Tuesday, July 26, 2011

Krugman: In denial about spending and borrowing

In reading through Paul Krugman's material through the years, I find that time and again he is in denial both about history and the present state of the U.S. Government. You see, in Krugman's world, whatever Progressivist historians (or, more accurately, distorians) claim about history MUST be true. Why? Because they said so.

Herbert Hoover, despite all evidence to the contrary, was a True Believer in laissez-faire. The New Deal was bringing economic recovery to the nation until the Fed raised interest rates in 1937. World War II brought the USA out of the Great Depression. The regulated banking cartel worked wonderfully but was phased out because of the ideology of free markets, the Republican Party, and Ronald Reagan. (This is despite the fact that much of the banking deregulation of which Krugman speaks took place when Democrats had an overwhelming majority in Congress and Jimmy Carter was in the White House.)

The beat, of course, goes on. We had prosperity during the late 1990s because Bill Clinton got Congress to raise the top income tax rate from 33 percent to 39.6 percent, and that the Fed-sponsored stock market bubble never existed or was irrelevant to the boom. Or, that cutting the top tax rate from 39.6 percent to 35 percent is largely responsible for the current deficits. We now get Krugman's latest rewriting of history: there has not been an increase in government spending since Obama took office. And so on.

As for the current state of affairs, Krugman actually seems to believe that the responsible thing is for the U.S. Government to continue to borrow and spend as though there is no tomorrow (for inflation can repudiate the debt, and, as all followers of Krugman know, inflation is your friend). Now, despite Krugman's utter partisanship, I am not taking the Republican side of things, especially given that it was the Republicans from 2003 to 2007 who jacked up spending, escalated U.S. involvement in military conflicts around the world, and encouraged the financial bubble that brought down the house.

However, when Krugman is claiming that Obama somehow is a "moderate conservative Republican," then I wonder what planet he inhabits. This president has run the largest deficits in history, has unleashed the EPA to throw a slew of new regulations in the middle of a depression, who is demanding that colleges and universities conduct what essentially are kangaroo courts in order to increase sexual assault claims so feminists will be satisfied, and Krugman fails to acknowledge any of this?

The Keynesian party is over, even if Krugman cannot recognize that we cannot spend our way out of an economic crisis. Contrary to what he claims in The Return of Depression Economics, printing money does not create a "free lunch." However, if the government continues to follow the Keynesian directives of borrowing and spending, the "free lunch" soon enough will create enough destruction to ensure that there will be no lunch at all.

38 comments:

Lord Keynes said...

"The New Deal was bringing economic recovery to the nation until the Fed raised interest rates in 1937"

The US experienced positive and quite high real GDP growth from 1933-1937 and unemployment was falling in every year. That was a significant recovery. Only in the minds of Austrian idieologues is this not a receovery.

"Fed-sponsored stock market bubble never existed or was irrelevant to the boom. "

Where does he deny that the bubble didn't contribute to growth? Did you just make this up, for god's sake??

"This president has run the largest deficits in history,

Following in the footsteps of Ronald Reagan? Whose peacetime deficits were the largest to that point in US history?

has unleashed the EPA to throw a slew of new regulations in the middle of a depression,"

Following in the footsteps of Richard M. Nixon??

And we're not in a depression: this is your rhetorical fantasy: we had a severe recession 2008-2009 and emgered quickly from it by Keynesian stimulus, which averted an actual depression. What we have now is positive real GDP growth but a situation of very high unemployment.

However, when Krugman is claiming that Obama somehow is a "moderate conservative Republican," then I wonder what planet he inhabits.

Don't wonder too hard. Obama is very different from your historical New Dealer or progressive liberal: he is a centrist, and - like the Republicans - is in bed with Wall Street.

the "free lunch" soon enough will create enough destruction to ensure that there will be no lunch at all.

The only destruction we will see in the future is the destruction wrought by austerity and budget cuts.

Radical austerity, and wage and price deflation delivers a savage blow against oridinary people: you want an exmaple of what your Austrian "solution" of doing nothing actually results in?
Have a look a Weimar Germany: what an amazing success.

