Sunday, November 7, 2010

Krugman's Treasure Trove of Shibboleths

Paul Krugman definitely has been busy since the last election, and so have I -- but not in reading Krugman's material as the day job (and some consulting work on the side) have taken front-and-center. Nonetheless, as I read the Nobel Prize winner's blog this morning, I must admit that I have missed a real treasure trove of Krugman's Shibboleths, including a number that he has written himself.

It is hard to know where to begin, but I think I will begin with Krugman's own Shibboleth: inflation. Some years ago, I read a book by someone lambasting the Keynesians in which he said that their only real "arrow in the quiver" was inflation, and I think that Krugman has continued that long tradition. According to Krugman, the only way that an economy can recover from a depression is via inflation, coming in the form either of central bank monetary expansion or increased government spending.

As Krugman has claimed many times, the U.S. economy -- for that matter, all of the world (except for Zimbabwe) -- is mired in a "liquidity trap" in which individuals and businesses are selfishly holding onto their cash and not spending it. Obviously, THAT is intolerable, so the government either must find a way to confiscate it by force (raise taxes, which Krugman has advocated) or via inflation (which Krugman pursues with religious zeal).

Along the way, he attacks Jim Rogers, a person who actually understands capital, unlike Krugman, who seems to believe that capital magically springs from the ground when people start spending. Yes, Krugman wants us to believe that if the government tries to recreate the government-run financial cartel in which external capital markets were scarce (and the system clearly was running into a wall by the mid-70s), and if government showers the economy with newly-printed dollars, blocks Chinese imports, raises taxes, forces taxpayers to pay for high-cost, subsidized "clean energy," and demonizes any business that actually is profitable (except for those businesses getting government subsidies), that the U.S. economy will roar back into a state of real growth and full-employment.

Yes, Krugman definitely identifies himself with the Inflationists, claiming that if government debases the currency -- and that is what inflation really is -- and, thus, depreciating the cash that people have earned, that we will have prosperity. In a world in which all labor and capital are homogeneous, that would be true. However, in a world in which a government-caused boom creates huge malinvestments -- as we saw with the housing boom -- we have to face reality.

According to Krugman, we can keep the original boom alive via spending and more spending. Assets mean nothing; depreciated currency is everything. In the meantime, blame everything on Goldstein: the Chinese and Republicans. And that is what passes for Great Economic Wisdom with modern Progressives.

To use Krugman's own words: Paul Krugman makes my head hurt.

27 comments:

Anonymous said...

Very interesting analysis. Krugman is definitely a pox on our economic house.

But Bush gave this type of thinking a moral patina by bailing out AIG and others. He should have waited, it appeared to me that the market was starting to work to shake out the institutions that were having problems.

Once Bush announced his plan for a bail-out the process came to an abrupt halt and gave fuel to the libs that Bush/Paulson were bailing out their Wall St. buddies at the expense of "main st".

Most people, even those we call conservative do not trust the market at their core. Take Larry Kudlow for example, he was all for the TARP. He lost a good deal of my respect for that proclamation.

Anonymous said...

We had extremely high inflation and negative interest rates in the 70s. Where was the bubble?

William L. Anderson said...

An actual bubble is not necessary for malinvestment. Inflation distorts the structure of production, changes relative prices of assets, and results in a series of investments that ultimately must be liquidated.

Bubbles do magnify the problem, but you are correct: there were no financial bubbles as such in the 1970s, or at least nothing like the massive malinvestments we saw in the housing market and the stock market in 1999 and 2000.

Another Anonymous said...

A question to Professor A - just what are the profitable businesses you think are demonized?

Banks sort of are profitable, but how anyone can think they shouldn't be demonized is beyond me. The big banks are nothing but criminal enterprises run to enrich their management, and use political pull to keep the government from enforcing the numberless laws against fraud they have broken.

Also, the basic Keynesian / MMT idea is that creating new money will often not inflate prices, the only inflation anyone reasonable cares about - why should anyone care about various quantities of money out there? Often enough "inflating" raises the value of a currency in international trade, the opposite of a naive quantity theory prediction. It will just bring the economy closer to the full employment that Austrians and neoclassicals imagine, without empirical or logical support, to be be natural.

We don't disbelieve in the "Law of Scarcity" - we just believe that it should be applied to things that are actually scarce. In the depressions that capitalism is prone to - especially with hard money the Austrians prefer - what is scarce is money and jobs, like right now. In the nowadays rare situation of full employment, resources and goods.

Lord Keynes said...

According to Krugman, the only way that an economy can recover from a depression is via inflation, coming in the form either of central bank monetary expansion or increased government spending.

Straw man argument.
It is not inflation that causes recovery, it is fiscal policy, employment programs, and the surge in economic activity that lead to private recovery.

Increased economic activity causes inflation just as it would if there was a private sector boom.

