Sunday, October 30, 2011

A couple of Krugman howlers

Every once in a while, Paul Krugman gives us the Ultimate Howlers, and today he seems to have eaten his Wheaties.

First, on Social Security, he says this:
I’ve written about this repeatedly in the past, but here it is again: Social Security is a program that is part of the federal budget, but is by law supported by a dedicated source of revenue. This means that there are two ways to look at the program’s finances: in legal terms, or as part of the broader budget picture.

In legal terms, the program is funded not just by today’s payroll taxes, but by accumulated past surpluses — the trust fund. If there’s a year when payroll receipts fall short of benefits, but there are still trillions of dollars in the trust fund, what happens is, precisely, nothing — the program has the funds it needs to operate, without need for any Congressional action.

Alternatively, you can think about Social Security as just part of the federal budget. But in that case, it’s just part of the federal budget; it doesn’t have either surpluses or deficits, no more than the defense budget.

Both views are valid, depending on what questions you’re trying to answer.

What you can’t do is insist that the trust fund is meaningless, because SS is just part of the budget, then claim that some crisis arises when receipts fall short of payments, because SS is a standalone program. (Emphasis mine)
Despite the claims by Algore when he was running for president 11 years ago that he would put SS funds in a "lockbox," there IS no "lockbox." The "trust fund" of what Krugman writes are government bonds, IOUs that only can be redeemed either by selling more bonds or with future tax revenues.

The vaunted "trust fund" is no trust fund at all. It is a piece of a fictitious Rob-Peter-to-Pay-Paul scheme that any one can recognized to be a fraud.

On another post, one about "weaponized Keynesianism" (and I actually like the phrase, which apparently was coined by Barney Frank, Krugman writes this:
The first thing to say is that liberals shouldn’t engage in mirror-image thinking, and imagine that spending we dislike somehow lacks the job-creating virtues of spending we like. Economics, as I say often, is not a morality play. As far as creating aggregate demand is concerned, spending is spending – public spending is as good as but also no better than private spending, spending on bombs is as good as spending on public parks. As I pointed out not long ago, a perceived threat of alien invasion, by getting us to spend on anti-invasion measures, would quickly restore full employment, even though the spending would be on totally useless object.
While I realize that Krugman is writing from a pure Keynesian point of view that says it is the spending and ONLY the spending that matters, it seems to me that where resources are directed DOES matter. During WWII, Americans had jobs and pockets full of money, but there was little to buy and a huge portion of the workforce was in the trenches in Europe and Asia or being shot out of the skies. Yes, the GDP was high, but Americans were not manufacturing wealth; it was destruction of wealth.

Again, I realize that Keynesians see only aggregates and that GDP making bombs is as good as GDP making bread. Frankly, I'd rather eat bread.

13 comments:

Dan said...

Well Krugman at least he admits he has no idea how the world actually works. Private and Public spending does matter, what is produced does matter. If the entire economy just produced military weapons, we would all be in poverty and bread lines. Just because money is spent that doesn't create wealth, something he can't seem to understand. The simple fact is that Keynesian economics completely ignores the principles of microeconomics, of personal choices and values, making Keynesian thought completely wrong.

ayassos said...

Krugman has written the Social Security post several times in the past and seems to be very proud of the clever logical trap in which he has ensnared the critics of S.S. and its obvious funding problems. Unfortunately, clever logical traps do not actually produce any money, no more than the stack of stationery in the file cabinet representing the S.S. trust fund produces money. These IOU's are simply a record of what's been collected and spent already. Their enforceability, by law, can be rescinded by Congress. What Krugman does not like to admit is the most important point of the Post article: the S.S. system, on a cash on cash basis, is already negative, about 6 years ahead of schedule. Given that we're already running $1.5 trillion deficits, this is very dire indeed, and it's going to get worse. Of course, Krugman does not see a real problem anyway, since he does in fact believe that the Federal Reserve should directly buy Treasury new issues, up to and including all that the Treasury issues. Now that Krugman has essentially come out as a Modern Monetary Theorist, we'll get to see whether his confidence that Treasury rates and inflation will remain forever low no matter how much money-conjuring we engage in. It does amaze me, every day, that this man is taken seriously as an economic analyst.

Bob Roddis said...

This obsession with “spending” telegraphs the fact that the Keynesians cannot even conceive of the idea of exchange. All transactions involve exchanges where each side supplies something and each side “demands” something. Each side does this only if they perceive that the exchange will make them better off. The idea that one must “spend” just to “spend” is preposterous. The Keynesians are clueless about the nature of known human existence.

We’ve won. The other side knows it has lost or else it wouldn’t limit Ron Paul to 4 minutes of a two hour debate and, instead of suppressing them, they would fairly critique our positions.

