Friday, April 1, 2011

Krugman rewrites history (again)

One of the most famous lines said by anyone in the Herbert Hoover administration was what Secretary of the Treasury Andrew Mellon supposedly told his boss: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” Oh, and he said one other thing: "Purge the rottenness out of the system."

In his column today, Paul Krugman takes that quote and decides to rewrite history. True, Krugman is famous for that, as he gives us several howlers per week, but this one is important because not only does Krugman give us a false accounting of history then, he makes an equally-spurious claim for today.

The first and most important thing to remember (and something Krugman always seems to leave out -- not surprisingly) is that Hoover brags that he rejected Mellon's advice. This is important, because Krugman always presents that quote as an official policy of the Hoover administration when, as Hoover notes in his memoirs, he not only refused to follow Mellon's suggestion but he also tried actively to keep the liquidation from happening.

My sense is that Krugman ignores that fact because it does not fit into his chain of events, and because he wants to claim that the Republicans, who apparently want to cut all of $61 billion from a $3.5 TRILLION federal budget are trying to engage in what he calls Mellon-style austerity:
But never mind the lessons of history, or events unfolding across the Atlantic: Republicans are now fully committed to the doctrine that we must destroy employment in order to save it.

And Democrats are offering little pushback. The White House, in particular, has effectively surrendered in the war of ideas; it no longer even tries to make the case against sharp spending cuts in the face of high unemployment.

So that’s the state of policy debate in the world’s greatest nation: one party has embraced 80-year-old economic fallacies, while the other has lost the will to fight. And American families will pay the price.
Now, I am not sure how a tiny proposed cut in spending translates to "austerity," but like Blutarsky in "Animal House" who asked his frat brothers if the Americans quit "when the Germans bombed Pearl Harbor," Krugman is on a roll.

However, I think for all his botching of history, Krugman does perform a useful function here, and that is to ask the question (in his own, nasty way, of course) as to the larger issue underlying debate about boom and bust. Are we dealing with simple idle resources that need to be jump-started via an infusion of government spending, or are we dealing with malinvested resources that need either to be liquidated or transferred to other uses?

This is not an idle question, for I believe it is at the heart of all of Krugman's anti-"austerity" diatribes. Krugman clearly believes that the problem is that of idle resources; people stopped spending, and the only way to get the economy moving again is to bring in wads of new government spending that will give the economy "traction" and continue the circular process.

To Krugman, a boom is just that: a boom. It can and should be continued by all means possible, including policies of massive borrowing, spending, and, yes, creation of new money. (As Krugman claims in The Return of Depression Economics, many economic problems can be solved simply by printing money, and that printing money creates what he calls "a free lunch.")

In that world, all factors of production, economically speaking, are homogeneous. It does not matter from what direction the spending comes, as everything moves in the same way. If a boom is touched off by something like the housing bubble, it creates the very kind of mix of capital and labor that a huge infusion of government spending would produce.

Should that be the actual situation, then Krugman is correct and the way to long-term prosperity is for government to print and spend. Money in that view would be nothing more than a tool used by government to manipulate events, and as long as the "correct" people are in political power, such policies will create a second-best nirvana.

The Austrian position, however, is much different. Austrians hold that factors of production are heterogeneous, and that the mix of capital created during a credit-fed boom cannot be sustained, even if the government throws in new spending measures after new measures. In fact, Austrians believe that the very wave of spending that Krugman demands government do only exacerbates the situation, as it only deepens the unsustainable capital structures and creates even more malinvestments. That is the heart of the Austrian Theory of the Business Cycle (ATBC).

I'm not about to claim that the "austerity" measures of what Krugman speaks are based upon the ATBC or that finance ministers across the globe suddenly have embraced Austrian Economics. Nonetheless, I will say that until the economy can deal with the very real malinvestments that piled up during the last 20 years, we are doomed to have a low-growth economy with high unemployment.

This is the Austrian critique in a nutshell. As for Krugman's claims that the Republicans suddenly have become the Second Coming of Andrew Mellon, I believe that is, to put it mildly, a bit of hyperbole. But, Krugman never would engage in that kind of rhetorical fallacy, would he?


Bob Roddis said...

Both the Keynesians and its Year Zero malignant offshoot MMT rely upon the most dim-witted obliteration of the basic data of human existence in constructing their aggregated models. Human beings work very hard to accumulate their personal capital in the form of the savings of resources and their own skills. Since everyone is unique, each person finds other people with different skills sets and subjective values to trade with. Because value is subjective and we are all basically ignorant, the pricing process is necessary to guide us in our endeavors.