You might as well rant that the "private sector only ever wants to cause inflation". Wicked private sector capitalists! Wanting to employ people, engage in investment, use idle resources and increase economic activity!! Those inflationary thieves!

individuals and businesses are selfishly holding onto their cash and not spending. Obviously, THAT is intolerable, so the government either must find a way to confiscate it by force...

What is intolerable is high unemployment, wasted resources, lost growth.
The government has been borrowing money from the private markets and spending it by deficits.

Investors have chosen to freely lend money to the US government.

Who are you to tell them what to do with their hard earned money??
You think you know better than private investors?

Yes, Krugman definitely identifies himself with the Inflationists, claiming that if government debases the currency -- and that is what inflation really is..

If you think inflation is immoral, then why would you return to the gold standard and leave your money supply able to be inflated easily buy an influx of new gold discoveries or by gold flooding in the capital account?

Bala said...

LK,

The comedy show continues....

"It is not inflation that causes recovery, it is fiscal policy, employment programs, and the surge in economic activity that lead to private recovery.

Increased economic activity causes inflation just as it would if there was a private sector boom."


In case no one ever told you, Prof. Anderson means "increase in the supply of money, especially of fiduciary media" when he says "inflation". Seen in that light, your statement is priceless.

Lord Keynes said...

Prof. Anderson means "increase in the supply of money, especially of fiduciary media" when he says "inflation

Anderson says:

According to Krugman, the only way that an economy can recover from a depression is via inflation, coming in the form either of central bank monetary expansion or increased government spending

"Increased government spending" does NOT add money to the total money stock, since the money was drawn out of the money stock by government lending to begin with!

If Anderson means inflation in the sense of "rising money stock, he has himself made a mistake.

More likely he just means a rising price level.

And meanwhile you flunk economics 101 too.

Lord Keynes said...

since the money was drawn out of the money stock by government lending to begin with!

=

since the money was drawn out of the money stock by government borrowing to begin with!

Bala said...

LK,

"More likely he just means a rising price level."

That's your preferred interpretation.

"And meanwhile you flunk economics 101 too."

The way you flunked Logic 101 by failing to note the difference between "if" and "only if"? ROFLMAO

burkll13 said...

"
Increased economic activity causes inflation just as it would if there was a private sector boom."

wrong. government funny money comes out of thin air, with no prior production to speak of. a "private sector boom" is a result of prior production. it is not the same.

Lord Keynes said...

a "private sector boom" is a result of prior production.

Wrong. In our system, business borrows from fractional reserve banks (FRB). Fiat money is created by FRB for business too.

Even in the 19th century gold standard, the fractional reserve banking system still created fiduciary media unacked by gold or silver.

People and private business freely choose repeatedly to engage in FRB - there was no government compulsion.

And you would step in and use violence and coercion to stop people freely choosing and voluntarily engaging in FRB?

burkll13 said...

"Wrong. In our system, business borrows from fractional reserve banks (FRB). Fiat money is created by FRB for business too."

borrowing does not a boom make. in order for a boom to happen there needs to be products sold. my point is that the government doesnt produce anything, but they get the full purchasing power of the newly created money. in other words, more base money chasing less products (than a "private sector boom") again, not the same.

Lord Keynes said...

in other words, more base money chasing less products (than a "private sector boom") again, not the same

The lazy assumption that "more base money [is] chasing less products" is FALSE.

America imports a good many commodities - these are ready and available to purchase if demand rises, and production will just be ramped up in China, Taiwan, Japan, South Korea, etc. to meet new demand.

With low domestic US capacity utilization, the extra demand will just increase capacity utilization and output, and lower unemployment.

my point is that the government doesnt produce anything

Yes, it does - public infrastructure, R&D, education, health care.

And its welfare payments prevent skilled and semi-skilled labour from dying and being lost to private enterprise.

burkll13 said...

"
my point is that the government doesnt produce anything

Yes, it does - public infrastructure, R&D, education, health care.
"

no, it purchases those things without prior production. you said its the same. it clearly isnt.

Lord Keynes said...

No one can just "produce" things without some prior production of the capital goods or factor inputs necessary for the production process.

By this sort of logic, you might as well say that the private sector can NEVER produce "things without prior production" either.

This is a chicken and egg paradox.

Public infrastructure construction that creates highways, roads or bridges IS production and produces public goods. Prior production of raw materials and capital goods for this would STILL have been necessary even if it as done by the private sector.

burkll13 said...

"Prior production of raw materials and capital goods for this would STILL have been necessary even if it as done by the private sector. "

if i go out and buy a snickers, yes, it will promote production, but that money came from my prior production. if i pay with a counterfeit dollar, then yes, it has promoted production, but i have not added any goods and services in order to attain that snickers. i am taking without giving. i am adding to the total amount of money without adding to the amount of goods.

Lord Keynes said...

but i have not added any goods and services in order to attain that snickers. i am taking without giving.