This is probably why Hayek in later life rejected policies that cause "secondary deflation". Clearly, though, you're are not in Hayek's league.

ekeyra said...

"we had a severe recession 2008-2009 and emgered quickly from it by Keynesian stimulus, which averted an actual depression. What we have now is positive real GDP growth but a situation of very high unemployment."

Im sure those people who havent had a job in 18 months and cant feed their families will be so releaved to hear we have positive gdp growth. Why dont you deliver the joyous news personally?

Mike Cheel said...

@ekeyra I'm not sure which country (or planet) LK is from but all you have to do is read the headlines or go outside.

@LK Really?

Bob Roddis said...

1. If Lord “Spiro Agnew” Keynes is the best they’ve got, we’ve already won.

2. Jonathan F. Catalan explains 1937:

The 1937–1938 dip was not the product of tight fiscal and monetary policy, but of excessive government regulation and loose monetary policy.

http://mises.org/daily/4039

A “recovery” based upon deficits and funny money cannot be sustainable. Further, economic principles are not established by historical anecdotes. And we know that the Great Depression was not precipitated by the free market but by Britain’s attempt at reinstituting a gold standard at an unsustainable exchange rate.

3. A neat cartoon explains how funny money leads to war:

http://www.lewrockwell.com/blog/lewrw/archives/92015.html

4. We’re all Nixonians now:

http://www.flickr.com/photos/bob_roddis/3520131008/in/set-72157600951970959

Mike M said...

LK, your statement that we have positive real GDP is incorrect. Using a proper GDP deflator that is untarnished by political adjustments over the last 30 years will show that GDP has been and continues to be marginally negative. The only way to produce positive GDP figures is to use the government’s deflator (rough corollary of CPI) which is a political number and no longer an economic number.

If you accept or advocate the government’s calculations in these matters you are either a fool or a shill. Accordingly we are and continue to be in a soft depression. Eggheads will argue about the definitions but to the average person on the street, there is no recovery.

BTW your constant attempt to inject partisanship with “this constant “insert republican name here” did it too” is tiresome. In Professor Andersons’ post he specifically to Republications to task for there misbehavior.

Daniel Hewitt said...

Here's another good one - Scott Sumner uses Keynesians logic to refute the Keynesian account of 1937.

http://www.themoneyillusion.com/?p=9548

William L. Anderson said...

It is funny how LK and the others believe that I am shilling for Republicans such as Nixon and Reagan. I believe that Nixon's presidency was a disaster, and I was in high school and college through that time and remember it quite well.

As for Reagan, the one thing he did right was to allow a lot of the necessary liquidation to occur. There was pressure for the government to reflate in order to boost agricultural prices and to jump-start the construction industry.

(I know. Al Hunt claims that it was the tax increases of 1982 that made the economy recover. Hunt also is the person who claimed that it was "government to the rescue" after the 9/11 government failure.)

As for the vaunted recovery from 1933 to 1937, the rate of unemployment was in double digits all through that time, and the nation suffered under FDR's NRA and AAA schemes. And please don't tell me that bailing out the banks prevented a depression. It only put off the Day of Reckoning by papering over the real asset problems in the economy.

Lord Keynes said...

"it is funny how LK and the others believe that I am shilling for Republicans such as Nixon and Reagan."

I didn't acuuse you of "shilling for Republicans" above: that is nothing your plaintive straw man.

It is your attempt to argue that Obama cannot be seen "moderate conservative Republican" that is rubbish - in fact there is ample precendent for large deficits (e.g., Reagan) and use of the EPA (e.g., Nixon) by Republicans.

"As for Reagan, the one thing
he did right was to allow a lot of the necessary liquidation to occur. "


LOL.. There was no "necessary" liquidation needed in 1980: the recessions of 1979-1982 were engineered by Volcker's quasi-monetarism at the Fed - a deliberated induced recession.

