Friday, June 25, 2010

Krugman: In the Long Run, We Screw Future Generations

Years ago, I taught an Intermediate Macroeconomics college class in which the required text was written by Keynesian disciple Wallace Peterson. In short, the book quoted the General Theory as though it were Scripture, and repeated the numerous economic fallacies that make up the structure of Keynes' book.

(I countered Peterson with Henry Hazlitt's The Failure of the New Economics, which I featured yesterday.)

So, in his post today, he repeats Keynes' silly phrase, "In the long run we are all dead," as though it had great economic value. Now, perhaps certain self-absorbed people might think that when they pass, there are no more generations, but in the real world, the present generation will hand off its economy to the generations of the future -- and in THAT long run, they will very much be alive.

Krugman uses this line to insist that we really cannot afford at the present time to get our financial house in order. We need to borrow, spend, inflate, all to give that perpetual motion machine called an "economy" enough "traction" to where it can move on its own without government spending.

Now, I would love to know what plant Professor Krugman occupies, for on that planet, spending exists to bolster production for its own sake. Indeed, spending replaces consumption, for in the Austrian paradigm, people acquire goods they believe will meet their needs by purchasing them in the marketplace. "Spending," in that view, is a purposeful activity done by individuals who wish to satisfy their needs.

However, on Planet Krugman, spending is an activity that is done for the sole purpose of keeping people "employed." It does not matter what is produced just as long as the government (or someone else) purchases it. If one steps back and takes a hard look at this paradigm, one can see that it is not "economics" at all, but rather something that turns production and exchange upside down.

Now, I can appreciate Krugman's point regarding the long and short runs. He is saying that if governments do not try to borrow and spend us into prosperity, then in the "long run," there will be no opportunity at all to bring prosperity, since the economy will be in permanent doldrums. He writes:
I mean, why shouldn’t we be focused on the business cycle? We’ve suffered the worst cyclical downturn since the Great Depression; in terms of unemployment and output gaps, we have recovered almost none of the lost ground. Millions of willing workers are idle because of lack of demand; let them stay idle, and we can turn this into a long-term structural problem, but right now it is precisely a short-term, cyclical problem.
When Krugman uses "demand," he means "aggregate demand," which economically speaking is a nonsensical term. There is no such thing as "aggregate demand;" Furthermore, people are trying to build up their savings precisely because they want to have some cushion for the future. If they are abstaining from some present spending, it is because of the current recession/depression.

In other words, personal cutbacks in spending are occurring because the economy is in recession; to say otherwise is to violate what Carl Menger calls The Law of Cause and Effect. Yet, Krugman and his followers continue to believe that the recession came about because people stopped spending, period.

I will go further. If governments cut back on present spending and start to get their financial houses in order, then the long run actually will hold much more promise than what will be the case if governments continue their suicidal attempts to spend resources that, frankly, we no longer have.

12 comments:

Anonymous said...

"governments continue their suicidal attempts to spend resources that, frankly, we no longer have"

Then how do you explain long term treasury rates rapidly falling? Not sure if you noticed, but the 2 yr. note is at an all time low, and the 10 yr. is approaching 3%. I was tought in finance 101 that when entities lack resources, their funding costs rise, not fall. How can this be? Could you please explain this?

FYI - you may not realize that Krugman is a macro economist, which is why he refers to things in the aggregate.

http://en.wikipedia.org/wiki/Aggregate_demand

William L. Anderson said...

Gee, you really got me there. Yes, the rates for U.S. treasuries are falling, so that means that all is well.

Aggregates are numbers, not economics. There IS a difference. Robert Higgs, who is a much better economist than either Krugman or me, had an excellent commentary about aggregates in this article:

http://www.lewrockwell.com/higgs/higgs125.html

Anonymous said...

"Gee, you really got me there. Yes, the rates for U.S. treasuries are falling, so that means that all is well"

What kind of response is this? Nobody said all was well. You have implied repeatedly that the US government is bankrupt, but clearly funding markets say otherwise. So my question is why are rates so low according to the almighty Austrian view of the world? It's OK to say 'I don't know'. Most economists (particularly Austrians) don't understand capital markets and the monetary system.

