Friday, October 1, 2010

Paul Krugman's Excellent Protectionist Adventure

Note: Before starting on my post today, I want to share an excellent article, "My Encounter With Paul Krugman," by Murray Sabrin, a professor of finance in the Anisfield School of Business, Ramapo College of New Jersey. Prof. Sabrin lays out the Keynesian nonsense that Krugman gave in his talk and provides an alternative explanation. The article is well-worth reading.

(Murray is a friend of mine and is a regular reader of KIW. Yes, my sympathies to him on both counts!)

One of the things Krugman likes to do is to write a number of columns and blog posts according to a certain theme, and he keeps things varied, although the Keynesian thread runs through them. Thus, he "stays on message" even when moving from one area to another.

In his column, "Taking On China," Krugman repeats a couple of his constant themes: China's refusal to allow its currency to have an official value that meets Krugman's approval is helping to cause this current depression, and protectionism is a legitimate policy when the economy is in the tank. He writes:
Serious people were appalled by Wednesday’s vote in the House of Representatives, where a huge bipartisan majority approved legislation, sponsored by Representative Sander Levin, that would potentially pave the way for sanctions against China over its currency policy. As a substantive matter, the bill was very mild; nonetheless, there were dire warnings of trade war and global economic disruption. Better, said respectable opinion, to pursue quiet diplomacy.

But serious people, who have been wrong about so many things since this crisis began — remember how budget deficits were going to lead to skyrocketing interest rates and soaring inflation? — are wrong on this issue, too. Diplomacy on China’s currency has gone nowhere, and will continue going nowhere unless backed by the threat of retaliation. The hype about trade war is unjustified — and, anyway, there are worse things than trade conflict. In a time of mass unemployment, made worse by China’s predatory currency policy, the possibility of a few new tariffs should be way down on our list of worries.
So, let's see. Because prices are not rising out of control right now when some people predicted that the Federal Reserve System's vast expansion of the monetary base was going on, that means protectionism is a worthy policy. This is a typical fallacy that Krugman uses, the non sequitur.

To further his cause, Krugman resorts to another fallacy, the "Appeal to Authority," by enlisting the late Paul Samuelson (another Nobel Prize winner) who was one of Krugman's mentors when he was in graduate school at MIT. In a recent blog post, Krugman quotes Samuelson:
With employment less than full and Net National Product suboptimal, all the debunked mercantilist arguments turn out to be valid.
Yes! Laws of economics from the Law of Scarcity to the Marginal Utility Theory of Value hold ONLY when times are good! However, if the economy is sluggish, then it is time to trot out "Fable of the Bees" and start all over again.

Krugman lavishes praise upon those in Congress who are pushing this latest round of protectionism. (He calls this latest move "bipartisan," so I guess when Republicans -- who always have been protectionist since their beginnings in the 1850s -- aren't so bad when they do Krugman's bidding, or at least we can say they have taken a holiday from their usual goals of Doing Evil.)

However, as he has done with the "stimulus" and new government spending, Krugman claims that this still is not enough. I only can imagine that his next move would be to trot out Smoot-Hawley II, since it worked so well the first time it was imposed. He writes:
For the truth is that U.S. policy makers have been incredibly, infuriatingly passive in the face of China’s bad behavior — especially because taking on China is one of the few policy options for tackling unemployment available to the Obama administration, given Republican obstructionism on everything else. The Levin bill probably won’t change that passivity. But it will, at least, start to build a fire under policy makers, bringing us closer to the day when, at long last, they are ready to act.
So, it seems that those Evil Republicans have not been channeling enough of their Inner Smoot-Hawley to satisfy Krugman, but maybe, just maybe, we can have a full-blown world-wide trade war, blaming those Dastardly Chinese for their intransigence and for their effrontery in producing goods that Americans want to buy (and for buying U.S. Treasuries by the handful in order to fund our own deficit spending).

No doubt, this will rev up Krugman's base, as his supporters will claim that we can have this wonderful economy based upon a form of autarky. (It is amazing that Krugman actually got his Nobel Prize allegedly for his trade theory, as now he is claiming that unless currencies are matched according to Krugman standards, trade creates poverty.)

Keynesianism is based upon a belief that the laws of economics hold only in special conditions, and when those conditions are not met, then governments need to act as though the Law of Scarcity does not exist. To Austrians like me, the laws of economics are like the Law of Gravity: they are immutable and always apply.

