Friday, March 11, 2011

Krugman: Dumbing Down Economics

I must admit that I look forward to reading Paul Krugman's Friday column, as he generally produces something with enough howlers to last a weekend. Today, he does not disappoint, and I should thank him for providing some fodder for me.

(I am sitting in a session of the Austrian Scholars Conference in Auburn, which means I am not exactly sitting with members of the Paul Krugman Fan Club. Tomorrow, I present a paper in which Dave Kiriazis and I argue that the Jim Crow laws were not a "blind spot" of the Progressives that historians always present as "reformers," but rather they were part and parcel to the system that was created.)

Anyway, back to Krugman. In a screed against House Republicans today, he declares that the U.S. Government really is in no fiscal danger at all, so no budget cutting is necessary. Second, he once again tells us that "costs" are purely administrative affairs, and that central government planning can lower costs of medical care.

But first, he starts out with a bit of interesting hubris, writing:
Like anyone who writes regularly about what passes for economic and fiscal debate in American politics, I’ve developed a strong tolerance for nonsense. After all, if I got upset every time powerful people were illogical and/or dishonest, I’d spend every waking hour in a state of raging despair.
Funny, but a lot of his columns and blog posts really do look like episodes of "raging despair." But, there is more:
Yet there are still moments when I find myself saying, “They can’t really be that stupid,” or maybe, “They can’t really think the rest of us are that stupid.”
Now, while he is talking about Republicans -- who really do manage to say Really Stupid Things -- I cannot help but apply Krugman's words to his following declaration:
...you have to realize two things about the fiscal state of America. First, the nation is not, in fact, “broke.” The federal government is having no trouble raising money, and the price of that money — the interest rate on federal borrowing — is very low by historical standards. So there’s no need to scramble to slash spending now now now; we can and should be willing to spend now if it will produce savings in the long run.
This is worthy of an entire blog post itself, but nonetheless, you have to understand what Krugman is saying. Interest rates for government bonds are low because the opportunity cost of investment also is very, very low. The very policies of bailing out banks, housing, the U.S. auto industry, and numerous other entities, along with the government's other policies have ensured that the economic "recovery" will be anemic at best.

To put it another way, the non-government sector of the economy is not producing enough goods and services to be able to fund the current rate of government spending, so the Obama administration then runs gargantuan deficits. According to Krugman, this is due to the fact that the government does not have high enough taxes and because government needs to spend, spend, spend in order to end the depression.

So, Krugman claims that we can "pretend" that everything is just fine, as though this blizzard of government spending will create "future savings." It is mind-boggling to me, and maybe IT will drive me to "a state of raging despair."

Krugman then turns to medical care:
Second, while the government does have a long-run fiscal problem, that problem is overwhelmingly driven by rising health care costs. The Congressional Budget Office expects Social Security outlays as a percentage of G.D.P. to rise 30 percent over the next quarter-century, as the population ages, but it expects a near doubling of the share of G.D.P. spent on Medicare and Medicaid.

So if you’re serious about deficits, you shouldn’t be pinching pennies now; you should be looking for ways to rein in health spending over the long term.
On the surface, this seems to make sense. However, what Krugman actually is saying is that the spread of bureaucracy over ALL medical exchanges and procedures somehow will result in lower costs AND better medical care. This is madness, as I see it.

Bureaucracies do not make things less costly. At the present time, our family is pursuing an overseas adoption, and over the past decade (we last adopted in 2001), the bureaucratic tentacles over international adoptions have greatly expanded. I can tell you from personal experience that bureaucrats are vastly raising the costs that we have to incur.

Keep in mind that these bureaucracies are operating on the premise that they are lowering the probability that a child will be taken from a foreign children's home to a worse situation with another family. That does happen, but it is pretty rare.

However, by forcing up costs on the adoptive family's end, the government is vastly increasing the probability that a child won't be adopted at all, which means that when these children turn 16, they are booted out into the streets. Thus, the bureaucrats are GUARANTEEING that there will be more fodder for international prostitution rings. All in the name of "making people better off."

