Monday, September 19, 2011

Krugman versus Volker: Will Krugman now attack him?

[Update] It didn't take Krugman long to attack Volker. In his blog post today, Krugman claims that inflation can be a good thing and we need more of it. Yeah, inflation is "good." And War is Peace, Freedom is Slavery, and Ignorance is Strength. [End Update]

Paul Volker is a Democrat, and that might be enough for him not to be placed in Paul Krugman's cross hairs in future columns. However, for now it is interesting to see the difference between the last Fed Chairman to really get inflation under control and an "economist" who today claims that inflation is the answer.

Volker today writes in a NYT op-ed:
...now we are beginning to hear murmurings about the possible invigorating effects of “just a little inflation.” Perhaps 4 or 5 percent a year would be just the thing to deal with the overhang of debt and encourage the “animal spirits” of business, or so the argument goes.

It’s not yet a full-throated chorus. But remarkably, at least one member of the Fed’s policy making committee recently departed from the price-stability script.

The siren song is both alluring and predictable. Economic circumstances and the limitations on orthodox policies are indeed frustrating. After all, if 1 or 2 percent inflation is O.K. and has not raised inflationary expectations — as the Fed and most central banks believe — why not 3 or 4 or even more? Let’s try to get business to jump the gun and invest now in the expectation of higher prices later, and raise housing prices (presumably commodities and gold, too) and maybe wages will follow. If the dollar is weakened, that’s a good thing; it might even help close the trade deficit. And of course, as soon as the economy expands sufficiently, we will promptly return to price stability.

Well, good luck.
When Volker became Fed Chairman in the summer of 1979, inflation was running in double digits and the economy was moribund. G. William Miller, Volker's predecessor, believed that the way to "stimulate" the economy was to crank up the printing presses, and the results were obvious. Volker, on the other hand, was willing to slow the presses and within a few years, inflationary expectations were near-zero.

Yet, the economy recovered. During the recession of 1982, there were liquidations as the economic landscape in places like Cleveland and Pittsburgh changed drastically. (Pittsburgh has recovered well, while Cleveland stays with the old model of thwarting entrepreneurs -- it takes well over a year to get new business permits there -- and looking to government spending as its own rescue fairy. The results speak for themselves.)

According to Krugman, however, one cannot have any liquidations AND recovery. No, the only way to have an economic recovery is for government to borrow, print, and spend. His most recent claims that the U.S. Government is on an "austerity" program simply don't wash. The federal government has ramped up spending in the days of Obama, and the president promised us that if Congress would pass his 2009 plan, unemployment would not rise above 8 percent.

In calling for yet more spending and more "stimulus," Krugman writes:
In the United States, the modest federal stimulus of 2009 has faded out, while state and local governments have slashed their budgets, so that over all we’ve had a de facto move toward austerity not so different from Europe’s.

Strange to say, however, confidence hasn’t surged. Somehow, businesses and consumers seem much more concerned about the lack of customers and jobs, respectively, than they are reassured by the fiscal righteousness of their governments. And growth seems to be stalling, while unemployment remains disastrously high on both sides of the Atlantic.
The cure? He declares:
The answer is that we need a major push to get the economy moving, not at some future date, but right now. For the time being we need more, not less, government spending, supported by aggressively expansionary policies from the Federal Reserve and its counterparts abroad. And it’s not just pointy-headed economists saying this; business leaders like Google’s Eric Schmidt are saying the same thing, and the bond market, by buying U.S. debt at such low interest rates, is in effect pleading for a more expansionary policy.
And how will government finance this policy? It cannot come from the primary bond market, as that would be nothing more than a simple transfer.

No, what Krugman wants is for the Fed to purchase short-term government debt, and lots of it, and to do it on the primary market. He has not said so directly, as the Federal Reserve Act of 1913 expressly forbids the Fed from doing so. However, I believe that what Krugman wants is for Congress either to change the law or for Obama to declare an emergency or to issue a convoluted executive order like what FDR did when he confiscated gold.

Like it or not, that is Krugman's end game in which the Fed simply buys government debt on the primary market. While Krugman might claim that this constitutes a "free lunch" and the promise of prosperity, Volker knows better. It will be interesting to see when and where the collision between them occurs.

16 comments:

Pete said...

If inflation of the money supply does not enter the economy via EVERYONE'S checking accounts, equally, then inflation necessarily leads to some people consuming at the expense of other people according to the Cantillon effect, and thus cannot be claimed as a tool to increase the general standard of living of people. It can only be a tool of exploitation of gains with equivalent losses.

Lord Keynes said...

"Volker, on the other hand, was willing to slow the presses and within a few years, inflationary expectations were near-zero.

Yet, the economy recovered. "


You have forgotten some salient facts:

(1) In October 1982, Volcker abandoned his quasi-monetarism and high interest rates, and returned to a discretionary interest rate policy, by slashing the Federal funds rate significantly by the end of 1982.

(2) As Reagan's tax cuts came into effect, the deficit was pushed even higher by increases in discretionary spending on military programs. Reagan's deficits as a percentage of GDP were the highest ever seen to that point in post-1945 America. In fact, the deficit reached 6% of GDP in fiscal year 1983 (October 1 1982-30 September 1983):

http://www.presidency.ucsb.edu/data/budget.php


Both (1) and (2) are classic instances of Keynesian fiscal and monetary stimulus: the recovery that began in December 1982 was a Keynesian one.

Furthermore, since Volcker cut the interest rate significantly from 1982 did this not cause another Austrian business cycle?

By your own trade cycle theory, there was no real "recovery" in 1982: just another unsustainable boom.

Lord Keynes said...