As I see it, Krugman's latest missives contain about as much sound thinking as would be a directive from the MIT graduate that in special conditions, the Law of Gravity does not hold. However, I somehow doubt we would see Krugman then getting ready to take a leap off the Empire State Building, but economically speaking, that is exactly what he is demanding we should do.


AP Lerner said...

"blaming those Dastardly Chinese for their intransigence and for their effrontery in producing goods that Americans want to buy (and for buying U.S. Treasuries by the handful in order to fund our own deficit spending)."

If China funds the US deficit, then how come the US did not have to get Chinese approval for TARP? How come the US government did not have to get Chinese approval to invade Iraq? How come the massive expansion of Medicare under George Bush was not contingent on a bond auction and approval by our bankers, the Chinese?

William L. Anderson said...

Gee, I had no idea that China was not holding U.S. bonds. Silly me.

AP Lerner said...

"Gee, I had no idea that China was not holding U.S. bonds. Silly me."

Gee, I went to an Ivy League school, which you seem to despise and look down upon, so I can only assume I'm not smart enough to understand that comment. Maybe you can elaborate how that answers the question why the US government does not ask the Chinese for funding before spending $1T on Medicare, or $700B on TARP, or $2T on two wars. Could you please, please, please explain why TARP was not contingent on a bond auction? That was a lot of money to just expect the Chinese to 'fund'. Where did it come from?

Shalom Patrick Hamou said...

An Innovative Credit Free, Free Market Economic Ideology.

Our Economy is in Shamble

The consequences, the Great Depression and history tells us, will necessarily be a Formidable Chaos:

Social and political turmoils, and military adventures.

Neither supranational bodies nor governments can propose a plausible solution;

What is Politically Correct is both Mathematically and Morally Wrong!


- Do you feel that your ideology pushed you to make decisions that you wish you had not made?

- Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to -- to exist, you need an ideology. The question is whether it is accurate or not. And what I'm saying to you is, yes, I found a flaw. I don't know how significant or permanent it is, but I've been very distressed by that fact.

- You found a flaw in the reality...(!!!???)

- Flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.

- In other words, you found that your view of the world, your ideology, was not right, it was not working?

- That is -- precisely. No, that's precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.

It is our responsability to create a meaningful increment of jobs, revenues and investments:

We urgently need the only plausible solution that is offered to us:

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It is your duty to insure your own security and economic survival, no one else will do that for you!

History teaches us that men and nations behave wisely once they have exhausted all other alternatives.


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Scott D said...

Our hero, AP Lerner is so committed to discrediting William Anderson that he is now utilizing the awesome power of semantics! Yes, by the simple expedient of interpreting "in order to fund" as literally meaning that the Chinese bought treasury bonds in response to a US request for funding, the illustrious (and Ivy League educated!) AP Lerner has once again deftly defeated William Anderson in literary combat. Only a complete fool would interpret that phrase merely to mean that the Chinese government holdings of $800 billion has contributed to the US' continuing ability to deficit spend. It is fortunate that we have AP Lerner to set us straight.

Thank you, AP Lerner, for rebutting William Anderson's argument that Paul Krugman advocates trade restrictions against China. Without you, we'd surely be lost.

burkll13 said...


im pretty sure APs too narcissistic to understand sarcasm.

callahan auto said...

AP - My first thought was that one has to be an utter fool to interpret the professor's post in the manner you have.

However as you so kindly informed all of us, you attended an Ivy League school. That changes everything, your ideas and thoughts deserve respect and genuflecting because, umm, you went to an Ivy League school, because as we all know, only really, really smart people go to Ivy League schools and all the other dumb heathens go elsewhere.

AP Lerner said...

I have little interest in rebutting Prof. Andersons criticisms of Krugman regarding trade, since I happen to agree with Prof. Anderson on this (as I have said many times before - Krugman is wrong on trade with China.). You see, despite my Ivy League education, and general narcissism, I'm also intellectually open minded enough to agree with Prof. Anderson when I happen to believe he is correct.

Where Prof. Anderson is wrong is believing China, or anyone else for that matter, funds the US government. The US government is not a household. The US government is not a corporation. It is not revenue constrained, and has the ability to spend first, then issue securities later to control the target feds fund target. The US government is not required to issue 'debt'. There is no difference between the treasury issuing securities and the Fed's open market operations. They both achieve the same goal, which is maintaining the target rate, not funding the spending of a sovereign issuer of its own currency.

