Friday, October 8, 2010

Krugman Tunnels Under Economic Logic

I was wondering why all of a sudden Paul Krugman was on a railroad tear, but now I know why: New Jersey Gov. Chris Christie has pulled the plug on yet another high-cost boondoggle that characterizes construction projects in the New York City area.

Yes, Krugman is bewailing the loss of the long-planned rail tunnel under the Hudson River between New Jersey and NYC, a project that promises to have billions of dollars of cost overruns and would burden the state with even more debt. From what I know, I believe Christie did the right thing, and the angst on the editorial pages of the NY Times that has accompanied Christie's decision definitely tells me the guy is correct.

In defending this boondoggle, which has been "planned" for two decades and still lacks the requisite funding, Krugman resorts to the kinds of cheap tricks that should be beneath a Nobel Prize-winning economist. (OK, I'm not really sure that a Keynesian also can be an economist, but nonetheless Krugman did win the Nobel a couple of years ago.)

For example, in a blog post yesterday, Krugman trots out this notion that the economics of public transit is something quite mysterious and that when one factors in all of the "externalities" and implicit costs that accompany people driving into Manhattan, then the mass transit facilities there more than pay for themselves.

(It is interesting that Krugman actually resorts to trying to make an argument by using "opportunity cost," since part of his current economic theme is that economic downturns at best modify and at worst do away with the Law of Scarcity. So, opportunity cost is fine when Krugman thinks it helps make his argument, but when Austrians try to point out the issues of opportunity cost in the analysis of the business cycle, Krugman claims that they are crackpots.)

Furthermore, Krugman does not want to address the cost issue because labor union practices in New York and New Jersey are behind the astronomical cost numbers for mass transit. However, at this point, Krugman then can switch back to his Keynesian mode and claim that all these high costs are just great, because THEY MEAN MORE SPENDING! He writes:
So this was a terrible, shortsighted move from New Jersey’s point of view. But that’s not the whole cost. Canceling the tunnel was also a blow to national hopes of recovery, part of a pattern of penny-pinching that has played a large role in our continuing economic stagnation.

When people ask why the Obama stimulus didn’t accomplish more, one good response is to ask, what stimulus? Leaving aside the cost of financial rescues and safety-net programs like unemployment insurance, federal spending has risen only modestly — and this rise has been largely offset by cutbacks at the state and local level. Many of these cuts were forced by Congress, which has refused to approve adequate aid to the states. But as Mr. Christie is demonstrating, local politicians are also doing their part.

And the ideology that has led Mr. Christie to undermine his state’s future is, of course, the same ideology that has led almost all Republicans and some Democrats to stand in the way of any meaningful action to revive the nation’s economy. Worse yet, next month’s election seems likely to reward Republicans for their obstructionism.

So here’s how you should think about the decision to kill the tunnel: It’s a terrible thing in itself, but, beyond that, it’s a perfect symbol of how America has lost its way. By refusing to pay for essential investment, politicians are both perpetuating unemployment and sacrificing long-run growth.
I have serious doubts that this tunnel, with its costs of $11-15 billion, would "revive" the economy of that area and also provide for long term growth. First, other policies that Krugman has been endorsing are going to sap growth in the future and second, if there is any growth, much if not most of the financial gain will go to paying off the debt incurred to building those projects.

No, what we have is yet another Krugman shot at someone who actually wants to be fiscally responsible. However, being that Krugman is trying to claim that the current regime in power is being "stingy" with its spending, I doubt the man really is capable of comprehending an economic argument.

30 comments:

Difster said...

The thing that struck me first was where Krugman said, "Visionary public projects are part of the American tradition, and have been a major driver of our economic development."

I'd like to see how's he measuring that!

I guess only in Wonderland can it possibly be considered that a few public works projects could be a major driver of economic development.

If the government wouldn't have built the Hoover Dam, someone else would have.

The Erie Canal? That could have been privatized too; quite easily.

And do we really even need to contemplate the disaster our interstate highway system is? Really Paul? A major driver?

Sure, if there was no Erie Canal, no interstate highway and no Hoover Dam, we would be worse off, but you imply that these things wouldn't have existed without being public projects. That is intellectually dishonest. But we're used to that from Mr. Krugman.

Anonymous said...

They should sell off the Lincoln and Holland tunnels, raise prices and negotiate preferential pricing contracts with bus companies and other high incidence users, spreading traffic across day and night. But of course Krugman would have none of this.

AP Lerner said...

