Wednesday, March 16, 2011

Krugman joins the "Broken Window Fallacy" crowd

I am in New York for a conference, but I will share this gem from Paul Krugman's recent blog post in which he claims that the tragedy and recovery in Japan likely will be "expansionary." Yes, we see yet another "economist" become a caricature of the people who claimed that the hoodlum who broke the baker's window described in Henry Hazlitt's classic Economics in One Lesson.

As Hazlitt explains in the first chapter, the "Broken Window Fallacy" is the central fallacy that we see in one form or another, and from what I see, Krugman is the biggest advocate of this fallacy. Hey, I know. We're in a "liquidity trap," so the world is turned upside down. Right?


Anonymous said...

Problem with all these people - Bernanke, Krugman - is that they are stuck to their government accounting and models. No one is willing to look at the actual reality on the ground. Bernanke is more concerned with the inflation rate rather than LEVEL of prices. when he says effect of oil spike is transitory, he means the spike in inflation RATE is transitory and will go back to zero. Of course, if gas spikes to 4$/gallon and then stays there for a year, the inflation rate will revert to zero (making him happy and doing more QE). Meanwhile the people are starving. He does not give a shit.
Similarly, Krugman is talking about the flow effect of hundres of thousands of homes being lost as zero. No effect on the way GDP is measured. THESE PEOPLE ARE INSANE.

Maurizio said...

I wish you would address his usual argument that in a "liquidity trap" economic rules are overturned, "mercantilism works", and presumably breaking windows creates prosperity.

Bob Roddis said...

"Anonymous" is right. These episodes of the “broken window fallacy” should demonstrate that the problem with Krugman, the Keynesians and the Chartalists is that they believe fundamentally in the bizarre quasi-religious belief that “the economy” is mechanical or quasi-mechanical and is external or partially external to real human existence. They also firmly believe that the machine must spin and it must be induced to spin by the scientific actions of our betters running the total state. Thus, they conceive of output gaps which must be filled to keep the machine spinning. A disaster will induce much machine spinning because of the necessity to fix the damage. Trying to convey the “broken window fallacy” to these people is like asking AP “Hut Tax” Lerner where the stuff will come from to satisfy the unpayable government debt. They will not understand the question because they simply ignore the fundamental facts and data of human existence: Acting man, subjective value and economic calculation by living breathing people.

Bob Roddis said...

in a "liquidity trap" economic rules are overturned

The follwing is my version of the ABCT on this issue. The sole purpose of fiat money is to allow the undetected shifting of assets and purchasing power (basically, theft without due process). People getting new funny money are basically stealing purchasing power from those holding existing money. This will induce a boom as most everyone believes that they and everyone else are getting richer than they really are. Increased fiat money lending will induce unsustainable economic activity which will induce even more lending and money dilution. Once the bust begins and reality sets in, people realize that they are a lot poorer than they had thought and they hopefully will stop spending and start saving. Krugman realizes that it is at this point that more money dilution will not induce his mechanical economy to spin because people realize that they can no longer "flip" assets and debt as they could during the boom. The only way to induce the economy to "spin" in the short run is with government debt. The problem is conflating the spinning with true wealth creation. But you'll probably have as much luck explaining this reality to your poodle as to a Keynesian due to their bizarre world-view (the Keynesians, not the poodles).

Mike Cheel said...


And when I brought up in this comment space a while about how a candy bar cost me a quarter when I was a kid and now it costs a dollar I got back the reply that earnings have also gone up (meaning I earn more now than when I was a kid).

When I mentioned that if I had saved that quarter instead of buying the candy bar I would not be able to afford that same candy bar today.

To that I got no reply (of course). That seems to be the Keynesian (and Chartalist) thinking. Present time preference is the only thing important I guess.

Bob Roddis said...

@Mike Cheel:

Since time preference is a) an attribute of humans; and b) humans and their stuff take a very subsidiary or non-existent role in the magic world of the Keynesian, naturally they are going to want to ignore any and all of those attributes.

Also, based upon my reading of Wray and Mitchell, the Chartalist vision is based fundamentally upon the phony historical narrative that laissez faire and sound money caused and causes depressions. Everything they believe flows from that narrative combined with their spinning machine vision of "the economy". Remember what MMT guru Mitchell said:

"The general reasoning failure that occurs when one tries to apply logic that might operate at a micro level to the macro level is called the fallacy of composition."