"As for the vaunted recovery from 1933 to 1937, the rate of unemployment was in double digits all through that time"

No it wasn't: unemployment under Roosevelt came down from 25% to just 9.5% by 1937:

http://edgeofthewest.wordpress.com/2008/10/10/very-short-reading-list-unemployment-in-the-1930s/

http://socialdemocracy21stcentury.blogspot.com/2011/06/roosevelts-record-on-unemployment-myth.html

Bob Roddis said...

No it wasn't: unemployment under Roosevelt came down from 25% to just 9.5% by 1937

Real US unemployment in t 1937 was 14.3% absent the make-work projects. A program that leaves 14.3% unemployed eight years after the statist-induced crash is a failure.

Canadian unemployment in 1937 was 9.1% without a New Deal.

Live by anecdotes, die by anecdotes.

Mike M said...

Bob, for LK it depends what your definition of "is" is.

Anonymous said...

Another blog entry with flat assertions and no data to back it up. At least when Krugman makes a factual statement in his blog, he backs it up with data, charts and cited sources.

Bob Roddis said...

To understand LK, you must understand Minsky, Steve Keen, Bill Mitchell and L. Randall Wray.

http://tinyurl.com/4ybd98n

http://tinyurl.com/3wmdp6x

http://tinyurl.com/3ond5zf

Note that Wray doesn’t think much of the concept of GDP.

EVERYTHING they believe and the entire basis for calling out the SWAT teams is based upon:

1. The phony claim that the free market settles at an equilibrium of high unemployment without their benevolent insertion of unplayable debt and funny money dilution into society at gunpoint; and

2. The free market goes off the track just cuz, the Minsky theory. It meticulously avoids even thinking about Austrian truths such as ignorant acting man, the essential nature of economic calculation and how their funny money regime fatally distorts economic calculation.

Lord Keynes said...

"Real US unemployment in t 1937 was 14.3% absent the make-work projects. "

It is only ideological fanaticism that causes the belief that people employed in Roosevelt's relief projects should not be included in the employment statistics.

Under Roosevelt, unemployment came down from 25% to just 9.5% by 1937: a significant achievement and this would tell anyone but the ideological hack that more, not less, government spending was needed.

"Canadian unemployment in 1937 was 9.1% without a New Deal"

The Canadian government did not engage in contrationary monetary and fiscal policy in 1937, so you have no argument at all.

Bob Roddis said...

Canadian unemployment from 1930-1941 with no New Deal:

9.1
11.6
17.6
19.3
14.5
14.2
12.8
11.4
11.4
9.2
4.4

Bob Roddis said...

Correction, I previously left out 1937.

Canadian unemployment from 1930-1941 with no New Deal:

9.1
11.6
17.6
19.3
14.5
14.2
12.8
9.1
11.4
11.4
9.2
4.4

Lord Keynes said...

"Note that Wray doesn’t think much of the concept of GDP."

Wray is wrong on that issue. He is utterly alone amongst MMTers or Post Keynesians in claiming "GDP doesn’t really tell you ... whether you actually have economic growth".

"The free market goes off the track just cuz, the Minsky theory. ...

Pathetic.

With the approproate changes:

"EVERYTHING the Austrians believe is based upon:

1. The phony claim that free markets result in plan/pattern coordination, even though they hold that expectations are subjective in the investment decision and there is no a priori at all why markets woudl clear or investment would equal loanable funds supply; and

2. Modern capitalism goes off the track just cuz of - just cuz! - the fantastic idiocy of ABCT, even though there is no such thing as a unique natural interest rate. They meticulously avoid even seriously thinking about truths such as the economic effects of money with a store of value function, uncertainty, subjective expectations, and the instability of financial markets and debt deflation."

Anonymous said...

"The 1937–1938 dip was not the product of tight fiscal and monetary policy"

Payroll tax was introduced during this time period. Fiscal tightening. Get your facts straight

"As for the vaunted recovery from 1933 to 1937, the rate of unemployment was in double digits "

But fell during that time period. Get your facts straight.

Lord Keynes said...