Pete said...

Anderson, are you talking about the 2011 version of Krugman, or the 1996 version of Krugman?

Because in 1996, Krugman said Social Security is based on a Ponzi Scheme mechanism:

"Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme. In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today's young may well get less than they put in)."

http://www.bostonreview.net/BR21.6/krugmann.html

The 1996 version of Krugman had fewer bugs and was more user friendly. Unfortunately Krugman has since been updated with "political_hack.exe", as well as "contradiction.msi" framework, and the 2011 version of Krugman now suffers from constant crashes.

Salamano said...

It seems that the "idea" of various legislation and programs of Government somehow absolves it from the "reality" of their repercussions...

Case 1: Social Security ... It's not the program's fault that the politicians keep raiding the 'trust fund' for money, so criticizing the solvency of social security is not allowed at this juncture.

Case 2: Fannie Mae and CDS ... It's not the governments fault that every major lender had to resort to sub-prime mortgages to keep pace competitively with the federal government's program crafted out of a desire to help low income earners qualify for houses they couldn't afford (especially if the economy were to tank)... Just the romanticized idea of the program by itself should eliminate criticism. Instead, criticise everyone else, who made their move solely for business reasons...

I'm sure there are others.

William L. Anderson said...

Krugman's column today gives us the same theme, with a few more ad hominems thrown in. I believe he is right about the hypocrisy of the Right that champions military spending as a "jobs program," but there is much more. I realize that he has no idea as to what an economy really is, that everything is just a "jobs program."

Calgacus said...

Ayassos, there is only one way to produce money. Print it. Create it out of nothing. Write an IOU. No other way is possible, has ever been used, or is even conceivable.

Washington Post Discards All Journalistic Standards In Attack on Social Security is a fine critique of the Post's innumerate lies.

the S.S. system, on a cash on cash basis, is already negative, about 6 years ahead of schedule. Given that we're already running $1.5 trillion deficits, this is very dire indeed, and it's going to get worse. No, this is a very good thing. The more cash coming out of the government, the bigger the deficit spending, the sooner the SS Trust Fund is drained, the better. The SS Trust Fund, which was minuscule, economically meaningless until Greenspan/Reagan's 1982 tax the poor & give to the rich plan is the record of this gross, predatory overtaxation of working people, that wrought nothing but economic destruction. Why do Austrians want big government predatory taxation, and not to give money back to those who earned it and were ripped off?

Now that Krugman has essentially come out as a Modern Monetary Theorist, we'll get to see whether his confidence that Treasury rates and inflation will remain forever low no matter how much money-conjuring we engage in.
Inflation has to do with the real world, and is only indirectly & imperfectly controllable, or even definable, by the government. The danger remains deflation; there is not the slightest possibility of spending-driven inflation currently.

Of course it would be nice if the Fed did QE-ishly "monetize" more debt, print currency instead of bonds, lower interest rates. Centuries of history show that "printing money" instead of "printing bonds" (misnamed 'borrowing') tends to be disinflationary.
But Treasury rates are something set by the government. Period. If the Fed/Treas want the risk-free rate to be pi percent. It will be pi percent. Interest rates are set the same way the value of a five dollar bill is set in terms of ones. Hint: It is not because there is a "5" on fives. If the government wanted fives to be worth four or six ones, that's what they'd be worth. That's the power governments have over their money/debt/IOUs.

Bob Roddis said...

Just what we need, another MMTer after MMT has been completely eviscerated by Bob Murphy and Taylor Conant.

http://calgacus1.blogspot.com/2011/07/economics-aka-mmt-in-three-words.html

If the government suddenly mandated 85 pound bags of belly button lint as monopoly currency which you must use to pay your taxes, it could easily establish its purchasing power for each of the zillions of factors that make up the capital structure, right? No problem there at all.

You just have to understand the miracle of double entry bookkeeping. When the government issues government bonds, the amount of bonds sold equals the amount of bonds purchased! Who knew? The fact that the MMTers confusingly employ the term “savings” to mean “savings minus investment” so that “savings” means government debt (as opposed to the foregoing of consumption) isn’t meant to be purposefully deceptive. No way. Further, only a fool would claim that when rich people buy these “safe” government bonds in lieu of investing in true “risky” entrepreneurial activities that this deprives entrepreneurial endeavors of investment. That would only be true if the law of scarcity applied, and we all know that MMT has abolished the law of scarcity.

http://www.flickr.com/photos/bob_roddis/4163003939/in/set-72157623413687847/

In fact, if the government didn’t issue these debt securities, people wouldn’t have ever been able to “save” at all and would have ended up starving to death, or eating their pet poodles. Everyone knows that. Right?