He's right. The logic of the spinning machine (religious Keynesianism) is not the logic of micro (AKA "real world existence").

AP Lerner said...

"the Chartalist vision is based fundamentally upon the phony historical narrative that laissez faire and sound money caused and causes depressions."

While I'm impressed you have expanded your reading list beyond Mises, the next step in your evolution is comprehension. Keep studying, you'll get it eventually.

Bob Roddis said...

Dr. Hut Tax:

Why don't you direct me to a reading list? I've had to hunt for the stuff I've found myself.

All I find in what I've read is reference to your Keystroke operational reality (which may very well be true) combined with the most primitive Keynesian "theories" and refuted historical narratives.

Bob Roddis said...

Mises preceded Keynes and the Great Depression. I note that both the Keynesians and Chartalists completely ignore Austrian School concepts (except for a cursory, superficial and ignorant note of disgust here and there). I note that APLerner continues to refuse addressing our basic and repeated concerns with these theories.

I submit that they ignore our concerns because they have no response.

And I suppose we all knew that already.

AP Lerner said...

Here you go Bobby.

And PS. I've answered your questions over and over. But you know what they say about the definition of insanity, so I've moved on. How come you never answered my question? How the money multiplier has broken down? How come big spending bills like war are not contingent on a succesful bond auction? How come TARP was not passed contingent on a successful bond auction? And please don't say they sold drug dealers cars like Murphy implied.

Until you understand this chart
You'll keep making the same mistakes over and over again

"Mises preceded Keynes and the Great Depression"

That is correct. Which means his entire thought process regarding monetary and fiscal policy is irrelevant. FYI-the US left the gold standard.

Bob Roddis said...

Those books are expensive. I'm starting with this article which is free:

You can explain what's wrong with the article in lieu of the book.

Bob Roddis said...

How the money multiplier has broken down?

I don't understand the question. I don't exactly believe in the money multiplier. What exactly are you asking me? How do you think it has broken down and why should I care?

Bob Roddis said...

How come big spending bills like war are not contingent on a succesful bond auction?

That's the entire point of the funny money dilution scheme. The government steals purchasing power from the victims (the voters) without them realizing what is happening to fund its pet projects that could not funded if the voters had to pay up front and with eyes wide open. That's why the Federal Reserve Act preceded the US entry into WWI. I don’t see how we disagree on the “operational reality” of these actions. We disagree about the real world results of these actions and their morality.

Bob Roddis said...

How come TARP was not passed contingent on a successful bond auction?

For the same reason that big spending bills like war are not contingent on a succesful bond auction. These wealth transfers are funded by the surreptitious theft and fraud of the funny money dilution scheme and the victims are oblivious.

Bob Roddis said...

I'm not impressed with the magic Chartalist chart. It makes sense that funny money induces people to borrow too much creating a private sector deficit. During boom times, tax receipts are up, property values are up and the need for government to spend goes down. Once the bust hits, people are going to save since they realize how poor they really are and, thanks to the Keynesians, the government is going to spend like crazy. So there's probably a corrolation there.

However, there's nothing on the magic chart to refute basic common sense or to suggest that private surpluses CAUSE government deficits or that government deficits are necessary for private surpluses.

Bob Roddis said...

These Chartalists sound downright Bolshevik (William Mitchell, Joan Muysken):

“In the Post World War 2 period up until the mid-1970s, everybody who wanted to earn an income was able to find employment. Maintaining full employment was an overriding goal of economic policy which governments of all political persuasions took seriously. Unemployment rates below two per cent were considered normal and when unemployment threatened to increase, government intervened by stimulating aggregate demand.”

Wow. As soon as the last link to gold was cut and everyone went wacky with fiat funny money, unemployment jumped! Who knew?

And of course, “employment transcends its income generating role to become a fundamental human need and right.”:

“(1) Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment.

(2) Everyone, without discrimination, has the right to equal pay for equal work.

(3) Everyone who works has the right to just and favourable remuneration, ensuring for himself and his family an existence worthy of human dignity and supplemented, if necessary, by other means of social protection.

(4) Everyone has the right to form and to join trade unions for the protection of his interests.”

ekeyra said...

AP's chart's logic: The sidewalk being wet caused the rainstorm.

William L. Anderson said...

