Friday, April 6, 2012

Krugman: Not enough economic destruction

There are times when Paul Krugman is merely outrageous, and then there are times when he really lets himself go, and today's column reflects the latter. In one fell swoop, Krugman exposes his ignorance on money, on investment, and on economics itself.

I'll go further. Krugman is not advocating a real economic recovery; instead, he is demanding that the Federal Reserve System and Ben Bernanke take the kind of action that will be utterly destructive and thus guarantee that in order to have a real economic recovery, people in the United States are going to have to suffer the kind of pain that would not have been necessary had we done the right thing four years ago and, for that matter, 11 years ago.

The theme of Krugman's column is explained by his title, "Not enough inflation." In other words, we don't need less destruction of the dollar; we need more, and make no mistake about it, inflation is the destruction of the value of money.

As Steve Horowitz pointed out in my recent post, Keynesians like Krugman cannot differentiate between factors of production and consumer goods, nor can they differentiate among capital and other factors. For that matter, Krugman cannot even explain what real investment is. Take the following from his column:
How so? For one thing, large parts of the private sector continue to be crippled by the overhang of debt accumulated during the bubble years; this debt burden is arguably the main thing holding private spending back and perpetuating the slump. Modest inflation would, however, reduce that overhang — by eroding the real value of that debt — and help promote the private-sector recovery we need. Meanwhile, other parts of the private sector (like much of corporate America) are sitting on large hoards of cash; the prospect of moderate inflation would make letting the cash just sit there less attractive, acting as a spur to investment — again, helping to promote overall recovery. (Emphasis mine)
This simply is an outrage; no other word will do. What Krugman is saying is that inflation would create incentives to invest, which is something that no real economist would say. As Robert Higgs has noted here, and here, the economy is lacking the kind of long-term investment that is needed for real recovery, and inflation will NOT bring that about.

In fact, inflation would have the opposite effect, as it would create even more regime uncertainty and would force people to put it into things where the value of money can be sheltered, and that would NOT be the kind of long-term investment that requires both confidence and low interest rates and, yes, low or no inflation. As one can see in this column, such investment is not even on Krugman's radar screen; after all, to a Keynesian, the real value of investment is the short-term spending that takes place and little or nothing else.

Once again, we also see the "Goldstein" analogy that Krugman is fond of giving. Yeah, if it were not for those evil right-wingers, we would have lots of inflation and lots of prosperity. What Krugman does not say is that the kinds of "investments" promoted by inflation are not sustainable because they are malinvestments. That is the hard truth, even if Krugman denies it.

One of Krugman's constant revisionist themes is that the 1970s were a golden age of investment and economic growth. He can throw all the charts he wants, but we had two serious recessions, double-digit inflation, price controls, and a lot of economic chaos. Yes, since Krugman and I were in college at the same time, both of us remember what it was like, and people were not spinning the happy tales that Krugman wants us to believe.

If Krugman is successful in encouraging Ben Bernanke to unleash the wolves of inflation, the result is not going to be one with a happy ending. The economy still will be moribund, there will be lots of unemployment, and people will have to deal with higher real prices, which means they will become poorer with no hope in sight. True, Krugman believes that somehow the Fed can "manage" inflation rates of 4-6 percent quite easily, but as F.A. Hayek once noted, inflation creates a "tiger by the tail" situation, and it does not take long for the situation to get out of hand.

And when and if it does, then look for Krugman and his acolytes to call for price controls, capital controls, and all other modes of coercion, as though the state can coerce an economy into prosperity. Don't kid yourselves about what Krugman is demanding; he is calling for economic destruction in the name of promoting economic recovery. We cannot have both.


Anonymous said...

William I would like your opinion on why corporations who have recorded record profits and have plenty of money to invest are setting on those piles of cash.

William L. Anderson said...

First, I don't know if they are actually "sitting on piles of cash." Second, would you invest in the current climate with a president and administration hostile to private enterprise?

Third, as I have noted, there is a lot of economic uncertainty.

Let me ask you a question: Can government bring about prosperity via coercion?

Anonymous said...

I would invest if I thought demamd was going to pick up. With the lack of consumer spending because of the unemployment which has been a persistent problem I would be cautious especially until there were signs of a recovery. I don't believe who is president actually makes a difference when businesses makes decisions to expand or invest. Uncertianty in Europe and high unemployment would be my biggest concern.

Lord Keynes said...

"One of Krugman's constant revisionist themes is that the 1970s were a golden age of investment and economic growth."

Where is your evidence that Krugman ever said any such thing?