I asked a pretty simple question, which is how come the US government does not bother to check with China before spending, since, according to Prof. Anderson, China funds the US government. When corporations need cash, they need to raise it first, then spend. However, the US government does not. Otherwise, a spending program such as TARP would be contingent on Chinese approval. The US would have needed Chinese approval to invade Iraq. Of course none of that happened, because government debt issuance is not used for funding, and is simply a monetary operation, not a fiscal operation. Prof. Anderson, like most neo liberal economists, has a fundamental misunderstanding of the monetary system of the US.

The simple fact the prior posters chose to attack me personally, instead of responding to the question I posed, speaks to how much you really have to contribute to the topic. For anyone intellectually curious, here's some light reading explaining the operating realities of the monetary system of a country such as the US.

cotterdan321 said...

The reason they don't have to ask the Chinese permission is because the Chinese already have $800 billion in treasuries (probably more off the books) and they don't want to see that investment evaporate from inflation. The US can always rely on the Fed to step in and monetize the debt if there are no buyers and this is something all our creditors fear. If I were the Chinese I would be selling dollars when it rises by buying commodities and buying dollars when it begins to plunge like we've been seeing for the past 3 months. At some point they will have to accept their loses but in the mean time they can keep quietly selling off their dollar holdings and increase their holdings in real assets until the bond bubble pops. When it does pop and China and the rest of our creditors start selling off the dollar you will see how much they were funding our deficits as inflation runs wild.

Bob Roddis said...

I think I finally understand what AP is saying: The US government and central bank are completely detached from any moral or legal restraints on their ability to steal and defraud. In other words, because the state is not morally or legally restrained by anything, it can loot and dilute until the cows come home. That may all be true functionally, but it does not change Austrian analysis in the slightest other than one needing to understand that this practical functionality is even more evil than was originally believed.

Similarly, Austrian Mish Shedlock has been saying that banks lend first and that the reserves come later. He’s still an Austrian.

Anonymous said...

I like Mish. He actually understands that deflation is more of a danger than inflation, unlike most of the Austrian crowd.

Anonymous said...

AP Lerner,

Let me see if I have this right.

When the government issues debt it is not a fiscal operation. When the government collects taxes, then, I suppose it must also not be a fiscal operation (I am inferring this based on your statement about funding via the purchase of debt. Taxes, too, are just a monetary operation).

So, when the government wants to pay for a program, and someone asks "who is paying for this?" the answer is "no one, because there is no fiscal operation involved" ? The government does not issue debt to pay for it, it does not collect taxes to pay for it. These are just operations required to control the amount of money issued by the FED which will ultimately fund it?

Bob Roddis said...

"Warren Mosler states that US Government spending of dollars is not operationally constrained by revenues, and will pay $1 million to any senatorial candidate on the ballot who can prove he's wrong.

Because he does understand that there are no operational constraints, Warren Mosler is uniquely qualified to propose the right policies to fix the American economy and quickly restore full employment and prosperity."

I've always assumed that the Keynesians got their way in the world because of their brilliant use of obscurantism. Average people were convinced that the whole system was as complex as nuclear physics when it's just a relatively simple case of theft and fraud after one cuts through all the crap and double-talk. I think it is wonderful that nuts like Mosler come right out and trumpet statist fiat counterfeiting without the slightest bit of shame. Convincing the masses that the government is stealing from them through official counterfeiting is 90% of the battle.

These MMT kooks are doing the job for us!*

* "!" courtesy of the Mosler style book.

Bob Roddis said...

Host: "Are you saying that England is either going to go bankrupt or that England is going to become a dictatorship? What specifically do you mean is going to happen in Great Britain?"

Hayek: "The English people are beginning to experience, which they hardly have yet, but they have become very much poorer and are rapidly getting poorer still. And that will lead to the resolution or the recognition that the policy of the past was wrong. The amazing fact is that the great majority of British people are not yet consciously aware that they are living in a very severe economic crisis. For that reason, they are not willing to consider seriously a complete change in policy."

Host: "Well but what do you think is going to happen since you believe that? What's going to happen there? Are they going bust?"

Hayek: "No country can go bust. All that happens is that economic conditions of daily life are getting much worse, so there will be scarcities. People will find that their income is no longer sufficient to maintain their standard of life. They will come to distrust first the present government and present policies, and may then be willing to return to an altogether different system. But I'm no prophet; I can't say how soon it will—"

Host: "And do you think that if we follow along our present footsteps that the same thing's going to happen to us?"

