stiglitz insists that the huge and growing divide between the richest 1 percent and 'the 99 percent' is not just one concern among many, but the defining characteristic of a thoroughly sick economy. We may be the richest nation in the world, but poverty is higher and social mobility between generations lower than in other rich nations. In other respects, our model is bloated: we release far more carbon dioxide and use far more water on a per capita basis; and we spend far more on health care, while leaving tens of millions uninsured and achieving health outcomes that are mediocre at best.

The reason, according to Stiglitz, is that the vaunted American market is broken. And the reason for that, he argues, is that our economy is being overwhelmed by politically engineered market advantages'special deals that Stiglitz labels with a term familiar to economists: 'rent-seeking.' By this, he means economic returns above normal market levels that are derived from favorable political treatment. In the most powerful parts of The Price of Inequality, Stiglitz chronicles the blatant tax and spending giveaways to big agriculture, big energy, and countless other sectors. Yet he also pointedly argues that much of the rent-seeking that plagues our economy takes a more subtle form, also familiar to economists: 'negative externalities,' or costs that economic producers impose on society for which they don't pay.

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