Brooks and Krugman

Well, today we get the first of what I pray will be very few of Bobo’s ruminations on the Olympics.  In “The Olympic Contradiction” he gurgles that the Olympics are a peaceful celebration of our warlike nature and a good example of how being contradictory leads to success.  No, the whole thing doesn’t make any much more sense.  Prof. Krugman has a question in “Money for Nothing:”  Why do the markets love government debt? The answer might tell us something important about the nature of our economic troubles.  Here’s Bobo:

Abraham Lincoln said that a house divided against itself cannot stand. He was right about slavery, but the maxim doesn’t apply to much else. In general, the best people are contradictory, and the most enduring institutions are, too.

The Olympics are a good example. The Olympics are a peaceful celebration of our warlike nature.

The opening ceremony represents one side of the Olympic movement. They are a lavish celebration of the cooperative virtues: unity, friendship, equality, compassion and care. In Friday’s ceremony, there’ll be musical tributes to the global community and the Olympic spirit. There will be Pepsi commercial-type images of the people from different backgrounds joyfully coming together. There will be pious speeches about our common humanity and universal ideals.

And there will be a lot of dancing. Because we’re social, semi-herdlike creatures, we take a primordial pleasure in the sight of a large number of people moving in unison. Dance is physical, like sports, but, in many ways, it is the opposite of sports. In dance, the purpose is to blend with and mirror each other; in sport, the purpose is to come out ahead. Dancers perform for the audience and offer a gift of emotion; athletes respond to one another and the spectators are just there to witness and cheer.

Dancers, especially at the opening ceremony, smile in warmth and friendship. No true sport is ever done smiling (this is the problem with figure skating and competitive cheerleading).

After the opening ceremony is over, the Olympics turn into a celebration of the competitive virtues: tenacity, courage, excellence, supremacy, discipline and conflict.

The smiling goes away and the grim-faced games begin. The marathoner struggling against exhaustion, the boxer trying to pummel his foe, the diver resolutely focused on her task. The purpose is to be tougher and better than the people who are seeking the same pinnacle.

If the opening ceremony is win-win, most of the rest of the games are win-lose. If the opening ceremony mimics peace, the competitions mimic warfare. It’s not about the brotherhood of humankind. It’s about making sure our country beats the Chinese in the medal chart.

Through fierce competition, sport separates the elite from the mediocre. It identifies the heroes and standards of excellence that everybody else can emulate (a noble loser can serve as well as a talented winner). The idea is not to win friendship; it’s to win glory. We get to see people experiencing the thrill of victory from the agony of defeat and judge how well they respond.

In sum, the Olympic Games appeal both to our desire for fellowship and our desire for status, to the dreams of community and also supremacy. And, of course, these desires are in tension. But the world is, too. The world isn’t a jigsaw puzzle that fits neatly and logically together. It’s a system of clashing waves that can never be fully reconciled.

The enduring popularity of the Olympics teach the lesson that if you find yourself caught between two competing impulses, you don’t always need to choose between them. You can go for both simultaneously. A single institution can celebrate charitable compassion and military toughness. A three-week festival can be crassly commercial, but also strangely moving.

F. Scott Fitzgerald famously said that the mark of a first rate intelligence is the ability to hold two contradictory thoughts in your mind at the same time. But it’s not really the mark of genius, just the mark of anybody who functions well in the world. It’s the mark of any institution that lasts.

A few years ago, Roger Martin, the dean of the University of Toronto’s management school, wrote a book called “The Opposable Mind,” about business leaders who can embrace the tension between contradictory ideas. One of his examples was A.G. Lafley of Proctor & Gamble.

Some Procter & Gamble executives thought the company needed to cut costs and lower prices to compete with the supermarket store brands. Another group thought the company should invest in innovation to keep their products clearly superior. Lafley embraced both visions, pushing hard in both directions.

The world, unfortunately, has too many monomaniacs — people who pick one side of any creative tension and wish the other would just go away. Some parents and teachers like the cooperative virtues and distrust the competitive ones, so, laughably, they tell their kids that they are going to play sports but nobody is going to keep score.