I've often wondered what Prof. Anderson based many of his so called economic theories on. I mean, it's pretty clear from this blog he has little interest in including data in his posts. Rarely sticks to the facts. And often just makes things up (like saying Krugman endorses criminal activity) to support his narrow minded ideology. In fact, I have not seen an original idea in most of Prof. Andersons posts or essays on Mises. Usually, he acts as a spokesperson for Higgs and Murphy. But today, we finally get an original idea from Prof. Anderson. We get a sense of what he basis some of his 'theories'. It can be summed up in this quote:

"the angst on the editorial pages of the NY Times that has accompanied Christie's decision definitely tells me the guy is correct"

So for any of you Frostburg students out there, skip class on Monday. Forget about studying. No need to do any research. That employment number this morning? It's meaningless. The fact the 10 yr. is approaching 2%? Who cares. Just drop out because all you need to know about economics is to just believe the opposite of what the Times writes. It's that simple because, you know, everything the Times publishes is wrong, therefore, the opposite must be correct.

Bob Roddis said...

Wow, AP, such insight!! What we really need is Warren Mosler to sic a "hut tax" on those dumb darkies so they will work for us and pick our crops, right? And that’s a “fact”, not a “theory”, right?!!!!

[follow the link and read AP's beloved Mosler book at page 26 if you don't get my joke -- in fact, read the whole thing if you want to be truly horrified]

Daniel Hewitt said...

AP Lerner does make some good points:

1) Assuming that the NYT is always wrong on economics - that is a pretty safe bet.

2) People will do what you say, when you point guns at them. (Thanks for the link Bob R.)

Ike said...

AP Lerner...

You are correct, and Prof. Anderson is wrong to assert "Times editorial angst" as proof of anything, blind squirrel and their nuts notwithstanding.

However, he does make salient points about Krugman's ability to ignore opportunity costs when it is convenient for his argument.

In fact, Prof. Anderson didn't go far enough, as Prof. Krugman made an even larger blunder in his missive.

"...federal spending has risen only modestly — and this rise has been largely offset by cutbacks at the state and local level. Many of these cuts were forced by Congress, which has refused to approve adequate aid to the states."

In reality, the cuts at the state level have been a direct result of the economic slowdown, with lower receipts across the board in sales, income and property taxes.

The "villian" in Krugman's scenario is a series of state laws that require their legislatures to apportion public funds with balanced budgets. Apparently, Krugman's preferred model would have all money to the states be funneled through the federal system first.

Prof. Krugman's creation of expectation that Congress should have to "bail out" states with responsible spending limits is tantamount to creation of a Moral Hazard... and the "villain" of balanced budgets should be re-cast as the hero.

However, feel free to ignore any of what I have written, because I didn't include any statistics to back up my arguments.

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Brent said...

AP,

When you find yourself justifying your argument based on an obviously sarcastic sentence, does it bother you (at least a little bit)? Obviously not enough to prevent you from proving you're either socially "challenged" or very petty.

Anonymous said...

Krugman's point about New Jersey needing a railway because it has 1200 people per square mile has a problem - rail transit systems are only beneficial in places with more than 4000 people per square mile. For this reason, 90% of mass transit users are in New York, and only 10% of New York regularly uses mass transit. Meaning it is used only in the very very very crowded places, like London or Paris and only parts of those cities at that.

Even New Jersey doesn't justify mass transit. Recently, the Indian government built a multi-billion dollar mass transit system for a tiny, 200,000 people strong town called Gurgaon. Grand public projects are an end only in themselves.

AP Lerner said...

"only 10% of New York regularly uses mass transit. Meaning it is used only in the very very very crowded places, like London or Paris and only parts of those cities at that"

I must say, the amount of stuff just made up on this blog just continues to accelerate. Care to share a link? Never mind. Here's the truth:

http://money.cnn.com/2007/06/13/real_estate/public_transit_commutes/index.htm

Lord Keynes said...

Krugman trots out this notion that the economics of public transit is something quite mysterious and that when one factors in all of the "externalities" and implicit costs that accompany people driving into Manhattan, then the mass transit facilities there more than pay for themselves.

Even if an intervention like public transport has economic costs, which is certainly does, if one can show its benefits (NOT limited to economic “efficiency”) outweigh the costs and/or there is a moral argument or it, it is justified:

“Economics neither approves nor disapproves of government measures restricting production and output. It merely considers it its duty to clarify the consequences of such measures. The choice of policies to be adopted devolves upon the people. …. There are certainly cases in which people may consider definite restrictive measures as justified … The decision about each restrictive measure is to be made on the ground of a meticulous weighing of the costs to be incurred and the prize to be obtained. No reasonable man could possibly question this rule”
Mises, L. 1998 [1949]. Human Action: A Treatise on Economics, Ludwig von Mises Institute, Auburn, Ala., p. 741.

