Thursday, September 16, 2010

Spending or Regime Uncertainty?

In a Wednesday post, Paul Krugman assures us that the only reason that businesses are not spending is, well, businesses are not spending. As he declares:
...the best thing government could do to help business would be to spend more, increasing demand.
Yes, yes, these ignorant rubes who own small businesses might cite other reasons as to why there is not more longer-term investment and hiring, but face it: the only reason that businesses are not spending is because, well, people are not buying their products.

This contrasts with Robert Higgs' contention that "regime uncertainty" is playing a large role in the current stagnation, just as it did in the 1930s, he said. The difference appears to be that Prof. Higgs actually listens to what business owners are saying, while Krugman does not.

Granted, often in economics we hold to things that might be counter-intuitive to the "man on the street," such as the marginal utility theory of value and the "derived demand" for factors of production. Value of the factors, economists point out, is derived from the value of the final goods, as opposed to the view that governs most voters and public policies: the value of final goods is derived from the value of factors of production.

(This was the reason cited for the government's energy policies of the 1970s, in which Washington held that if it could artificially hold down the price of crude oil, those "savings" would be reflected in the prices for gasoline. Well, it didn't quite work that way, as those of use who were adults during that decade can attest.)

In Krugman's post, however, what he is making is essentially a circular argument: if businesses will spend more, then they will be able to spend more. Sorry, in economics, we don't make or accept circular arguments.

24 comments:

tunecede said...

"Sorry, in economics, we don't make or accept circular arguments. "

Sorry, but Krugman doesn't do economics!!

AP Lerner said...

"The difference appears to be that Prof. Higgs actually listens to what business owners are saying, while Krugman does not."

Really? Maybe you should pass this along to the Prof.

http://www.nfib.com/press-media/press-media-item?cmsid=54603

I know it's a long report, so here's the relevevant statement.

"“What businesses need are customers, giving them a reason to hire and make capital expenditures and then they may have the need to borrow to support those activities,” said Dunkelberg."

But hey, maybe everyone taking the NFIB survey is lieing. Or, maybe this entire regime uncertainty gibberish is just a convenient arguement to support yet another baseless theory. Does anyone actually look at data on this blog?

Anonymous said...

“If the poor political environment is top of mind for nearly 1/5th of those opposed to expanding, it is likely second on the list for most of the others,” said Dunkelberg.

Anonymous said...

"But hey, maybe everyone taking the NFIB survey is lieing. Or, maybe this entire regime uncertainty gibberish is just a convenient arguement to support yet another baseless theory. Does anyone actually look at data on this blog? "

From your own source:


"Seventy-three percent of all owners said the current period was NOT a good time to expand. Of those, 69 percent cited the poor economy as the reason, but 18 percent blamed the political environment, unchanged from July.

“If the poor political environment is top of mind for nearly 1/5th of those opposed to expanding, it is likely second on the list for most of the others,” said Dunkelberg. "

It really doesn't pay to be an arrogant moron, does it?

Bob Roddis said...

Businesses have no customers because the customers are in debt and broke, having been induced by funny money to spend, invest and work in unsustainable lines of production. The idea that more government debt and/or money dilution (with its associated waste and malinvestment) will make these customers more wealthy is preposterous.

Matthew said...

"entire regime uncertainty gibberish" - How exactly is that gibberish? So you think that people in business aren't concerned at all with potentially huge increases in costs? (taxes)

I'm not sure how you get that it's gibberish. I get that you don't think it's the main problem.

Bob Roddis said...

Since no one can plan for the future without worrying about what or whom the donut eater regime is going to smash or grab, and since it is the cause of the collapse and is preventing the necessary repricing and restructuring, I would say that "regime uncertainty" is a very accurate, but mild, description of the havoc the regime is wreaking.

Note that the chartalist scheme relies expressly upon regime grabs and manipulations, and it is expressly hostile to even the concept of morality.

Daniel Hewitt said...

An enlightening article on regime uncertainty by Mish, with many useful links.

http://globaleconomicanalysis.blogspot.com/2010/08/small-businesses-are-not-hiring-why.html

Indeed, a predatorial state makes future planning all but impossible.

Bob Roddis said...

Quants are those notorious number crunchers and equation designers who have failed to comprehend the basic lesson taught to us all by Friedrich Hayek in is book on methodology, The Counter-Revolution of Science.

In the book, Hayek argued that social scientists who used mathematical equations to mimic the physical sciences suffered from an inferiority complex. He argued that because the social sciences (This includes the stock market) dealt with human action, there were no constants such as exist in the physical sciences. There is no equivalent in the social sciences, according to Hayek, of say the physical fact that water freezes at 32 degrees.

Hayek argued that any one attempting to create such equations in the social sciences was creating a faulty equation.

Jonathan M.F. Catalán said...

If anybody is interested in my short response: http://www.economicthought.net/2010/09/its-not-that-simple-stupid/

Joe the Plummer said...

It's not a circular argument. Krugman believes the cause of fall in aggregate demand was due to the housing bubble and improper monetary policy after the bubble popped. The fall in aggregete demand that's self defeating as Hayek put it, is caused by "secondary deflation" or "secondary depression."

The secondary deflation is caused by a fall nominal gdp. Hayek called it the money stream. Keep in mind M (money supply) * V (velocity) = NGDP. Unlike Anderson, Proffessor Hayek would understand that the fall in NGDP is our main problem today.

What fiscal policy does is increase V. Even Hayek wasn't as ideologically blind to know that government stimulus has a role to play.

“[B]ut that one measure to offset secondary depression would be to provide ‘employment through public works at relatively low wages so that workers will wish to move as soon as they can to other and better paid occupations.’”