"It cannot come from the primary bond market, as that would be nothing more than a simple transfer."

You mean tranfer of (1) idle domestic money, (2) domestic money that would have been spent on financial asset purchases on secondary markets, or (3) money brought in via the capital account by foreigners to purchases on goods and services?

That stimulates production and employment.

Oh, and, by the way, you've still not told us what ethical theory you subscribe to.

Dennis said...

By what criteria do you term domestic money "idle"?

Why are financial asset purchases presumably unable to stimulate production and employment? Capital investment is precisely what is needed to stimulate employment.

I recall back in 1982 when my neighbor financed a house addition at 24% interest. Interest rates at those levels certainly wrung inflation out of the economy and don't sound very Keynesian to me.

Sam said...

If it worked it was Keynesian. If it didn't work then it wasn't Keynesian.

Lord Keynes said...

"Why are financial asset purchases presumably unable to stimulate production and employment? Capital investment is precisely what is needed to stimulate employment."

Note the words "financial asset purchases on secondary markets".

That excludes purchases of IPOs, newly-issued corporate bonds etc, primary issues which go to capital goods investment.

The hundreds of thousands of tranactions on secondary financial asset markets are a different type of spending from that on goods on services.

Spending on the latter provides the bulk of growth in employment in a modern economy. The former does little to increase production and employment.

Pete said...

2/3


Oh, and, by the way, you've still not told us what ethical theory you subscribe to.

You have not. You have only listed a series of mutually exclusive ethical theories that can't all be right, that you say any of which are "better" than natural rights theory. It's absolutely clear that you are just trying to undermine natural rights theory because you know it's the only ethical framework standing between you and your dictatorial worldview being manifested.

"Why are financial asset purchases presumably unable to stimulate production and employment? Capital investment is precisely what is needed to stimulate employment."

Note the words "financial asset purchases on secondary markets".

That excludes purchases of IPOs, newly-issued corporate bonds etc, primary issues which go to capital goods investment.

Financial asset purchases on secondary markets ALSO "goes to capital goods investment" by improving the quality of investment. Not every investor is equal in terms of their ability, and buying and selling securities in the secondary market leads to an improvement in the quality of investment by punishing bad buyers and sellers of securities in the secondary market and rewarding good buyers and sellers of securities in the secondary market.

Pete said...

3/3


The hundreds of thousands of tranactions on secondary financial asset markets are a different type of spending from that on goods on services.

They benefit the individuals involved in the trades, without violating the property rights of anyone else, which means they are Pareto efficient trades and thus economically beneficial.

As long as any two parties can make voluntary exchanges that do not themselves violate the property rights of others, these trades generate gains.

You are ignorant of the requirements of the division of labor. Not all trades in a division of labor society can be, nor should they be, money for real goods only. A division of labor society contains more exchange types than the basic kinds your primitive worldview is only capable of accommodating.

Spending on the latter provides the bulk of growth in employment in a modern economy. The former does little to increase production and employment.

False. Production and employment are improved when the division of labor expands to include voluntary trades other than money for machines or labor. As long as all trades are voluntary at the individual level, they necessarily create gains to those involved in the trades.

The individual in your primitive collectivist worldview is nothing but a means to the ends of others. If two people buy and sell something that does not include buying labor or a machine, then according to you these trades are not "economically beneficial." But production of wealth and employment are but means themselves to attain individual ends. They are not ends in themselves. You cannot claim that because two parties make exchanges that do not lead to an end of more physical production or employment that their exchanges are not "economically beneficial."

"Economically beneficial" is subjective to the individual, and whether or not an individual uses the means of machines and labor to accomplish their ends, is up to them, not you. You can only sit back and observe.

Bob Roddis said...

1. LK still does not understand the concept of ignorant acting man or the concept of economic calculation.

2. LK insists a prioir that free people can never freely associate to accomplish ANYTHING except a prioir to properly select a group of wise overseers to compel with SWAT teams the proper behavior that such people could not even voluntarily contemplate.

3. LK fails to see that the major problem which mankind faces is assaultive behavior from others, most especially from governments, which leads to war, genocide, theft, rape, poverty etc…. The Keynesian program is based upon the obliteration of the essential protections provided against those problems by private property, contract rights and due process of law in order to solve a non-existent “problem”, the alleged “lack of aggregate demand”.

4. Where’s that proof of the existence of that alternative world of macro (with color slides)? It’s been weeks and weeks that we have been waiting.

dchamil said...

As "Lord Keynes" said, it's "Paul Volcker," not "Volker."

Bob Roddis said...

LK continues his shenanigans about the ABCT. Since he does not, will not or cannot understand the concepts of ignorant acting man and/or economic calculation, he continues to shoot Nerf bullets at us (and he misses).

Check out how he mangles the concept of “static equilibrium”. “Pete”, a commenter on the side of the good guys, sets him straight:

http://tinyurl.com/6f6dtca

Pete said...

I was Major_Freedom

Lord Keynes said...

There is no mangling the concept of “static equilibrium”. Hayek's version of ABCT in Prices and Production uses a stationary/static Wicksellian equilibrium concept.

And as for "Pete", his style, feeble arguments and language suggested to me a long time ago the possibility that he was Major_Freedom under another name.

Bob Roddis said...

Our new/old buddy "Pete" destroys LK's "confusion" about Roger Garrison's statements:

http://tinyurl.com/3vzgx7g

Anonymous said...

This made me think of LK...

http://i.imgur.com/QhT1Y.jpg

Anonymous said...

Where is all that inflation???

The monetary base has TRIPLED since 2008 with no notable uptick in inflation. Could it be that the economy is in a liquidity trap, as Krugman has argued all along?