Hayek: "Yes, but in ten or twenty years' time, not a problem for the immediate future."


callahan auto said...

AP - you obviously believe that your Ivy League degree is an important piece of information for evaluating the 'substance' of your post. If it wasn't, why would you mention it? Any one addressing that portion of your post is addressing the substance of your post since you believe it would be better to preface your post with it.

Bob Roddis said...

I've been wondering what it says about an Ivy League education when its graduates

a) Say really dumb things like their opponents have ideologies and theories but they don't (which is supposed to be a plus); and

b) Maintain a strict and meticulous unfamiliarity with each and every basic Austrian School concept while embarking upon a futile "debate" with Austrians.

Bob Roddis said...

Only an Ivy League grad is smart enough to come onto a libertarian blog and exuberantly announce that his MMT* is marvelous because it is based upon what bloodthirsty British colonialists did to the Africans in the late 1800s:

The following is not merely a theoretical concept. It’s exactly what happened in Africa in the 1800’s, when the British established colonies there to grow crops. The British offered jobs to the local population, but none of them were interested in earning British coins. So the British placed a “hut tax” on all of their dwellings, payable only in British coins. Suddenly, the area was “monetized,”as everyone now needed British coins, and the local population started offering things for sale, as well as their labor, to get the needed coins. The British could then hire them and pay them in British coins to work the fields and grow their crops. [from page 26 of the "brilliant" Mosler book]

*Mad and Monstrous Thievery

Ned Netterville said...

Krugman's advocacy of a trade war with China makes sense--in a Krugman sorta way--when you remember that this is a man who described World War II as "enormous public works project...which finally provided a fiscal stimulus adequate to the economy’s needs." I'm not kidding, he said it here: And to prove that his demented comment wasn't a slip of the lip or a typo, just the other day, claiming that Roosevelt's New Deal spending wasn't enough to end the Great Depression and only the huge spending for World War managed to turned the trick, Krugman professed that "the political consensus for spending on a sufficient scale never materialized; we needed Hitler and Hirohito instead." Here it is in context:

Krugman has lately conceded that there is little or no hope, politically speaking, that the Obama administration and this congress will legislate sufficiently large government spending projects adequate, as he sees it, to what the economy needs to pull out of the recession. So it would make sense to Krugman that a trade war, which historically has often led to a hot war, is well worth the risk. For Krugman, war is not to be condemned out of hand if it will generate sufficient government spending to attain the Keynesian, never-precisely defined Nirvana known as full employment.

Forrest Drake said...

It is a comedy, 'nobel' prize for economics lost any value for decades to come.
Anyway, i don't agree with your 'To Austrians like me, the laws of economics are like the Law of Gravity', it sounds like comparing economics to natural sciences, something Hayek wouldn't like to see :)

Another Anonymous said...

this is a man who described World War II as "enormous public works project...which finally provided a fiscal stimulus adequate to the economy’s needs."

So Krugman said something which (a) happens to be true (b) is still believed by the overwhelming majority of academics in all fields and ordinary people. - uh because it is true and has overwhelming evidence behind it. Funny how there aren't any old economics papers that say WWII didn't end the Great Depression - maybe that is because people had just lived through it, and would have thought it about as sensible as saying that Hitler and Germany had never existed.

bravo said...

typing "uh" before your sentence doesnt make anything true. try again. maybe uh read a book, something by rothbard. before you do, lets go through a thought experiment. lets say i told you to invest every last dollar you had in fireworks, black cats, roman candles, whatever. then lets say after you do this and acquire an enormous stockpile, we light it them all up, enjoy the show and dont stop until every last one of them has exploded. do you feel richer having done this? how you answer that should make you reflect on the delusion that military spending makes anyone besides weapon delevopers richer.

Another Anonymous said...

Read books? - probably 99+ out of 100 say what I'm saying. (Again, because it is true and makes sense, and is what people believed at the time). About your experiment - Yes, but WWII occurred when unemployment was still high, though not as high as it is now. The New Deal deficit spending had brought the economy partly, but not completely, out of the depression. The government can't invest every last dollar it has, because it has an infinite amount. Wartime deficit spending by the government just created real wealth by mobilizing unused capacity and workers and made everyone better off. Least that is what everyone thought at the time, but I guess they weren't smart enough to read pseudohistory rewritten decades in the future. Of course it would have been better economically for the greatly increased deficit spending to have gone to enlarged New Deal programs, and not destruction, but there happened to be a war against some pretty bad people. The wartime deficit spending, the legacy of the New Deal etc created the very real wartime prosperity and the subsequent golden age of 1945-1980, where worldwide (watered down) Keynesianism brought the world the most prosperous period it had ever seen.
If you are from the USA, that's what you probably learned in high school. Guess what? - it is true.