You were paid your dollar by WORKING for it. It is the remuneration for your labour.
Those working on, say, a public works program are producing a public good.

bravo said...

LK let me repeat what burkll13 said very very slowly.

"if i go out and buy a snickers, yes, it will promote production, but that money came from my PRIOR...PRODUCTION..."

This would be the labor you reference getting paid for

"but if I pay with a COUNTERFEIT...DOLLAR..."

please try again. If your doing so bad that I can hit your softballs out of the park you should really rethink your gameplan.

Lord Keynes said...

Putting aside for the moment the absurd idea that fiat money is counterfeit, you say:

but if I pay with a COUNTERFEIT...DOLLAR...

The money spent by government is borrowed from private markets or from foreigners.

And how on earth would you know what % of this money is acquired by private production? If say 60% or 70% is, then presumably 60%-70% of the government deficit is backed up by prior production and then legitimate??

And how would you know % of the dollars are "COUNTERFEIT" (created by the Fed) anyway?

Lord Keynes said...

And what's more, if you believe that ALL modern fiat money is counterfeit (as I have seen some Austrians arguing), then ALL private use of it and private transactions are just as illegitimate as public spending too.

bravo said...

Shouldnt the fact that you cant calculate what percentage of fiat currency is backed by actual production and how much is backed by absolutely fucking nothing, tell you somthing is wrong? At what point does not being able to properly calculate cost economically stop being a problem for anyone but government thugs who can simply confiscate more money?

Lord Keynes said...

At what point does not being able to properly calculate cost economically stop being a problem for anyone but government thugs who can simply confiscate more money?

Government are borrowing money from private investors who are freely choosing to lend it.
Who are you to tell investors what to do with their hard earned money?? You think you know better than other people what they should do?

Mike Cheel said...

Can the Keynes folks kindly explain how expanding the 'money' supply is a good thing? Or how fractional reserve banking is a good thing? Why it is ok for one entity (such as a FRB) to print money out of thin air but it is wrong for someone like me to do it? If we were all trading in free market currency (gold and other things people actually want to trade in) and everything was on the level would we even be having these arguments?

bravo said...

"You think you know better than other people what they should do?"

Baseless accusations that im standing in the way of private investments is not only pathetic even for you, but pretty far off the mark of what were even talking about. I never said anything about preventing investment. What i said was adding counterfeit dollars not backed by prior production distorts economic calculations. If youd like to address that feel free. If not keep lobbing craptastic accusations, who knows, someone might be dumb enough to believe you.

Count to 10 said...

Well, inflation is one way to reduce real wages to the market clearing level, but it isn't a good one, precisely because it punishes the wrong activities.

Having just had a crash course in the hiring and wage setting process, I'm starting to understand why wages aren't moving on their own, though. The fact that salary is not even brought up until the field has been narrowed to a tiny fraction of applicants means there really isn't a mechanism to bid wages down (let alone considering the impact of unions).

burkll13 said...

"The money spent by government is borrowed from private markets or from foreigners. "

and how are they paid back? by borrowing even more from other private parties or foreigners. the net effect is a constant flow of new money being created, out of thin air.

i should amend my analogy, seeing as you disagree with the idea of counterfeiting, to paying with a credit card, and instead of paying it off with my production, i just get another credit card, pay off the balance and interest, and get another snickers. i am expecting an endless supply of credit, with no negative consequences, which is foolish.

Tel said...

My feeling is that a small amount of controlled inflation (maybe 2% or 3%) would be of benefit for the following reasons:

* It would be a mild wealth transfer from those who have money to those who don't, and thus encourage spending. Also a wealth transfer from the old to the young.

* It would be a way to raise taxes by stealth and effectively pay back government debt (also by stealth). I really can't see a way for government debt to be paid back any other way.

* It would compensate for the deleveraging, and make it a bit easier for private debt to be repaid too.

* It would reduce real wages in a gradual manner, improve competitiveness. There is great resistance to reducing nominal wages so inflation reduces them by stealth.

* It would devalue the US dollar, improving exports, reducing imports.

Having said that, there are some fundamental problems. Most seriously, it is incredibly difficult to create controlled inflation over a sustained period. Central banks think they can handle it but once people come to expect inflation then they also come to expect matching wage increases, and shopkeepers feel justified in continual price increases. Constant demand for wage increases and price increases pushes the inflation out of the "controlled" region an into the "what the heck is happening?" region.

Thus, government inevitably deliberately lies about statistics claiming that inflation is lower than it really is (to give themselves a bit of headroom). Thus, trivial items such as food get omitted from inflation calculations. These lies are temporary solutions because pretty soon all the punters start to accept that the government statistics are lies and they follow their own nose instead. Once that happens you have loss of confidence in the system as a whole, people switch over from productive mode to survival mode. This process destroys far more productive wealth than any stimulus will create.

So yeah, creating controlled inflation is a knife-edge thing like bomb disposal. Only takes a small slip and it goes horribly wrong.