Talk to a doctor and find out just how ObamaCare has vastly increased the paperwork and bureaucratic oversight which govern their practices. Any doctor will tell you that this has raised his or her own costs, and doctors must now direct resources to satisfying the bureaucratic monsters.

Yet, Krugman claims that this will "lower" costs. Well, I will tell you how this will work, just as it has "worked" elsewhere: governments will "lower" medical costs by increasingly denying care, which is nothing more than passing off costs to the consumers of medical care. The costs don't go away; they just are shifted.

In economics, we speak of costs as "opportunity costs." However, in Krugmanland, costs simply are administrative numbers that the state can manipulate. That is fantasy, not economics.

31 comments:

Anonymous said...

"Talk to a doctor and find out just how ObamaCare has vastly increased the paperwork and bureaucratic oversight which govern their practices. Any doctor will tell you that this has raised his or her own costs, and doctors must now direct resources to satisfying the bureaucratic monsters."

Outside of generalized testimony, could you give a specific conversation that you had with a doctor? Or maybe cite what doctors are saying about it?

I am inclined to believe you, but I am hoping this could be substantiated.

Will said...

I am a doctor, and so far, I've seen no new burden to my paperwork, and the hospital where I work is not hiring any new bureaucrats. In fact, due to budget issues, the hospital is shedding administrators.

And Krugman is right about one thing- comparative effectiveness research will be the key to driving down costs in the future. I don't think you'll find any doctor who will disagree with that. Evidence based medicine is the future.

AP Lerner said...

To the posters above, Prof. Anderson does not believe in facts and data. Get use to it.

@ Will - thanks for bringing some honesty to this blog.

The real howler in this post:

"Interest rates for government bonds are low because the opportunity cost of investment also is very, very low."

Fortunantly, a real economist explains:

http://moslereconomics.com/2011/03/10/qe-and-the-term-structure-of-rates/

And of course saying "the non-government sector of the economy is not producing enough goods and services to be able to fund the current rate of government spending" is complete gibberish since it's impossible for the non government sector to fund the federal government when the federal government is the supplier of the currency that is used for spending. This is just common sense, no ideology.

And PS:

"Tomorrow, I present a paper in which Dave Kiriazis and I argue that the Jim Crow laws were not a "blind spot" of the Progressives that historians always present as "reformers"

Sounds like a complete waste of Maryland tax payer money. Way to be a sponge.

Bob Roddis said...

it's impossible for the non government sector to fund the federal government when the federal government is the supplier of the currency that is used for spending.

Welly welly welly. That sounds to me like reason #3,487 to end the federal government’s role as “supplier of the currency that is used for spending”. Facts, not ideology, eh?

Hey Dr. Hut Tax. When are you going to explain where all the stuff is going to come from to satisfy all of this unpayable debt?

Prof. Anderson, I’m looking forward to your research on the Progressives and Jim Crow. When a southern state passes a law against black people and white people playing pool together, I assume a) It was natural for them to play pool together and they were doing it; and b) The southern state government was simply acting as a typical obsessive-compulsive nanny-state in the usual pattern of “progressives”. The same folks who brought us The Fed. Jim Crow is just another one of those progressive government programs which is blamed on laissez faire by the statists.

Bob Roddis said...

I already have to do a rerun of basic economics from a few days ago:

We can know in advance that ObamaCare will be a disaster because it relies almost completely upon command and control to “control” prices and to allocate resources. The simple fact is that Krugman and all the statists refuse to understand the pricing process (which is also why he won‘t wrap his little mind around the ABCT). Because ObamaCare is going to employ command and control in lieu of market pricing, it will be a nightmare. From the December 2010 issue of LIBERTY:

