Sunday, September 5, 2010

Fallacy of Composition, or a Non Sequitur?

Of all of the things that Paul Krugman has written demanding that the government engage in even more massive borrowing and spending to "give the economy traction," perhaps this September 3 post is the most fallacious. Ironically, Krugman is claiming that his opponents are engaging in an informal fallacy, the Fallacy of Composition.

He writes:
Whenever the issue of fiscal stimulus comes up, you can count on someone chiming in to say, “Only a moron could believe that the answer to a problem created by too much debt is to create even more debt.” It sounds plausible — but it misses the key point: there’s a fallacy of composition here. When everyone tries to pay off debt at the same time, the result is contraction and deflation, which ends up making the debt problem worse even if nominal debt falls. On the other hand, a strong fiscal stimulus, by expanding the economy and creating moderate inflation, can actually help resolve debt problems.
So, what is his example? It is World War II. He goes on:
From 1929 to 1933, everyone was trying to pay down debt — and the debt/GDP ratio skyrocketed thanks to contraction and deflation. During and immediately after WWII, there was massive borrowing — but GDP grew faster than debt, and the debt burden ended up falling.

Yes, it seems paradoxical — but that’s the kind of world we’re living in. And the refusal of so many people to face up to the fact that we’re in a world where conventional rules don’t apply makes it likely that we’ll stay in that world for a long time come.
Here is the problem. As Robert Higgs wrote nearly 20 years ago, to say that World War II was a time of "prosperity" is an obscenity. It is true that the GDP numbers were high, but Prof. Higgs points out that the economy mainly was producing war goods. He writes:
In fact, conditions were much worse than the data suggest for consumers during the war. Even if the price index corrections considered above are sufficient, which is doubtful, one must recognize that consumers had to contend with other extraordinary welfare-diminishing changes during the war. To get the available goods, millions of people had to move, many of them long distances, to centers of war production. (Of course, costly movements to areas of greater opportunity always occur; but the rate of migration during the war was exceptional because of the abrupt changes in the location of employment opportunities.) After bearing substantial costs of relocation, the migrants often found themselves crowded into poorer housing. Because of the disincentives created by rent controls, the housing got worse each ear, as landlords reduced or eliminated maintenance and repairs. Transportation, even commuting to work, became difficult for many workers. No new cars were being produced; used cars were hard to come by because of rationing and were sold on the black market at elevated prices; gasoline and tires were rationed; public transportation was crowded and inconvenient for many, as well as frequently pre-empted by the military authorities. Shoppers bore substantial costs of searching for sellers willing to sell goods, including rationed goods, at controlled prices; they spent much valuable time arranging (illegal) trades of ration coupons or standing in queues. The government exhorted the public to “use it up, wear it out, make it do, or do without.” In thousands of ways, consumers lost their freedom of choice.
Furthermore, Krugman seems to be claiming that the "high GDP" numbers between 1941 and 1945 came as a result of all of the heavy borrowing done by the Roosevelt administration. This is nonsense. It is as though World War II came about because of "investments" by FDR and his "Brain Trust" when, in fact, the war had nothing to do with the New Deal per se.

So, in claiming that he is ferreting out the "Fallacy of Composition," Krugman engages in yet another non sequitur. Not exactly good economic analysis.


Anonymous said...

I guess one should expect such paltry analysis from a man who has dedicated himself to debunking one man.

I mean Krugman doesn't assert that WWII was a time of prosperity, and the evidence you present is solely anecdotal. Aren't you an economist? I could not find the word prosperity in Krugman's blog post.

Don't you think we borrowed money to fight WWII? What does that have to do with the New Deal? He meant borrowing for the War.

You have presented no alternative explanation for the GDP-debt ratios during and after WWII. Where Krugman does stumble is his assumption that following the war it was government spending that put us on the road to prosperity rather than international economic conditions that do not exist today.

Anonymous said...

Here is a 100 trillion dollar bill:

Remember, the government is not revenue constrained.

Bob Roddis said...

a man who has dedicated himself to debunking one man

One can presume that Prof. Anderson spends most of his spare time saving the citizens of NW Georgia from the ravages of the various state employees of the
Lookout Mountain Judicial Circuit
such as falsely accused people like Tonya Craft. A person of average intelligence with both halves of their brain tied behind their back could debunk the absurd claims of the Krugmaniac with minimal time and effort. It’s just that Krugman makes his fraudulent claims on a daily basis from the “prestigious” NYT.

Don't you think we borrowed money to fight WWII? What does that have to do with the New Deal? He meant borrowing for the War.

In the event a statist will admit that The New Deal did not end the depression, the fall-back position is that World War II ended the depression. That is also a completely false and fraudulent claim. It’s always important to debunk it at every opportunity.

Again, everyone should listen to Robert Higgs being interviewed by Scott Horton.

Anonymous said...

@Bob -- As usual with these posts you do nothing to address the claims that I made besides claiming that they are standard responses!

First, Krugman's blog is not called "Friedman in Wonderland." You want to make yourself more credible - change your blog title because otherwise it makes you seem petty and obsessed.

Second, Krugman has never denied that WWII spending raised aggregate demand and helped get us out of the depression. I depart from Krugman because he is not a structuralist. Spending can mitigate a depression, but it cannot propel a recovery.

Sean said...

"Spending can mitigate a depression, but it cannot propel a recovery."

To be more precise, government spending can mitigate a depression---though at the price of extending a depression's length and increasing its depth. Indeed, does government spending fail to "propel a recovery".

Sean said...

"mitigate" that is, for some at the expense of others.

Unless you're prepared to demonstrate where all the free lunches are being given away.

Anonymous said...

Really? You are so good that you are at F State trying to challenge a Noble prize winning economist, a professor at Princeton and London School - with an MIT PhD. Sorry, nice try but you aren't in the same league. And it's obvious.