Tel said...

From Bob:

The idea that one must “spend” just to “spend” is preposterous.

Ahhh, but the idea that one must force, trick or cajole someone else into spending is not preposterous. Especially when you can quote GDP as an indicator of success (and even more when you are in a position to skim some of the spending as per Solyndra).

We’ve won. The other side knows it has lost ...

I dunno, go to the cepr.net article and read the comments. A lot of very angry and confused people jumping on the MMT bandwagon. Don't underestimate the power of telling ignorant people exactly what they want to hear.

Calgacus said...

Bob, I've post here under this name for a while, used to use "Another Anonymous".
Neither eviscerators understand anything they have been talking about. Using words like "eviscerate" instead of calm rational discussion usually indicates that.

Further, only a fool would claim that when rich people buy these “safe” government bonds in lieu of investing in true “risky” entrepreneurial activities that this deprives entrepreneurial endeavors of investment. That's precisely what MMT & common sense say. That's why governments have to "invest"/net spend, because people want to save their intrinsically valuable :-) fiat money/bonds against an uncertain future. Capitalism, monetary economies are intrinsically unstable & have long periods of involuntary unemployment, because of the deflationary effect of taxation & savings. And this instability just makes fiat money more valuable. Trying to decrease private investment when there is full employment is one of the few reasons for governments to issue bonds instead of just printing/coining money.

Nobody can mandate belly-button lint as a monopoly currency, because currency is not a thing, but a relationship. A government could use belly-button lint bags as money-things which indicate a set amount of currency. So it would be setting a price of $1 say for an 85 pound bag, saying it would buy & sell belly button lint at that price.

Then people would have clean belly buttons. Just the way that gold mines are cleaned out of gold, because governments had the wild & crazy idea that the Gods ordained that governments must run a Gold Shoppe, that they exchange their valuable fiat money for otherwise worthless gold. :-)

Bob Roddis said...

Tel:

The human race seems to produce an inexhaustible supply of totalitarian-loving pseudo-intellectual Commie types. MMT is just the latest permutation for these infantile people who want to abolish the law of opportunity costs and law of scarcity while concocting schemes for running the world. The Mike Norman site (The number one MMT site on the web!) is explicitly left wing. They we never be converted.

http://mikenormaneconomics.blogspot.com/

I still say they know we’ve won the argument because they never address basic Austrian concepts and analysis. Further, they never (and will never) address basic Rothbardian/libertarian narratives because they dare not differentiate between laissez faire and crony capitalism even though their analysis is expressly based upon employing historical anecdotes as the basis of their schemes. In their little minds, “capitalism” is “capitalism”, laissez faire or crony.

As with the cowardly Keynes, there is no direct attack upon our ideas, only end-around attempts at obfuscation and intellectual confusion.

The only hope is to get average people to spend 15 seconds of their ADD rattled lives and understand that inflation is a purposeful government policy, not some mysterious force of nature. And that probably won’t happen.

Also, Prof. Anderson explains OWS:

http://www.lewrockwell.com/blog/lewrw/archives/97507.html

Bob Roddis said...

Trying to decrease private investment when there is full employment is one of the few reasons for governments to issue bonds instead of just printing/coining money.

You’re right. I’m convinced. I’ve changed my mind.

Let’s all borrow a bunch of money and buy Italian bonds! What could be more safe? Or smart? Governments, by definition, are omniscient and always smarter that ordinary people. Right?

http://mikenormaneconomics.blogspot.com/2011/11/is-mf-global-canary-in-coal-mine.html

Tel said...

Bob, intuitively I agree with you that there is an important difference between healthy competitive capitalism, and uncompetitive crony capitalism.

But could you help me and give me a simple rule that I can use to explain it to people? I need something that will work with someone who has the attention span of a 6 year old, and make it no longer than 20 seconds.

When you try to break it down into simple terms, it isn't so clear anymore.

I have run into similar problems when people say that the OWS is all about fairness and justice. They say that it is unjust for a CEO to earn 100 times more than the people working under him. I point out that justice is not defined by equality of outcome, it is defined by whether you get back a reasonable proportion of what you put in.

Trouble is, if you think about it, suppose a regular Joe worker puts in 8 hours a day, and maybe that worker is hugely inefficient and only for 1 hour a day is genuinely productive. Then the CEO would have to be putting in an effort equivalent to 100 hours a day to make it come out fair and just based on how much effort they put in.

Let's suppose the CEO is more talented, let's say 4 times more talented, so that would imply the CEO is only putting in 25 hours a day equivalent effort. But it still doesn't make sense.

Is this just crony capitalism at work? Or is that just some guy who figured he could milk the shareholders? Would a competitive environment solve that problem?