ObamaCare creates over 100 new government commissions. Some estimates are as high as 159; no one seems to know for sure. But judging by the 4,231 occurrences of the word “shall,” the commissions will be very busy, whatever their number. And they will be everywhere, all the time. According to the PPACA, commissions shall establish procedures; promulgate regulations; provide for efficient and non-discriminatory administration; prescribe regulations, rules, and guidance. They will be identifying health quality measures, monitoring outcomes, allotting money to states, awarding grants to entities, participating in rigorous federal evaluation of activities, ensuring that hospitals are representative of the spectrum, establishing a national strategy to improve healthcare, aggregating consistent data on quality, consulting with other commissions. They will be conducting demonstration programs, computing benchmarks, establishing geographically adjusted premiums, negotiating reimbursement rates, determining contingency margins, conducting competitive bidding processes. All this is barely the tip of a colossal, dizzying, and nebulous iceberg of healthcare command and control — so who needs the Public Option? @Page 25

http://www.libertyunbound.com/node/290

ObamaCare is a law written by economics deniers that only an economics denier could love.

I continue to find it strange that not only do the statists fail to understand the essential nature of the pricing process, they seem to have no understanding that the pricing process is central to Austrian theory. But they sure know they don’t like Austrian theory (whatever it might be).

Anonymous said...

And who, pray tell, is Bob Roddis?

Why, he's a guy on the Internet who is so hyped up on psychotropics that he believes HE (a guy commenting on some loser's blog) is going to tell a guy who won the Nobel Prize in Economics what economics is and what it isn't. Five'll get you ten Bob Roddis doesn't even have a bachelor's degree in economics.

That must be some GOOD dope you're smokin,' Bobby.

Anonymous said...

And who, pray tell, is anonymous?
Well, it is some cowardly statist (probably some Keynesian/Krugmanite) who trolls blogs that are critical to his views and calls people names that dare to criticize his little golden boy. And by golly, having a Nobel Prize in economics makes you untouchable doesn’t it? No one better dare try to be critical of you, especially if you subscribe to the views of another Oh wait, Nobel Prize winning economist, Friedrich Von Hayek.
http://nobelprize.org/nobel_prizes/economics/laureates/1974/hayek-lecture.html
These foolish statists never relent do they. They just call names and mock others, without even trying to grapple with the basic concepts or theories of their opposition. Statists=Useful idiots.

Anonymous said...

it's impossible for the non government sector to fund the federal government when the federal government is the supplier of the currency that is used for spending
So it's all about pieces of paper? Common sense tells me that wealth is the product of purposeful human action - goods and services.

Bob Roddis said...

Last month, the American Economic Review (specifically Kenneth J. Arrow, B. Douglas Bernheim, Martin S. Feldstein, Daniel L. McFadden, James M. Poterba, and Robert M. Solow) named its top 20 articles of the last 100 years. Included therein was:

Hayek, F. A. 1945. “The Use of Knowledge in Society.” American Economic Review, 35(4): 519–30.

http://pubs.aeaweb.org/doi/pdfplus/10.1257/aer.101.1.1

Back in 1974, Friedrich Hayek won the same Nobel Prize that Krugman recently won. Hayek won it for his work on Austrian theory which basically holds that the boom/bust cycle is caused by Krugmanite policies. In the Austrian system, economics is basically a KNOWLEDGE problem. So, the Nobel Prize proves nothing except that one needs to treat the ideas of the winners seriously if you are going to disagree with them.

There is really nothing left to say. If we were together across the table on Charlie Rose debating the Austrian School vs. Keynes, would you debate or just scream at me and call me names? Clearly, the latter. That says it all.

Lord Keynes said...

Some points:

(1) The Nobel Memorial Prize in Economic Sciences is not even a Nobel prize at all: it was was not set up by the will of Alfred Nobel in 1895.

(2) Friedrich Hayek won the prize in 1974 jointly the Swedish social democrat Gunnar Myrdal.

(3) the overwhelming number of Nobel Memorial Prize in Economic Sciences winners are neoclassicals, neoclassical synthesis Keynesians or New Keynesian economists who reject Austrian economics, but

(4) Big fat hairy deal if Hayek or anyone else won it. It doesn't mean much.