"Canadian unemployment from 1930-1941 with no New Deal:"

Your ignorance is so bad it is laughable:

(1) In 1930 the laissez faire Canadian prime minister was thrown out of office precisely because of his unwillingness to do anything about the depression: he was replaced with a Conservative government under R. B. Bennett who switched to public works and relief programs, and he spend an unprecedented $200 million over the next 5 years on public works and relief programs.

(2) the government created a central bank in 1935 to implement and help monetary and fiscal interventions.

(3) Certain provincial governments implemented much larger public works programs such as in Quebec, where “massive public works” were introduced with relief measures.

Also: Canada entered WWII in 1939 and was converted into a command economy so no figure after 1939 has ANY relevance here.

Again: if you had half a brain, government intervention aided recovery, and more, not less, was required, just as more was needed in the US.

Bob Roddis said...

A Canadian subsistence welfare program doesn’t sound like a “countercyclical” Keynesian utopia to me. And it didn’t work very well either, did it?

Live by anecdotes, die by anecdotes.

Bob Roddis said...

From Lord “Spiro Agnew” Keynes' blog, a cornucopia of MMT wisdom:

http://socialdemocracy21stcentury.blogspot.com/2011/07/some-miscellaneous-links.html

From Bill Mitchell:

The US government budget is not remotely like a family/household budget. Households have to finance their spending, the US government does not. Households use the currency that the US government issues (under monopoly conditions).

No tax dollars go “toward paying off the interest on our loans”. Please read my blog – Taxpayers do not fund anything– for more discussion on this point.

A government that tries to “balance its books” while the external sector is draining demand and the private domestic sector is trying to save to reduce its exposure to debt (after the credit binge) will force businesses to close up shop and sack workers. Government deficits put downward pressure on interest rates.


Gee whiz. Just what is the source of that mysterious "credit binge"?

There is also a video of L. Randall Wray saying that Ron Paul is right about something.

Lord Keynes said...

First:

And it didn’t work very well either, did it"

So now you're admitting your claim that Canada had "no New Deal" is false?? Slyly switched your position, huh?

"A Canadian subsistence welfare program ...

The relief payments were quite low, but that doesn't chnage that fact of signifcant government intervention, does it? You also conveniently ignore the public works programs, quite large in some provinces like Quebec. And you ignore the monetary interventions by the newly created Canadian central bank from 1935.

" doesn’t sound like a “countercyclical” Keynesian utopia to me.

LOL... And I didn't say that Canada
implemented some "effective countercyclical Keynesian policy": I said it implemneted a number of New Deal-style public works and relief programs, which - just like the US - aided recovery but were inadequate, not enough, for a proper return to low employment and robust growth.

Lord Keynes said...

"A Canadian subsistence welfare program doesn’t sound like a “countercyclical” Keynesian utopia to me. And it didn’t work very well either, did it?"

This is priceless. When you thought Canada had no New Deal-style programs, you were touting and quoting their unemployment figures from the 1930s as proof of the success of no New Deal! As evidence that by supposedly doing nothing Canada had superior employemnt than the US.

Now you find they actually had New Deal-style programs, then suddenly the Canadian figures prove that it "didn’t work very well"!!

You deserve an award.

Bob Roddis said...

If a government-induced depression reaches 26% unemployment and the government hires enough people in make work projects to get the rate down to 15%, the rate is 15% if you combine market and government jobs in your category. However, the underlying real rate is still 26%. This does nothing to show the cause of the 26% real rate nor that the make-work projects solved the long term problem, whatever its cause.

These anecdotes are not the basis of economic theory.

Bob Roddis said...

I submit that in 1929, we didn't have a Rothbardian laissez faire paradise to blame for the depression and we didn't have a perfect Keynesian paradise to credit with the alleged "curing" of the depression.

Arguing anecdotes with people who refuse to understand economics and whose views are based PURELY upon anecdotes is fruitless.

Bob Roddis said...

I submit that in 1929, we didn't have a Rothbardian laissez faire paradise to blame for the depression and we didn't have a perfect Keynesian paradise to credit with the alleged "curing" of the depression.

Arguing anecdotes with people who refuse to understand economics and whose views are based PURELY upon anecdotes is fruitless.