Couldn't find anyone more opposed than me to military spending nowadays - if anyone is the Hitler of today, it's the USA with its mindless, endless wars of aggression. And of course military spending, even if not in a war, is economically the worst form of Keynesian stimulus. All that doesn't change the universally known facts about WWII and the US economy.

AP Lerner said...

@ anonymous:

“When the government issues debt it is not a fiscal operation. When the government collects taxes, then, I suppose it must also not be a fiscal operation”

Correct. Government bond issuance simply mops up the excess reserves in the banking system to make the Fed’s life easier in controlling the target rate. The government spends first, and spending in excess of taxes creates reserves in the banking system, which need to be mopped up, otherwise, the overnight rate falls to zero, and the Fed’s job becomes much more difficult.

“These are just operations required to control the amount of money issued by the FED which will ultimately fund it?”

Yes, this is more or less correct. In reality government spending is just moving funds from one account to another. The government does not need the funds first, like a household or a government in a convertible monetary system (like the Euro). Spending creates the money, and it’s the fed’s job to control overnight rate. The Fed has zero control over the money supply. See Randall Wrays Modern Money for a longer, more in depth explanation.

@ Callahan auto:

“you obviously believe that your Ivy League degree is an important piece of information for evaluating the 'substance' of your post.”

No, where I got my degree is irrelevant. Prof. Anderson repeatedly makes claims about the elite Ivy Leaguers like Krugman, which are equally irrelevant. I was making an ironic statement. It’s a literary tool, but irrelevant to the debate.

Anonymous said...

"The Fed has zero control over the money supply."


AP Lerner said...

Yup, it's true. I know, it's a hard concept to grasp for those so that bought into the money multiplier myth. Fortunantly, the Fed is starting to realize they have no control over the money supply, and creating a bunch of excess reserves is a meaningless policy. Enjoy.

Anonymous said...

What exactly is responsible for the debasement of the dollar for nearly the past century?

Shouldn't we have had deflation given all our advancements?

Where did all the money come from?

I certainly wasn't printing any of it up.

Ned Netterville said...

Another anonymous said: "If you are from the USA, that's what you probably learned in high school. Guess what?" - it is true.

And he added:

"Couldn't find anyone more opposed than me to military spending nowadays - if anyone is the Hitler of today, it's the USA with its mindless, endless wars of aggression. And of course military spending, even if not in a war, is economically the worst form of Keynesian stimulus. All that doesn't change the universally known facts about WWII and the US economy."

Uh, you mean universally known by those who accept government-issued, war-time propaganda as truth. In other words, patriotic citizens like those in America who cheered Roosevelt's imprisoning of 'Japs.' and those Germans who became good Nazi citizens believeing everything Joseph Goebbels told them. What made you switch from a unthinking believer in USA propaganda to a modern disbeliever? Do you, like Obama, blame it on Bush? Or Reagan?

In addition to being a believer in war-time, government propaganda, I see that you have also fallen for Krugman's delusion that war is a Keynesian's stimulus, although it is not your first choice of stimulii. Like Krugman, you obviously fail to notice that war only serves to reduce the ranks of the unemployed, which is the primary objective of Keynesian economic policies, by killing off a lot of workers, drafting many more into involuntary servitude and putting others to work making weapons of mass destruction. What, may I ask you as one of them, is the moral code of Keynesians?

Anonymous said...

The global economy is beset by unfair trade practices—under the label of “Free Trade”—causing an increasing number of developed nations to protect their few remaining unionized workers against competition from lower-paid, third-world labor forces that have fewer benefits and are not hampered by safety and environmental regulations, at least not to the same extent. Overpriced labor forces employers to look elsewhere where skills and productivity are equal or better and transportation costs to markets are feasible.

The fact is that if nations want free trade, no treaties are necessary. Present “free trade” treaties are protectionist documents outlining items to be excluded from free exchange; they are designed to protect manufacturers, farmers, labor unions, and pharmaceutical researchers, etc. Import inspections under the guise of sanitary safety standards are frequently employed to circumvent free access to agricultural markets that are the most highly subsidized and protected. Legal recourse exists but is useless when perishable products are delayed. Higher fines must be imposed when this practice is found to be abusive.

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