William L. Anderson said...

Unfortunately, Lord Keynes is wanting to have it both ways:

1. The Nobel is not a "real" Nobel so winning it has no significance;
2. Most winners reject Austrian Economics;
3. Therefore, Austrian Economics is not valid because Nobel winners don't like it.

That is an interesting syllogism you present. Also, claiming that because Neoclassicals and Keynesians reject the Austrian paradigm, then it is illegitimate.

That is like saying that because most government-funded scientists accept the human-caused global warming paradigm (which the government already has declared to be the case), therefore, there can be no argument against human-caused global warming because these people are against it.

Jonathan M.F. Catalán said...

My original post doesn't seem to have gotten through (maybe I didn't follow through completely with the posting process), so I'll re-post.

Like most Austrians, I am against government spending, because it generally intensifies discoordination in the coordinating process of decentralized resource allocation (I am actually writing an article on this topic). However, I think it's worth looking at Krugman's article through a more objective lens.

1. Universal health care is bound to be cheaper per capita in the short run than our current convoluted private-public health care system. Yes, universal health care does suffer from all the economic problems of socialization (including the potential for an unlimited rise in costs - limited only by revenue constraints), but in the short run a complete reorganization of our medical system is likely to cut costs.

2. The government is not near bankruptcy. The argument against Krugman (and one Krugman has semi-endorsed, I think) is that the problem is long-term debt, not short-term debt. The problem is with programs that will cost us down the road (entitlement programs; unfunded liabilities), not with short-term countercyclical spending (this has its own problems, but one of them is not government bankruptcy).

_____________

Btw, the idea that most Nobel prize winners (or w/e you want to call them) have rejected Hayek is complete nonsense. Most of them reject Austrian economics in the sense that they don't accept the entire body of theory, but Hayek and Mises have been very influential in the neoclassical movement, especially RE, and whatnot.

Bala said...

"he believes HE (a guy commenting on some loser's blog) is going to tell a guy who won the Nobel Prize in Economics what economics is and what it isn't"

Oh!! So are you saying that a person who wins a Nobel Prize in Economics knows what Economics is and what it isn't better than someone who hasn't won a Nobel Prize in Economics? Care to explain how you came to that conclusion?

Tel said...

A bit off topic -- but I'd like to hear people's predictions on what the recent earthquake will do to Japan's economy.

By my understanding of the Krugman / neo-Keynesian theory, lack of demand and excess production is the main problem so destroying some of that production facility and stimulating demand should be a great boost to the Japanese economy. Thus in principle, Krugman should expect that the earthquake will be of great benefit to Japan.

Alternatively, under Austrian theory, a loss is a loss, regardless of how you stack it. Thus, the Austrian would predict the Japanese economy to be suffering a setback roughly in proportion with what has been destroyed.

I haven't seen Krugman make a clear prediction yet, but it is this sort of impulse event that is an excellent way to test the predictive capability of one economic theory against another.

One prediction I can fairly safely make is that commodity prices will continue to climb, because even if the Japanese economy does crank up a gear with the rebuilding effort -- they will still require steel, etc to actually build things out of.

Jesse said...

Thanks for sharing, that was funny!

"Anyway, back to Krugman. In a screed against House Republicans today, he declares that the U.S. Government really is in no fiscal danger at all, so no budget cutting is necessary."

Many others in that camp use the debt to GDP number to justify the spending. I just recently wrote on my blog about the GDP Bubble and how Debt to GDP is a flawed ratio as you are comparing deb to debt spending...

http://www.wtffinance.com/2011/03/the-gdp-bubble-and-why-debt-to-gdp-is-misleading/


"Second, he once again tells us that "costs" are purely administrative affairs, and that central government planning can lower costs of medical care."