Anonymous said...

I would also add, the Higgs article fails to recognize how the banking system operates. The article implies that excess reserves will eventually lead to inflation, which is not correct and fails to recognize how and why those reserves were created. The banking system is never reserve constrained, so why an excess of reserves would suddenly cause inflation does not add up. This is another example of not recognizing this is a balance sheet recession. Bernanke deserves to be criticized for his harmful policies, but those polices should be understood before being criticized.

And to say “Except for the Austrian School economists, hardly anyone is worried that the extensive restructuring necessary to put the economy back on a healthy” is not only arrogant, but nonsense. Try reading something by Barry Ritholz, John Mauldin, and Ed Harrsion.

William L. Anderson said...

Austrians don't understand money and capital markets? That is a joke, right?

I remember reading Keynes claiming that the stock market is useless because most stock sales are in secondary markets, and secondary markets make no contribution to the economy, only primary markets. Yeah, we Austrians, who are the only people who analyze money through the marginal utility framework, don't understand money.

Yeah, the pure quantity theory of money explains everything. Right.

alison said...

Treasure rates are falling mainly because other developed economies are in even worse shape than the USA and money has to go where the danger is the least, at least in the short run.

jason h said...

Treasury rates are low for two main reasons. Even though the U.S. is the most indebted nation of all time, our creditors can't dump their dollars all at once, so they continue to lend. Also, the Fed can print dollars to purchase treasury notes keeping rates low.

jason h said...

I'm surprised when Keynesians get away with justifying massive borrowing and printing under the false assumption that future generations will always be more productive and willing/able to pay back the debts of the current generation. The assumption becomes even more dubious when one considers that (propping up the malinvestments with Keynesian stimulus) the economy is prevented from becoming more productive.

Brent said...

"When Krugman uses 'demand,' he means 'aggregate demand,' which economically speaking is a nonsensical term. There is no such thing as 'aggregate demand;'"

This is perhaps the biggest point that macroeconomists (and, thus, their students) don't understand. It is literally impossible to split demand from supply when conducting macro theory.

Thisguy said...

I don't get why you keep on repeating the perpetual machine analogy. Perpetual machines (which don't exist) by definition function by themselves indefinitely without any outside help. If anything, Austrians think the economy is a perpetual machine because they think the economy will keep on moving along all fine and dandy as long as there's nothing disturbing it. (government)

See I can make poorly constructed useless analogies too. It's just intellectually lazy.

Franklin said...

Actually Thisguy, the Austrians appear to be the only school of economics that realizes that the economy is NOT a machine.

What Obama, Keynes, Krugman and Thisguy Don't Know

Anonymous said...

"Austrians don't understand money and capital markets? That is a joke, right?"

No joke. By claiming SS is a Ponzi scheme, and by dodging my questions on why rates are falling, you are kind of proving my point for me. The entire idea of long rates falling despite massive borrowing and money printing by the government throws a monkey wrench in everything the Austrian view is based off of. When you consider the fact the US government is never revenue constrained, and the banking system is never reserve constrained, then the rates question becomes very clear. And BTW, it's not Austrians who don't get this. Clearly, Krugman does not as well. So please don't mistaken my critiques of the Austrian theory as a defense of Keynes. This is not an either/or situation.

"Treasury rates are low for two main reasons. Even though the U.S. is the most indebted nation of all time, our creditors can't dump their dollars all at once, so they continue to lend. Also, the Fed can print dollars to purchase treasury notes keeping rates low."

Sorry, but this is nonsense. Creditors can't sell, so they continue to lend? First US government doesn't have creditors. There is no credit risk with the US government since the government can settle all debts by printing more money. Inflation is the only constrain. Besides, the entire logic for lending someone more because you can't sell their loan makes no sense. And by Austrian logic, shouldn't printing money to buy debt be inflationary? Thus causing rates to rise? Come on Prof. Anderson, even you have to see the foolishness in this comment, right? It would be nice if you could comment on this comment. Maybe correct jason h so we can all learn.