The Krugmanites, Keynesians and MMTers all purposefully ignore this essential data and those truths. In my reading of the MMT gurus, it is clear that they share the same phony and primitive narrative that the Great Depression was somehow caused by the free market, that low “aggregate demand” is the cause of depressions and a function of the free market, and the government can and should “stimulate” aggregate demand. Obviously, our Austrian analysis of how funny money and government spending screw up the pricing process is so fundamentally unassailable that they cannot bear to familiarize themselves with it, much less repeat it. Just as the Keynesian policies themselves are based upon fraud and lies, the Keynesian/Krugmanite “analysis” of the Austrian School must be based upon fraud and lies.

Again, I urge everyone to read Jonathan Finegold Catalan’s new article on government spending:

Justin said...

Just discovered your blog today via Mises. Outstanding work. I'll be returning often!

krislikesmath said...
This comment has been removed by the author.
James E. Miller said...

Nice Bob, I also recommend everyone read Jon's new Mises Daily. Krugman's column is simply unbelievable today. How in the hell can he continue the same "Herbert Hoover was a heartless liquidator" doctorine when it just simply isn't true? It's bold faced lies like this that should absolutely erode his credibility.

mikeyaustudent said...

All capital is homogenous. Thats why a pallette of bricks is just as good as a lathe to a machine shop.

Anonymous said...

"...until the economy can deal with the very real malinvestments...."
Can you provide a list and the reason the investment is a bad idea?

James E. Miller said...


The collapse of the housing bubble and subsequent prices isn't proof enough for you?

William L. Anderson said...

Will a note from my mother suffice?

Bob Roddis said...

And a picture of a pallet of bricks is just as good as a picture of Brooke Burke on a glossy calendar.

The only thing that matters is whether Brooke or the bricks are part of the private or public sector.

Bob Roddis said...

public deficits = private savings

That is nuts. This is quite different than claiming fiat money banks can get away with making loans ex nihilo without having any reserves (which is similar to saying that the President can get away with starting a war without a declaration of war from Congress).

I presume that if the magic state didn't spend at all, we would all shrivel up and die?

Bob Roddis said...

AP's post got eaten.

Anonymous said...

Before his presidency, Hoover as Secretary of Commerce advised the Harding Administration to stop liquidations in the Panic of 1921.

The amazing thing was that Harding did not heed the Hoover advice and the USA experiences a sharper downturn than in 1929 but recovered in less than 2 years.

Mark said...

I appreciate this blog!

Ned Netterville said...

Your job, elucidating Krugman's economic errors, must be close to a full-time undertaking. And imagine: the king of weasels castigating Republican weasels for using his own economic vocabulary (weasel words).

Anonymous said...

Well, my post was deleted again, and I will give you the benefit of the doubt.

This is nonsense. Krugman has never argued that one of the causes of the recession was not mal-investment. He has said repeatedly that the housing bubble was the primary culprit (and this is the subject of his recent blog posts).

Austrians cannot explain why a drop in one sector influences the entire economy. Here I believe Krugman is right - this is a financial crisis and a liquidity trap. The issue is not the re appropriation of badly invested resources but lack of consumer demand due to the enormous debt load.

Besides, why advocate then for austerity. It seems that the Austrian position would be do no evil here. If the economy should miraculously cure itself, why side on any side during this debate?

Mike M said...

It's and consumer income problem, not a consumer demand problem

mikeyaustudent said...

Come to think of it Bob, a pallette of bricks would be rather heavy and cumbersome for the artist to hold with one hand.I'll stick with the traditional concrete pallette, covered with lead sheeting, for practicality and a measure of protection against high levels of radiation.

William L. Anderson said...

I'll say again; I DON'T delete posts. Blogger has some issues that I don't understand, but my policy all along is that if I am willing to put my opinions on the web, I also need to be willing to take the criticism.

So, if your post is taken down, I did NOT do it. Not my policy.

burkll13 said...

"Well, my post was deleted again, and I will give you the benefit of the doubt."

well you should because the problem has deleted far more "Austrian" posts than non, including one of my 4 or 5 total just now.

"Austrians cannot explain why a drop in one sector influences the entire economy. "

flat out wrong and proves you have no grasp of the austrian position. id suggest getting the austrain view from an austrian and not a keynesian. they either dont understand or, like Krugman, warp it into something unrecognizable because they cannot compete with it on an honest plain.