That's really funny and totally ignores history. The cost for health care drastically increased since the HMO system became popular. It was Government policy that pushed the HMO system onto us through the HMO Act of 1973 (or was it '72?). Central Economic planning doesn't make the cost of goods go down, it's that type of market interference that allows the non-viable business practices to survive and push the viable ones out of business. If you want to bring the cost down you have to allow for competition. Businesses will compete not only in price but also for quality. Look at the advances in the cell phone market and how the cost came down. We didn't need Government policy for that. It's because of Government regulation that xrays in a hospital cost $950 and Government's involvement is also at the root of why the cost for medical care increases. Meanwhile, the local baby imaging center can get you a 20min ultrasound 4d video with background music burned on CD for $80, printed baby pictures included.. They aren't allowed to see you if you want to get images for medical diagnostic purposes but that in itself should be illustration enough of where prices could be were it not for the Government's involvement.


Jesse
www.wtffinance.com

Paul Krugman said...

If (when) ObamaCare does not lower costs, I will blame greedy health insurance companies. Win-Win.

Warren Mosler said...

That is correct, AP Lerner. If I just keep saying monetary sovereignty over and over again, the Austrians will eventually see how foolish they are.

Modern Monetary Theory recognizes that certain people need to be empowered to force others into involuntary exchanges. This is an operational reality.

Bob Roddis said...

Comments are disappearing again. Repeatedly.

jun said...

Referring to health care reform as "Obamacare" is specious at best. You are obviously unable to have a serious discussion about economics.

And your presumption as to what a doctor would say about his/her paperwork borders on delusional.

Nobels aren't given to the trite. Get over your envy.

Paul Krugman said...

jun,

Just curious if you know I won the Nobel and if you can explain my thesis.

Anonymous said...

@ Mosler

Force? why? who gets to intiate the force?

property rights? does MMT care?

Bob Roddis said...

The baseless claim that "certain people need to be empowered to force others into involuntary exchanges" is not an economic theory at all. It's an immoral theory of morality. Where's the proof?

No theory, just facts? You can't be serious.

Tel said...

Nobels aren't given to the trite. Get over your envy.

As LK correctly pointed out, Nobels aren't given to economists either, so get over your physics envy.

Anonymous said...

Clearly, you guys don't understand MMT.

Bala said...

"Clearly, you guys don't understand MMT"

Please tell me what's there to understand and why it is a "monetary theory".

Bob Roddis said...

I've been pleading with AP "Hut Tax" Lerner to explain MMT to us. Of course, it doesn't help that MMT is completely incoherent and that the MMTer's are tone-deaf to both economics and morality. At least we now have Mosler to explain to us how certain of us must be able to employ violence against certain others of us. That's a good start.

MMT guru L. Randall Wray explains that MMTer's are just welfare liberals with a bottomless pot of gold. Their keystrokes can create limitless wealth:

http://tinyurl.com/65n8zzu

Bob Roddis said...

MMTer's don't know history. Wray claims:

"And they know that each time we experimented with laissez faire, it led to economic depression, brought on by the robber barons and their Wall Street financiers in the late 19th century, the Wall Street investment bankers of the 1920s, and the Wall Street investment bankers (yet again!) in the 2000s. (Does anyone see a pattern?)"

Anonymous said...

Bala,

Please tell me what's there to understand and why it is a "monetary theory".

You don't understand MMT!

Lord Keynes said...

"That is an interesting syllogism you present."

I present no such syllogism. The one you construct is not what I say above. Austrian economics is rubbish because of the cogent arguments against it.

Note what I say at the end:

"(4) Big fat hairy deal if Hayek or anyone else won it. It doesn't mean much."

Bala said...

"Austrian economics is rubbish because of the cogent arguments against it."

Which cogent argument? Please explain in your own words (that means "No links please")

Bob Roddis said...

LK has never exhibited the slightest familiarity with basic Austrian concepts. He's never presented the slightest argument for the Keynesian Hoax or against the Austrian case against it.

His posts consist of links to differences among various non-Keynesian economists as if those differences refuted basic Austrian concepts or proved the validity of Keynesian "concepts", such as they are.