Mike M said...

It is somewhat amusing to watch people throw statistics around. Definitional issues and subjective interpretation causes a circular conversation that adds very little value to a discussion.
Where is the contextual discussion about the government action that contributed or caused the problem the government now feels empowered to fix? Neo-Keynesians claim a need to intervene in the economy to alleviate the ills of a recession/depression yet accept no responsibility for the actions that caused or prolonged it. Where is the discussion about adverse capital flows caused by government action? The manipulation of money and credit affecting behavior. Throwing statistical rocks around is a waste of time without context.
And why the obsession with the 1930’s? Where is the discussion of the depression of 1920-21? A painful but short episode.
The progressive mindset insists on intervening in the free market and treating it like a high school science experiment. They can’t help themselves. Either for their own nefarious power purposes or because they think they are just smarter than the masses and must impose their “wisdom.”
You want to get on the road to recovery? Get back to basics with minimal government according to the original construct of the Constitution, honest money, liberty and free market principals. Eggheads will want to list all the reasons why it won’t work and make it complicated to make themselves important. Sorry folks, economics is not that difficult. The compounding effects of intervention make it so. To be sure a back to basics approach would be very painful and people would scream for the government to “do something.” It’s not working now nor will it work. Its your choice fix it now or the laws of real workd economics will fix it for you latter with much more pain.
Go ahead LK & Anon throw your one line insults. I don’t care. You have an unhealthy need to be “right” on this blog rather than learn and share ideas. Your philosophy is killing this economy which needs to heal and is being prevented from doing so. Keep it up and the phrase ‘Going Galt” will become commonplace.

Lord Keynes said...

LOL... Citation of quite objective figures (e.g., $200 million Canadian dollars spent over the next 5 years on public works and relief programs) or quite publicly known facts (the creation of a Candadian central bank) constitute "purely anecdotal" evidence??

It is clear your attempt to paint Canada as a laissez faire example of emergence from the Great Depression by no New Deal-style interventions is a total failure.

Lord Keynes said...

"Where is the discussion of the depression of 1920-21? A painful but short episode."

It wasn't "short" at all, and it wasn't even a depression.

(1) The recession lasted from January 1920 to July 1921, for a period of 18 months. This was a long recession by the standards of the post-1945 US business cycle, where the average duration of US recessions was just 11 months. The average duration of recessions in peacetime from 1854 to 1919 was 22 months, and the average duration of recessions from 1919 to 1945 was 18 months. Therefore the recession of 1920–1921 was not even short by contemporary standards: it was of average length.

(2) The period of 1920–1921 was not a depression (a downturn where real GDP contracted by 10% or more): it was mild to moderate recession, with positive supply shocks. Christina Romer argues that actual decline in real GNP was only about 1% between 1919 and 1920 and 2% between 1920 and 1921. So in fact real output moved very little, and the “growth path of output was hardly impeded by the recession” (Romer 1988: 108–112). The positive supply shocks that resulted from the resumption in international trade after WWI actually benefited certain sectors of the economy.

(3) there was no large collapsing asset bubble in 1920/1921, of the type that burst in 1929, which was funded by excessive private-sector debt;

(4) Because of (3) the economy was not gripped by the death agony of severe debt deflation in 1920-1921;

(5) There was no financial and banking crisis, as in 1929–1933;

(6) The US economy in fact had significant government intervention in 1921: it had a central bank changing interest rates. The Fed lowered rates and had a role in ending this recession: in April and May 1921, Federal Reserve member banks dropped their rates to 6.5% or 6%. In November 1921, there were further falls in discount rates: rates fell to 4.5% in the Boston, Philadelphia, New York, and to 5% or 5.5% in other reserve banks. By June 1922, the discount rate was lowered again to 4%, and the recovery gained momentum.

So even by Austrian theory, there was NO real recovery in 1921: just another ABCT.

http://socialdemocracy21stcentury.blogspot.com/2011/06/there-was-no-us-recovery-in-1921-under.html

http://socialdemocracy21stcentury.blogspot.com/2010/10/us-recession-of-19201921-some.html

Bob Roddis said...