You know, Bob, I guess that the Chartalists actually believe that goods just produce themselves. From what I am hearing at the Fed conference I am attending, and from what I read, a lot of people have no idea that an economy must produce real goods and services that can be traded.

The "rights" which have been enumerated are "rights" that involve someone producing something. The notion that a government can just "produce" a "job" along with everything else is pure fantasy, unless one actually believes these things come about from fiat.

Bob Roddis said...

Upon reading the Chartalist original source materials, we learn:

1. These guys are a bunch of radical statist leftists;

2. They have no familiarity whatsoever with Austrian concepts (like everyone else). They are dueling against Irving Fisher and/or pre-Austrian pre-Keynesian “neo-Classical” concepts. Thus, Austrian concepts have not been refuted by them.

3. Their beliefs are basically free of economics itself and the law of scarcity. The centralized state can accomplish ANYTHING with keystrokes. All that is holding us back from unlimited wealth is the vast ignorance of and resistance to the Chartalist insights. This resistance has foolishly limited the authority of the benevolent state and our wise government officials to accomplish these great goals.

4. There are no Cantillon Effects, economic calculation nor malinvestment.

5. The state is able to control the precise value of the fiat currency simply by making everyone pay their taxes in that currency. Thus, concerns about price inflation are absurd.

6. All economic activity consists of completely homogenous aggregates. Private surplus (the consistency of which is irrelevant) CAUSES public deficit (the consistency of which is irrelevant). There are no people with dreams and plans and no resources. Time and space limitations do not exist.

Thanks to AP Lerner, we have all been enlightened.

Tel said...

It was ballsy of Krugman to come out with this, it opens him up to all sorts of criticism but the proof is in the prediction at it were. I predict that Japan will suffer a significant economic setback from this event, but they are very inventive and determined people so they will ultimately bounce back, but it might take a while (at least 5 years, probably longer).

From a world economy viewpoint, Krugman says he is "nervous about the disruption of world production" but that's a crock, there is no particular issue with lost production. India and China will happily fill the production capacity, even the USA is achieving ever-improving production capacity (largely due to sacking humans and buying machines).

Krugman says, "not worried at all about the impact of Japanese borrowing on world bond markets" and I'll disagree with him on this one, China has been searching around for meaningful investments for a decade or more so they would be happy to lend money to Japan. But for China to lend money to Japan means that neither China nor Japan are going to be buying US treasury bonds, so the US govt credit card just expired.

This has got to put additional downward pressure on the US dollar, and reduce the Asian purchase of treasury bonds. Whether this washes over into high interest rates or high inflation over in the USA (or a bit of both) depends on how the Federal Reserve wants to juggle it, but both options are bad.

The bumpy ride just got bumpier, then again, Krugman called for a bit of inflation, I think he will get a bit more than he asked for.

Tel said...

All economic activity consists of completely homogeneous aggregates.

Yes, this often surprises me, because systematic collapsing of dimensions essentially destroys information. It's a bit like listening to a concerto by just watching the level meter twitch, or cataloging all your favourite books by weight.

However, money itself collapses all economic dimensions into a single commodity... which is why in a really free system you would have contracts that demand a certain behaviour from both parties rather than a financial consideration. The fact that our current financial system reduces all transactions to currency terms shows it is already destroying value.

Just to vaguely link this back to Krugman, any history book will point out that the Great Depression was already coming to an end in the years leading up to WWII, and both production and consumption were already peaking before the war actually started.

However, this analysis by aggregates ignores the fact that most of the productivity in the years immediately before WWII was actually armaments production as the whole world entered into an arms race in preparation for the possibility of a coming war. Sadly, once they committed to making all those weapons, they effectively committed to using them as well (in order to get some return on their investment).

Thus, a statement that "World War II ended the Great Depression" is literally wrong, because the depression was over before the war started, but one might argue that ending the Great Depression drove the world into war.

Bob Roddis said...

More fun things to read from the "critics are getting desperate" dept. Little Matty Yglesias, who quotes Krugman approvingly almost every three days, explains:

"Bored by the proceedings at the Republican National Convention in St. Paul one day in 2008, I decided to try to gather some color down the road in Minneapolis, where Ron Paul and fellow dissident conservatives and libertarians were holding a counter-convention at the Target Center. At one point a speaker thundered that Barack Obama and John McCain “both have a lot to learn about Austrian business-cycle theory.” The crowd went delirious with cheers, and soon chants of “end the Fed” echoed throughout the arena.