Please read your Mises.

I note you also mention Murray Rothbard in another post. Regrettably, Rothbard’s natural law argument for libertarian economics is utterly untenable:

http://socialdemocracy21stcentury.blogspot.com/2010/10/rothbard-on-mises-utilitarianism-why.html

Bob Roddis said...

In line with Mosler’s excitement about exploiting Africans to pick crops, the Chartalists should be positively ecstatic about King Leopold and the Belgian Congo. A comment on the book
“King Leopold's Ghost: A Story of Greed, Terror, and Heroism in Colonial Africa
by Adam Hochschild explains the situation:

And the ringleader of these gang of hoodlums who invaded the Congo and massacred its inhabitants was King Leopold II of Belgium. In a tour de force of characterization, Hochschild portrays Leopold as a petulant and greedy monster who decided at a young age that the way to wealth was ownership of an African colony and the subjugation of its inhabitants. Leopold initially made his profits through the exportation of ivory, but his bureaucrats struck gold with the expansion of the international rubber market.

The victims were the natives, who lost not only their land and their freedom, but often their lives. There is no pretty way for Hochschild to tell this story: Leopold's officials used unbelievably harsh methods to force the locals to collect rubber--all in the name of bringing them European civilization, Christian charity, and a Western work ethic. In addition to taking wives and children hostage (in subhuman conditions) until the men made their quotas, soldiers would torture or kill the inhabitants if they faltered. One of the most grisly aspects of this calculatingly orchestrated version of modern slavery was the severing of hands--and their collection into baskets as proof of killings--as a means of terrorizing the population. The wonder of it all is that Leopold and his agents managed to keep most of these deeds secret and even disguised his colony as a charity for the benefit of "pagan" African natives.


I own the book. Here and here are some pictures.

Since the Chartalists don’t even believe in morality, and Lord Keynes eschews natural rights, what possible objection could there be to this exploitation, especially if it “works”?

Think of the cheap railroad tunnels that could be built using this tried and true method! It's a fact, not the theory!

Lord Keynes said...

Chartalists don’t even believe in morality

Your statement is false.
Mises rejected natural rights/natural law too, so would would you therefore jump to the conclusion that he would support the "exploitation" you take about?

Another Anonymous said...

Bob, please tell us what is immoral about Chartalist/Keynesian money-creation deficit-spending during a recession. I've asked several times. If the argument is that it dilutes the money supply, the total financial wealth of everyone, then granting us that it does not cause price inflation, how is this different from saying that if one builds a house with one's own hands, you have diluted the total real wealth of everyone by making everyone else's wealth a smaller fraction of the total?

The point is that we differ on factual beliefs, not morality. Austrians may believe that (chronic, capitalist) high unemployment is impossible, so the premise of wealth-building non-inflationary government deficit spending is false. But if you believe it is possible, then the immoral thing seems to me to be to not cure it by costless government spending / money printing.

Anonymous said...

Fixed pie fallacy

Tax Home said...

Another Anonymous:

I believe you make a good point.

Money printing by itself does not seem immoral to me in our current situation.

But I take exception when elected officials print money to reward government favorites at the expense of everyone else.

I would like to suggest an experiment. Let's increase the money supply by $5 trillion and give $16,000 to everyone.

This would be fair.

Also, we could directly measure how it effects the economy.

If nothing imporoves, at least we won't have to listen to the Keynesians for another 70 years of so.

Bob Roddis said...

Bob, please tell us what is immoral about Chartalist/Keynesian money-creation deficit-spending during a recession.

As to money dilution, the person getting the new money is using it purchase stuff to which he is not entitled. That stuff is now scarcer than it was before. It can't be in two places at one time. The purchasing power can't be in two places at the same time. Whether you can locate a specific price increase statistically to reflect that situation is irrelevant.

Money dilution is worse than a tax because when you are taxed, you know it and can protest. The whole point of Keynesian money dilution is to surreptitiously transfer that purchasing power from victims who tend to be unaware of what’s happening. It’s an immoral thieving scam. That’s it’s entire purpose.

Of course, if you had the slightest familiarity with Austrian theory, you would also know that money dilution impairs economic calculation and causes a distortion in the capital structure which will lead to an unsustainable boom. Whether or not the dilution produces a detectable increase in the general price level, it will nevertheless result in Cantillon effects:

Primary among the disequilibrating forces in the economy was government manipulation of money. While the Mercantilists generally viewed money as the source of wealth that could be profitably manipulated by government, Cantillon showed that money, interest rates, and international trade were all “well regulated” and reasonably stable in their natural state. Furthermore, manipulations by national banks and monetary interventions by government cause instability lead to harmful disturbances in the economy. Most famously, he showed that consumption and production patterns were altered and the economy was ultimately harmed when money and interest were manipulated by government, creating what we now call Cantillon effects.