Joe the Plummer said...

He would also understand that monetary expansion is necessary to offset secondary deflation that causes the the fall in aggregate demand.

"The second situation in which it is true that an increase of employment requires an increase in aggregate demand,” Hayek (1974, p. 5) now maintains, “is found in the later stages of a depression when, in consequence of the appearance of extensive unemployment, the economy frequently is subjected to a cumulative process of contraction of secondary deflation, which may go on for a very long time.” He concludes:

"I am the last to deny – or rather, I am today the last to deny – that, in these circumstances, monetary counteractions, deliberate attempts to maintain the money stream, are appropriate. I probably ought to add a word of explanation: I have to admit that I took a different attitude forty years ago, at the beginning of the Great Depression. At that time I believed that a process of deflation of some short duration might break the rigidity of wages which I thought was incompatible with a functioning economy. Perhaps I should have even then understood that this possibility no longer existed. … I would no longer maintain, as I did in the early ‘30s, that for this reason, and for this reason only, a short period of deflation might be desirable. Today I believe that deflation has no recognizable function whatever, and that there is no justification for supporting or permitting a process of deflation."

Anonymous said...

"Even Hayek wasn't as ideologically blind to know that government stimulus has a role to play. "

And what is that? Distort the economy? Also, appeals to authority (Hayek) won't cut it here.

Bob Roddis said...

In 1975, Hayek explained on "Meet the Press" that the problems of the economy were not caused by a lack of "aggregate demand". Thanks to my trusty college tape recorder, we still have that episode available.

http://mises.org/media/2773

Of course, there is no such thing as "aggregate demand" as I've explained so many times before.

Joe the Plummer said...

"And what is that? Distort the economy? Also, appeals to authority (Hayek)"
No appeal was intended. The only reason I mention Hayek is so maybe Anderson could see this isn't some sinister plot to have big government just for the sake of it.


"In 1975, Hayek explained on "Meet the Press" that the problems of the economy were not caused by a lack of "aggregate demand"."

He said the problem of 70s is not caused due to a lack of aggregate demand. Hayek had exceptions to this, like in the depression. We did not have tight money and monetary contraction in the 70s like we do today.

Bob Roddis said...

There's a good reason it's call the Von Mises Institute and not the Hayek Institute.

Congratulations to Jonathan Finegold Catalan. Tom Woods is using his excellent article "Dangerous Lessons of 1937" in Woods' online class on the depression and New Deal.

http://mises.org/daily/4039

Joe the Plummer said...

This blog should be renamed Hayek-and-Krugman-In-Wonderland then.

Joe the Plummer said...

Afte all, Hayek seems to be gaining some postmortem popularity to do Glenn Beck. Wouldn't want people to be indoctrinated by Hayek's silly statist communist ideas.

Bob Roddis said...

Wouldn't want people to be indoctrinated by Hayek's silly statist communist ideas.

No we wouldn't.

Anonymous said...

"No appeal was intended. The only reason I mention Hayek is so maybe Anderson could see this isn't some sinister plot to have big government just for the sake of it."

In Krugman's case? That's quite a leap in logic to make. Hayek at least had some (many?) redeeming features and did a lot of good work on economic theory, like capital theory (which Krugman mostly ignores.) Even if he supported certain fallacious notions, he dealt earnestly with criticism (unlike Krugman repeating the same strawmen of the ABCT over and over, which points to sheer intellectual dishonesty.) On this, Hayek is wrong, and one can refer to any number of dissolutions of the concept of "AD" on the mises.org site, including articles explaining why it's futile due to leading only to further capital distortions.

Xatrucho said...

Actually, I think Hayek is right but not in the way that Joe thinks. A key concept in that quote is secondary depression or deflation:

where bank failures and the resulting monetary contraction are effects (not causes) of an economic downturn, these can trigger a ‘secondary depression’ as goods are unsold, workers are dismissed and prices and wages tend to fall. So, there is a (practically difficult) distinction to be drawn between the structural unemployment that arises in sectors whose unwarranted expansion is the consequence of monetary profligacy, and the general unemployment that is caused by secondary deflation once the inevitable recession is set in train.” (G. R. Steele, “Hayek’s Theory of Money and Cycles: Retrospective and Reappraisal,” The Quarterly Journal of Austrian Economics, Spring 2005, p.8).

So, first you have to realize that by deflation Hayek means a decrease in money supply, not a decline in price levels. Then we have to determine if the USA is indeed in a state of secondary deflation as defined by Hayek which would be (loosely termed) whether a decrease in the money supply is the cause of the current crisis.

http://www.cato.org/pubs/journal/cj6n2/cj6n2-4.pdf

Xatrucho said...

There's more:

Again Steele interprets and quotes Hayek (F.A. Hayek, New Studies in Philosophy, Politics, Economics and the History of Ideas, published by Routledge and Kegan Paul, p.212): “[B]ut that one measure to offset secondary depression would be to provide ‘employment through public works at relatively low wages so that workers will wish to move as soon as they can to other and better paid occupations.’”

So Hayek's point is to make labor and capital restructuring as fast a s possible, but only in the case of secondary depression as defined in my previous comment.

Anonymous said...

Xatrucho, that pretty much describes exactly today. Bank failure, monetary contraction, general unemployment.

jason h said...

Not exactly.

The Fed doubled its balance sheet, this is not monetary contraction.

Today's crisis is not about monetary contraction, it's an economy trying to restructure after an artificial boom.

Restructuring has been delayed by Fed asset swaps, bailouts, and stimulus.