It was funny at the time. A bunch of cranks talking about their crank monetary theories and espousing a crank prescription.

Today, Paul is the chairman of the House Subcommittee on Monetary Policy."

I've commented on the Yglesias blog probably 156 times saying that Yglesias knows nothing about Austrian theory and isn't even entitled to an opinion.

Tom Woods explained two years ago:

"Woods, Yglesias declares, is ‘pushing a fringe economic doctrine that tells the right what it wants to hear so he's gaining popularity.’

Um, Matthew, what right-wing circles have you traveled in over the years that have "wanted to hear" scathing criticism of the Federal Reserve? How many "right-wing" politicians can you name that have even mentioned the Fed as a political issue over the past, oh, ninety-six years?"

Bob Roddis said...

I just got an e-mail from the NYT:

"If you are not a home delivery subscriber, you will have free access up to a defined reading limit. If you exceed that limit, you will be asked to become a digital subscriber.

This is how it will work, and what it means for you:

On, you can view 20 articles each month at no charge (including slide shows, videos and other features). After 20 articles, we will ask you to become a digital subscriber, with full access to our site."

This should help reduce the Kroog-man's influence I would think.

Anonymous said...

Krugman said it's going to be expansionary in a monetary sense. As in it might get them out of a liquidity trap. He never said an earthquake was good for the economy.

Jim said...

I think we should start a pretend war to lower unemployment and help our economy. It would create jobs after all.

TonyFernandez said...

We should be surprised? He's a mainstream economist, the same people who think that WWII brought us out of a Depression. It's a joke, and always has been.

AP Lerner said...

"The notion that a government can just "produce" a "job"

Odd statement coming from a government employee. But then again, this blog is a long running display of your general ignorance, so not too surprising.

Way to be a sponge.

And PS. would it be too much to ask oyou to pick up something written by Abba Lerner before commenting on functional finance? I mean I get it, your married to an ideogy that prevents you from thinking honestly, but atleast make an attempt? You sound like a cable news talking head.

Bob Roddis said...

What do you want us to read by Abba Lerner? I'd read those Mitchell and Wray books if they cost $6, but I'm not paying for expensive books when I can see from their articles that they are unrepentent left-wing quasi-totalitarian statists without the slightest appreciation for human rights (hut tax, anyone?).

Neither you nor Wray nor Mitchell nor Mosler have the slightest familiarity with Austrian concepts. Why don't you make an attempt at understanding those concepts before you come in here with your name-calling?

Bob Roddis said...

Functional finance is an economic theory proposed by Abba P. Lerner, based on effective demand principle and chartalism.

It states that government should finance itself to meet explicit goals, such as taming the business cycle, achieving full employment, ensuring growth and low inflation.

PrinciplesThe principal ideas behind functional finance can be summarised as:[1]

Governments have to intervene; the economy is not self-regulating.

The principal economic objective of the state should be to ensure a prosperous economy.

Money is a creature of the state; it has to be managed.

Fiscal policy should be directed in the light of its impact on the economy, and the budget should be managed accordingly, that is, 'balance' is not important in itself.

The amount and pace of government spending should be set in the light of the desired level of activity, and taxes should be levied for their economic impact, rather than to raise revenue.

Principles of 'sound finance' apply to individuals. They make sense for households and businesses, but do not apply to the governments of sovereign states, capable of issuing money.

Rules for fiscal policyLerner postulated that government's fiscal policy should be governed by three rules:[1]

1. There government shall maintain a reasonable level of demand at all times. If there is too little spending and, thus, excessive unemployment, the government shall reduce taxes or increase its own spending. If there is too much spending, the government shall prevent inflation by reducing its own expenditures or by increasing taxes.

2. By borrowing money when it wishes to raise the rate of interest and by lending money or repaying debt when it wishes to lower the rate of interest, the government shall maintain that rate of interest that induces the optimum amount of investment.

3. If either of the first two rules conflicts with principles of 'sound finance' or of balancing the budget, or of limiting the national debt, so much the worse for these principles. The government press shall print any money that may be needed to carry out rules 1 and 2.

I'm waiting to see the logic and proof behind these baseless and long-refuted claims.