So, except for money dilution being based upon fraud, being a form of theft and embezzlement of the purchasing power of others and being the cause of the boom/bust cycle, it must be perfectly moral, right?

The whole point of deficit spending is to transfer assets to one’s political allies to keep the government in power. There is no basis in theory or history to suggest that it helps get “the economy” out of a recession. Recessions are caused by a distorted capital structure as the result of money dilution.

Anonymous said...

So basically Bob wants to go back to a barter system. That sounds great.

burkll13 said...

So basically Bob wants to go back to a barter system. That sounds great.

Understanding Fail.

Anonymous said...

Lets go back to the gold standard so other countries could import their inflation to us.

Lord Keynes said...

You say:

As to money dilution, the person getting the new money is using it purchase stuff to which he is not entitled. … The purchasing power can't be in two places at the same time. Whether you can locate a specific price increase statistically to reflect that situation is irrelevant. Money dilution is worse than a tax because when you are taxed, you know it and can protest.

You rely on a flawed quantity theory of money which cannot and will not work when there is massive unused capacity, idle resources and high unemployment in an economy:

http://socialdemocracy21stcentury.blogspot.com/2010/07/quantity-theory-of-money-critique.html

Even the Austrian theory of inflation recognises that prices do not necessarily rise when money supply grows, as you say:

http://socialdemocracy21stcentury.blogspot.com/2010/04/austrian-theory-of-inflation-myths-and.html

And unfortunately the Austrian business cycle theory of Hayek (that uses the Cantillon effects you mention) was destroyed by Sraffa and Kaldor years ago.
Hayek petty much gave up business cycle theory and turned to other subjects after this take-down.

Xatrucho said...

> And unfortunately the Austrian business cycle theory of Hayek (that uses the Cantillon effects you mention) was destroyed by Sraffa and Kaldor years ago.

I would like you to explain us how did Sraffa and Kaldor "destroyed" ABCT. The debate derived, basically, from differences over the role of equilibrium theory, their understandings of market adjustment
processes, and the role and nature of knowledge in economic interaction. But the thing about Austrians is that they don't believe such equilibrium exists at all, instead austrians focus on how monetary disequilibria affect all money-using markets (i.e. all markets).

OTOH Sraffa's argument that "Hayek's formulation of the business cycle required a kind of money that was entirely neutral, and was in effect a simple commodity" becomes irrelevant when you realize that money (to austrians) is a simple commodity which differentiates from other commodities only in that its functions is to be a means of exchange for the rest of the commodities, money-related problems stem from the fact that, as stated before: monetary disequilibria affect all money-using markets.

Lord Keynes said...

Sraffa's argument that "Hayek's formulation of the business cycle required a kind of money that was entirely neutral, and was in effect a simple commodity" becomes irrelevant when you realize that money (to austrians) is a simple commodity which differentiates from other commodities

And there lies the rub, doesn't it.

To believe the Austrians, you have to assume that money has no store of value function (just as J. B. Say erroneously thought), and that money balances never become idle.

This is directly related to Say's law, which is examined here:

http://socialdemocracy21stcentury.blogspot.com/2010/10/myth-of-says-law.html

Cheers

Bob Roddis said...

You rely on a flawed quantity theory of money which cannot and will not work when there is massive unused capacity, idle resources and high unemployment in an economy:

That pesky Law of Scarcity is always lurking about whether or not the new scarcity can be measured with any particularity. The explanation of the Cantillon Effects demonstrate that we are not claiming a perfect and uniform increase in the “general price level” (whatever that means) from a particular increase in unconstitutional funny money. The distortion of the capital structure is always with us. [The usual pattern in these blog comments is for the Austrian “critic” to be completely unfamiliar with Austrian concepts AND to constantly repeat broad, general and unfounded criticisms after those criticisms have been completely eviscerated by prior response comments]

I (and other Austrians) reject concepts of “unused capacity“ and “idle resources” as basically meaningless other than to show how much damage prior Keynesian money dilution has caused. Heck, I have unused capacity as a street thug since I don’t do as much weigh lifting and running as I should. My house has unused capacity as a shelter for at least 12 strangers left homeless by the Keynesian housing bubble.