Politics has become a contest of monomaniacs. One faction champions austerity while another champions growth. One party becomes the party of economic security and the other becomes the party of creative destruction.

The right course is usually to push hard in both directions, to be a house creatively divided against itself, to thrive amid the contradictions. The Olympics are great, but they are not coherent.

Bobo, honey, they’re more coherent than that column was.  Here’s Prof. Krugman:

For years, allegedly serious people have been issuing dire warnings about the consequences of large budget deficits — deficits that are overwhelmingly the result of our ongoing economic crisis. In May 2009, Niall Ferguson of Harvard declared that the “tidal wave of debt issuance” would cause U.S. interest rates to soar. In March 2011, Erskine Bowles, the co-chairman of President Obama’s ill-fated deficit commission, warned that unless action was taken on the deficit soon, “the markets will devastate us,” probably within two years. And so on.

Well, I guess Mr. Bowles has a few months left. But a funny thing happened on the way to the predicted fiscal crisis: instead of soaring, U.S. borrowing costs have fallen to their lowest level in the nation’s history. And it’s not just America. At this point, every advanced country that borrows in its own currency is able to borrow very cheaply.

The failure of deficits to produce the predicted rise in interest rates is telling us something important about the nature of our economic troubles (and the wisdom, or lack thereof, of the self-appointed guardians of our fiscal virtue). Before I get there, however, let’s talk about those low, low borrowing costs — so low that, in some cases, investors are actually paying governments to hold their money.

For the most part, this is happening with “inflation-protected securities” — bonds whose future repayments are linked to consumer prices so that investors need not fear that their investment will be eroded by inflation. Even with this protection, investors used to demand substantial additional payment. Before the crisis, U.S. 10-year inflation-protected bonds generally paid around 2 percent. Recently, however, the rate on those bonds has been minus-0.6 percent. Investors are willing to pay more to buy these bonds than the amount, adjusted for inflation, that the government will eventually pay in interest and principal.

So investors are, in a sense, offering governments free money for the next 10 years; in fact, they’re willing to pay governments a modest fee for keeping their wealth safe.

Now, those with a vested interest in the fiscal crisis story have made various attempts to explain away the failure of that crisis to materialize. One favorite is the claim that the Federal Reserve is keeping interest rates artificially low by buying government bonds. But that theory was put to the test last summer when the Fed temporarily suspended bond purchases. Many people — including Bill Gross of the giant bond fund Pimco — predicted a rate spike. Nothing happened.

Oh, and pay no attention to the warnings that any day now we’ll turn into Greece, Greece I tell you. Countries like Greece, and for that matter Spain, are suffering from their ill-advised decision to give up their own currencies for the euro, which has left them vulnerable in a way that America just isn’t.

So what is going on? The main answer is that this is what happens when you have a “deleveraging shock,” in which everyone is trying to pay down debt at the same time. Household borrowing has plunged; businesses are sitting on cash because there’s no reason to expand capacity when the sales aren’t there; and the result is that investors are all dressed up with nowhere to go, or rather no place to put their money. So they’re buying government debt, even at very low returns, for lack of alternatives. Moreover, by making money available so cheaply, they are in effect begging governments to issue more debt.

And governments should be granting their wish, not obsessing over short-term deficits.

Obligatory caveat: yes, we have a long-run budget problem, and we should be taking steps to address that problem, mainly by reining in health care costs. But it’s simply crazy to be laying off schoolteachers and canceling infrastructure projects at a time when investors are offering zero- or negative-interest financing.

You don’t even have to make a Keynesian argument about jobs to see that. All you have to do is note that when money is cheap, that’s a good time to invest. And both education and infrastructure are investments in America’s future; we’ll eventually pay a large and completely gratuitous price for the way they’re being savaged.

That said, you should be a Keynesian, too. The experience of the past few years — above all, the spectacular failure of austerity policies in Europe — has been a dramatic demonstration of Keynes’s basic point: slashing spending in a depressed economy depresses that economy further.

So it’s time to stop paying attention to the alleged wise men who hijacked our policy discussion and made the deficit the center of conversation. They’ve been wrong about everything — and these days even the financial markets are telling us that we should be focused on jobs and growth.

 

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