Bob Roddis said...

Lerner (1941) likened laissez faire to a refusal to take hold of the ‘economic steering-wheel’. Government must use its powers to ‘fill its two great responsibilities, the prevention of depression and the maintenance of the value of money.’

EVERYTHING I have read by Chartalists completely ignores the massive and voluminous Austrian deconstruction of these statist fantasies due to problems of knowledge in society and problems of economic calculation. Where does Lerner EXPLICITLY and in detail refute those basic Austrian concepts? Where does he even address them? Where does any Chartalist address them? It’s pointless to “debate” these guys when they insist upon maintaining their ignorance of these essential concepts and refuse to respond to legitimate concerns.

David B said...

It's so funny that AP Lerner has to resort to name calling every time someone (in this case, Professor Anderson) brings up the reasonable objection that economic activity is an ACTION that is not DEPENDENT upon the creation of paper bills.

Mike Cheel said...

My question about AP's chart is where is the line that shows the deterioration of spending power.

I am still waiting to hear why it is okay to destroy savings by eroding present purchasing power. Other than natural market fluctuation due to supply and demand, why should money that I have put away be allowed to lose its purchasing power due to government fiscal manipulation?

Anonymous said...

I've been reading this blog for a while now, and I don't think anyone has mentioned (at least explicitly) the real problem with AP's chart: namely, that it doesn't actually mean anything. AP has often used this chart to argue that private savings cannot exist without public borrowing, or rather, that the private sector's financial surpluses depend on the public sector's financial deficits (when excluding external balances from consideration).
But this argument depends almost entirely on the fallacy of division--the assumption that what is true of the whole must be true of every part. Thus, if the private sector's financial balance were zero, that would not mean that every household, every business, and every other private entity has a zero financial balance; rather, it would mean that some private entities are net borrowers and others net savers. Reliance on huge aggregates such as those in AP's chart obscures this picture, but that's what would happen nonetheless.

Tel said...

1. There government shall maintain a reasonable level of demand at all times. If there is too little spending and, thus, excessive unemployment, the government shall reduce taxes or increase its own spending.

Both the George W Bush govt and the Obama govt followed this rule, they both reduced tax and also increased spending. It was a disastrous policy, both leaders explored new lows in public opinion rating and the lack of employment growth demonstrates that this policy fails to achieve it's primary stated outcome.

3. If either of the first two rules conflicts with principles of 'sound finance' or of balancing the budget, or of limiting the national debt, so much the worse for these principles. The government press shall print any money that may be needed to carry out rules 1 and 2.

Well the first unsound financial principle was for the US govt to borrow far more from China (and Japan) than it ever can pay back, and the second unsound financial principle was for the Fed to start money printing to fill the hole (and force devaluation of the US dollar, and effectively default on loans to China and Japan).

We can clearly see that an approach of "so much the worse for these principles" is exactly what is being used right now.

Sit back and eat popcorn while the disaster unfolds, just hope someone learns something out of this stupidity.

Tel said...

I am still waiting to hear why it is okay to destroy savings by eroding present purchasing power. Other than natural market fluctuation due to supply and demand, why should money that I have put away be allowed to lose its purchasing power due to government fiscal manipulation?

Krugman has answered this one many times. His answer is the "Paradox of Thrift" which is to say that by wanting to save money, you are to be labeled a "Hoarder" and you are thereby causing the economy to grind to a halt with your unreasonable propensity to save.

By blaming you for poor employment statistics, they create a moral justification for taking what you have away from you and transferring it to someone else.

I'm guessing that you are not happy with this answer.

Of course, teaching people that saving is immoral but stealing is OK has such devastating long terms consequences on any social system that devil worship and violent drug gangs pale in comparison. If you pretend that the long-term never comes and that morality serves no useful purpose it might help.

Roger Ritthaler said...

GDP is vastly overrated and overvalued since it includes the income of government workers - income that was taken from the producers (if there really is much of that anymore). Has anyone done an analysis to calculate this?

CrisisMaven said...

Krugman hasn't yet told us why it wouldn't be best for the US economy if the US blew up its whole nuclear arsenal at home and then rebuilt it all.
Your readers might be interested in how to treat their radioactively contaminated drinking water:
A Japanese translation seems underway, see comment by Takuya there. Maybe someone wants to help with other languages?