One thing about Keynes. Once Keynesian distortions caused real wages to be too high, he was all for tricking the workers into accepting lower real wages or tricking creditors into accepting less in contractual payments through inflation. Talk about a simple-minded (and evil) plan:

(i) Except in a socialised community where wage-policy is settled by decree, there is no means of securing uniform wage reductions for every class of labour. The result can only be brought about by a series of gradual, irregular changes, justifiable on no criterion of social justice or economic expedience, and probably completed only after wasteful and disastrous struggles, [when did this happen????] where those in the weakest bargaining position will suffer relatively to the rest. A change in the quantity of money, on the other hand, is already within the power of most governments by open-market policy or analogous measures. Having regard to human nature and our institutions, it can only be a foolish person who would prefer a flexible wage policy to a flexible money policy, unless he can point to advantages from the former which are not obtainable from the latter. Moreover, other things being equal, a method which it is comparatively easy to apply should be deemed preferable to a method which is probably so difficult as to be impracticable…….
(ii)…..If important classes are to have their remuneration fixed in terms of money in any case, social justice and social expediency are best served if the remunerations of all factors are somewhat inflexible in terms of money. Having regard to the large groups of incomes which are comparatively inflexible in terms of money, it can only be an unjust person who would prefer a flexible wage policy to a flexible money policy, unless he can point to advantages from the former which are not obtainable from the latter.
(iii) The method of increasing the quantity of money in terms of wage-units by decreasing the wage-unit increases proportionately the burden of debt; whereas the method of producing the same result by increasing the quantity of money whilst leaving the wage-unit unchanged has the opposite effect. Having regard to the excessive burden of many types of debt, it can only be an inexperienced person who would prefer the former. "General Theory" Pages 268-269

Xatrucho said...

> And there lies the rub, doesn't it.

Well, yes and no because its not "that money balances never become idle" but that all markets are in constant motion and never reach a true equilibrium so basing economic analysis of real world events on a theory of equilibrium is, at best, incomplete and, at worst, dilusional.

Your link makes a huge mistake pointing to financial assets as proof against Say's Law because people simply use money to buy other products, in this case, financial assets which they buy because people expect them to report them more money later. But, why do they want that money? Well, to buy other products so financial assets obey Say's Law as well.

Anonymous said...

"That pesky Law of Scarcity is always lurking about whether or not the new scarcity can be measured with any particularity"

When it comes to printing money, yes, the laws of scarcity are no longer pesky, the are non existant.

"I (and other Austrians) reject concepts of “unused capacity“ and “idle resources” as basically meaningless"

How convenient. When you have no explanation of a concept, or don't understand, you write off as meaningless. Well said.

Bob Roddis said...

When it comes to printing money, yes, the laws of scarcity are no longer pesky, the are non existant.

Suppose I save and save and I finally have enough money I earned and saved to buy a car from a neighbor. Another guy gets a funny money loan created out of thin air and out-bids me for the car. That car is now scarce and so is the existing supply of cars. There's nothing more to say.

Regarding idle capacity, etc..., I don't have time to teach "Man Economy and State" in blog comments. If factories are shut down, it's usually because the economy if going through a Keynesian-induced bust and recovery is being impaired by more Keynesian policies which prevent reallocation of assets in a sustainable structure of production. Trying to artificially induce a factory suffering from your "idle capacity" problem to make widgets in order to give "the economy" some "traction" would be an unsustainable waste and thus preposterous.

Go away for a while and learn some BASIC Austrian concepts.

http://mises.org/resources.aspx?Id=3081&html=1

dchamil said...

Bravo, Professor A. It's high time someone took Krugman apart. Too bad you and he can't trade places.

William L. Anderson said...

Well, I guess Lord Keynes will enjoy my newest post, which deals with Say's Law. Of course, I always am amazed that socialists still want to claim economic superiority. I guess that is why North Korea, which truly is socialist, has such a high standard of living.

BUT THEY HAVE FREE MEDICAL CARE (except they don't have that, either).

Another Anonymous said...

Professor Anderson: The rest of the developed world has "socialized health care" - which delivers better care more cheaply and efficiently than the shameful American health care nightmare system. Hayek did not oppose nationalized health care, and the statistics since then have decisively borne his good judgment out. "Socialism" in this important sector has an irrefutable claim to economic superiority over "capitalism". Government does health care better than the private sector. Period.

Well off white Americans (top third in income) live shorter and sicker lives than poor white Britons (bottom third in income). That's from a Harvard School of Public Health study of around 2007. Didn't get much press, it was so shocking, I think. If people value economic theories over their own life and health, why is beyond me.