[OPE] Paul Krugman and the political economy of insurance capitalism

Yes, Jerry, this is true, but the question is really whether, in a
globalising world economy, it is possible to prevent price inflation from
rising eventually, in particular if hardly controllable fluctuations in
currency exchange rates involving only a minor portion of the money stock
force up costs. One might argue, that if price inflation is near-zero, then
a few percent of additional inflation is really not such a problem, there is
plenty "room for maneouvre". But in an economy saddled with large debt
levels, in which real wages remain constant and output growth is rather
slow, and in which large amounts of capital transit between countries in
response to even rather small yield differentials, I think even rather
small movements in inflation can have big effects.

As I noted before, the Keynesian macro model was based essentially on the
idea of a self-contained national economy, but if say 20%, or 40% or more of
outputs are imported and exported, and if very large masses of capital are
imported and exported according to current yield differentials, then it
becomes possible to import or export inflation no matter what national
policy happens to be. It is then difficult to see how inflation can
ultimately be prevented, if the total credit volume continues to expand in
excess of what is really warranted by output growth.

Economists right and left, like Milton Friedman and Ernest Mandel, pointed
out about half a century ago that, at least in the long run, there is a
trade-off or zero-sum game between inflation and unemployment, the corollary
of which is that the attempt to squeeze inflation out of the economy,
although the credit volume expands, must result in a higher unemployment
level. Like I said before, my own judgement is that the world economy is
headed towards a durably higher unemployment level, and the corollary of
that is that the possibility for real GDP growth is also restricted, in
particular where productivity growth and fixed investment remains sluggish.

"Insurance capitalism" I think is above all about the continual displacement
in space and time of the consequences of rising debt levels, and this means
sadly that the costs, in a deregulated economy, typically devolve on those
market actors in the weakest market position, the ones that have the least
bargaining power and the least possibility of offloading costs onto someone
else.

Point is, that this "privatization of the gains of financial activity and
the socialization of losses" does not occur simply in a national arena, but
in an international arena. I think that this is a phenomenon that Keynes
could not really foresee. When he lived, the ratio between the magnitudes of
production capital and non-production capital was also vastly different, and
the proportion of state expenditure was only about half of what it is now.
It is true that the world's central banks nowadays act much more "in
concert" to compensate for economic fluctuations, but at a certain point
they can't reconcile that with the national interest, and that tends to have
inflationary implications, and implications for the interest rate regime.
Problem is that the "stimulus" doesn't really stimulate much in the way of
additional production growth, it mainly just reduces the magnitude of the
downturn. In reality, I think the Keynesian macro model can no longer
adequately explain "how the economy works".

J.

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Received on Tue Nov 24 14:43:08 2009