Who suggested Canada ever had laissez faire?

For the 1,001 time, the Fed and other central banks made WWI possible. WWI completely screwed up "the markets". This led to 1920. Putting Britain back on a gold exchange standard at the wrong exchange rate is a statist act. This led to 1929. These statist acts will invariably impoverish people and impair economic calculation, especially if what is going on is not recognized as such.

"The free market" did not cause these problems of unemployment and dislocation and statist interventions did not cure them.

The statists get the "good" (nothing) and the bad of statist programs (war, slaughter, poverty) on their ledger but they will never admit to the bad.

Bob Roddis said...

What is important about 1920-1921 was how wages and prices were significantly lowered on the market without a government program and which solved to a great extent the problems induced by the WWI controls and inflation. Left out of the statist narrative is how society became distorted, polluted and corrupted by war, central banking and "progressive" economic war controls in the first place.

That's a pretty important counter-anecdote to the statists' perpetual phony narratives. Since there was no period of freedom, we can't very well blame freedom for the problems that are blamed on it by the statists.

Freedom didn't fail. War, slaughter, central banking and "progressive" economic war controls failed.

Derrick said...

Based only on the information provided by LK...

I see that when comparing the United States and Canada during the great depression, the government that spent and did less spurred a better recovery. Is it possible that this is what we are seeing around the world now? I think so. Check out Estonia.

But anyways...

If LK is correct, and the keynesians are correct in their general theory, I must ask...

Wouldn't it be better if the gunvernment didn't tax at all, yet printed all the money it needed for spending.

Isn't taxing away money and then spending it less effective than just printing money and spending it?? It would surely be better to drop taxes to zero and then just print. Imagine the demand!!!

I am confused and would like LK to straighten me out. It seems the best Keynesian strategy would be 0% taxes and to run the printing press constantly. Especially during recessionary or depressionary times.

zackA89 said...

@derrick

Can’t speak for LK but the Keynesian prescription with regards to taxes would probably be to cut taxes for people with a higher marginal propensity to consume in order to increase “aggregate demand,” those people tend to be middle to low income individuals. Either in the form of tax credits or a payroll tax holiday. In fact, I have heard proposals about a payroll tax holiday suspending the payroll tax in order to boost “aggregate demand.”

In the Keynesian paradigm, if you continue to spend and stimulate when the economy is at full capacity and or near full employment then you will just get price inflation. But as long as there are output gaps, high unemployment etc, the spending will put “idle resources” back into use.

Anderson just alluded to the fact Krugman thinks that during a depression, printing money can create a free lunch. Im sure different Keynesians have different opinions on it. But printing money and spending it, coupled with low taxes, sounds to me like fiscal stimulus that a typical Keynesian would support when output gaps and slack resources exist in the economy.

See, I understand Keynesianism (kind of) lol despite the fact that I’m an Austrian and am very critical of the Keynesian worldview.

Bob Roddis said...

MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

http://moslereconomics.com/

zackA89 said...

Bob,"sufficiently" being the key word. Because as we have learned, if the tax cut or spending increase is not "sufficient" enough, well then, it just wont "Work."

Shouldn't our current prolonged recession remind us of this? That unemployment will continue to rise if the stimulus is not "sufficient" enough? Because as well as know, our efforts to "stimulate" the economy have not been "big enough",right?

JG said...

"MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it."

I didn't realize that broker/dealers counted as experts in economics. Apparently, all you need to have an economic "law" attributed to you is a bachelor's degree and your own website. Damn, maybe I can declare my own "laws".

Mike M said...

See this is my point. I raise the 1920-21 episode to see what we can learn from it and apply to our present situation and LK wants to argue about the definition of depression. What a waste.

zackA89 said...

lol JG I agree with you. First time for everything.

Rick said...

"Left out of the statist narrative is how society became distorted, polluted and corrupted by war, central banking and "progressive" economic war controls in the first place."

for example...

http://www3.telus.net/ricallen/img1.pdf