"Besides, why advocate then for austerity. It seems that the Austrian position would be do no evil here. If the economy should miraculously cure itself, why side on any side during this debate? "

i honestly dont know where to start on this.....

burkll13 said...

upon further review, maybe watch this:

a few times and think how that applies to the current situation

Another Anonymous said...

Just a test - from another computer that blogger seems to hate less. I've made at least a dozen posts in the last few weeks that appear and all get deleted in seconds. It's an unbiased snafu.

I think it is fairer to Krugman to say that he is expounding accurate, standard history that contradicts Austrian & neoclassical rewriting - A rewriting that can only succeed now with the deaths of most who experienced it first-hand. But don't any Austrians have parents or grandparents who could tell the Austrokids that their "history" is just plain nuts?

M.H. said...

"Krugman clearly believes that the problem is that of idle resources; people stopped spending, and the only way to get the economy moving again is to bring in wads of new government spending that will give the economy "traction" and continue the circular process."

Krugman, the only idle resources here is your brain. Krugman is naive to believe that capital is homogeneous.

Anonymous, April 2, 2011 11:18 AM

"He has said repeatedly that the housing bubble was the primary culprit (and this is the subject of his recent blog posts)."

This is not what I understood :

Mike M said...

MH said "Krugman, the only idle resources here is your brain."

OK that was funny! No comment on the depth of the idle resource.

Bob Roddis said...

Regarding disappearing comments, I've switched computers at my house and gone on other people's computers at different houses. If the comment eater is at work, it does not matter. The problem comes and goes. It was bad back in July, went away all winter almost and now is back.

I've tried to look up this problem online and all I can find are questions from bloggers asking each other why this problem exists. Blogger itself never seems to answer these concerns. Maybe Blogger is an advocate of MMT.

Bob Roddis said...

Austrians cannot explain why a drop in one sector influences the entire economy.

Why wouldn't it? Who said that one "sector" does not influence another "sector"? BTW, I'd like to see more detailed, longer and up to date version of the Chartalist's magic chart. Further, since your argument now is that the private sector is in hock up to its eyeballs, how is that consistent with the chart that claims our massive deficits cause private surplus?

The issue is....lack of consumer demand due to the enormous debt load.

Also, Austrian theory is not based upon historical narratives. You haven't a clue.

Bob Roddis said...

The issue is....lack of consumer demand due to the enormous debt load.

So, consumers who are broke need to spend less and save more while people in hock up to their eyeballs might consider bankruptcy.

beezer said...

I read Krugman and, although you hew to a different intepretation, I find what he writes remarkably consistent and understandable.

That's not to say he doesn't mess up from time to time. But his explanations are rational, from his reading of data and history. I do recognize rational thought.

Bob Roddis said...

But his explanations are rational

There is nothing rational about Krugman’s claim that economies have or need “traction”. Further, we already know what the “transmission mechanism” for money dilution is: Theft of purchasing power from those holding the existing money and other Cantillon Effects.

And I told him so today:

Mike Cheel said...

This is what the Fed and Keynesian thinking gets you:

Bob Roddis said...

@Mike Cheel

And they are destroying savings for no reason whatsoever, solving a problem that doesn't exist and insuring that a true free market interest rate cannot and will not emerge to guide us into the future.

Mike Cheel said...

@Bob Well I don't know if I would say no reason whatsoever. Clearly there are people benefiting from this and it isn't you or me.

And this is the whole point about savings that I have been trying to make to these Chartalist\Keynesian folks the whole time.

They probably still won't get it.

Bob Roddis said...

They probably still won't get it.

They don't want to get it. Their entire intellectual "superstructure" would fall to pieces if they ever bothered familiarizing themselves with just our basic concepts.

They are meticulous in their purposeful avoidance of understanding anything we say.

Mike Cheel said...

@Bob Reminds me of the quote:

"The Matrix is a system, Neo. That system is our enemy. But when you're inside, you look around, what do you see? Businessmen, teachers, lawyers, carpenters. The very minds of the people we are trying to save. But until we do, these people are still a part of that system and that makes them our enemy. You have to understand, most of these people are not ready to be unplugged. And many of them are so inured, so hopelessly dependent on the system, that they will fight to protect it. " -Morpheus

Scary to be honest.

Anonymous said...

@Mike Cheel,

Well said. My favourite movie of all time too. I think of the same lines and watch the same scenes flash past my eyes every time I encounter ordinary people mouthing and parroting propaganda from the mainstream. Fairly scary.