Krugman's actual words:

"Fundamentally, the right wants the Fed to obsess over inflation, when the truth is that we’d be better off if the Fed paid less attention to inflation and more attention to unemployment. Indeed, a bit more inflation would be a good thing, not a bad thing. "

Only in the fevered imagination of Austrianism does a call for "a bit more inflation" get transformed into a "kind of action that will be utterly destructive."

By contrast, your own demand for Hayekian liquidationism would not be horrendously destructive, I suppose? It would be greeted by the people will shouts of joy, would it? LOL...


"As Steve Horowitz pointed out in my recent post, Keynesians like Krugman cannot differentiate between factors of production and consumer goods"

A statement so laughable is like your doing a comedy show for us all.

Don said...

"Only in the fevered imagination of Austrianism does a call for "a bit more inflation" get transformed into a "kind of action that will be utterly destructive."

This is par for the course for libertarians and their ilk. A 1% increase in inflation is "destructive", Obama is "hostile" towards business, the gov't "confiscates" and "coerces." And of course ALL of it is just utterly "outrageous"!

These people live in a world where everything is the slippery slope to some unfathomable extreme. Bunch of psychopaths if you ask me.

Pulverized Concepts said...

Krugman is contending that the Fed has the capability of straightening out the economy and knows how to do it but is afraid to do so because of Republican _________ what? If the fed does whatever Herr Krugman suggests, maybe printing a lot of money and leaving it on park benches or paying off failing mortgages, will guys like John Kyl and John Boehner picket Bernanke's house? The reality is that the Fed can do just about anything it wants and has been. Krugman is able to sit at his desk on the Princeton campus and complain about the situation by blaming the meaningless opposition of the Republicans for the ineffective efforts of the Fed. If he was in charge, he'd probably blame the "wreckers" for his problems, as Stalin did.

American Patriot said...


no you would not invest if all you see coming from Washington are destructive regs (like recent NLRB moves towards unionization or EPA outrages) and uncertainty about future of fiscal policy.

Businesses are doing what any sane entity would do.
Trust me, if this administration gets anothr 4 years, we are looking at a downturn that will last as long as the great depression did.

Mike M said...

LK & Don

Do you two actually run a business?
I do. All my clients do.

You two ever put capital at risk and start a business. I have. My clients have.

he elements Professor Anderson highlighted in his 12:50 post aver very real I assure you.

You two have no idea what you're talking about as it applies to the real world. I have clients that ask themselves every day why the hell they keep doing what they do when many could cash out and sit on a beach somewhere.

Trust me many are near this tipping point. Good luck to you if Atlas really does shrug. All you will be left with is big corporate America and rapid progression to the Fascist utopia you love.

Bob Roddis said...

While I think it is important (if only for the sake of one's general knowledge) to understand the various "strains" (disease strains??) of Keynesian "thought", remember that when a Keynesian tries to bog you down with minutia, no Keynesian understands the first thing about economic calculation, subjective value, the objective nature of prices etc…

Thus, it is pointless attempting to have an intelligent discussion with people who cannot even understand the idea that their own beloved money dilution system is the cause of the impairment of the price, investment and capital structure. And we've known for a long time that folks like "Lord Keynes", Krugman and the MMTers haven't the slightest understanding of basic Austrian concepts. They are truly hopeless.

Thus, I find bizarre the current dispute between "New Keynesian" Krugman and "Post Keynesian" Steve Keen about the nature of our ghastly funny money system. (LK is a "Post Keynesian". The wild and crazy "AP Lerner" was an MMTer). The MMTers are cheering on Keen vs Krugman. On this topic, I wrote on LK's blog:

When you Keynesians finally decide upon the true nature and essence of your nasty funny money system, let us all know, ok? I find this dispute amazing because you guys cannot even agree upon what this thing you love really is. It is nothing but a regime that allows the surreptitious transfer of purchasing power without the victims realizing what hit them, just as it was intended to do. It is purposefully indecipherable precisely to hide its nature from average people who are its prime victims.

I also suggested that LK purchase the newly issued "Hayek on Firing" DVD. He was not amused.

macroman said...

Mike M I have clients that ask themselves every day why the hell they keep doing what they do when many could cash out and sit on a beach somewhere

Yes, I ask myself why they are doing what they are doing if it were true they could cash out and lie on a beach somewhere. And I conclude that it is not true; they are almost certainly exaggerating.

Or, I evoke an Austrian-like logical argument and say they clearly like what they are doing better than lying on a beach somewhere, so I hope they are not complaining about doing what they freely choose as the best thing they could do.

Anonymous said...

Mike M says.....
Trust me many are near this tipping point. Good luck to you if Atlas really does shrug. All you will be left with is big corporate America and rapid progression to the Fascist utopia you love.

I love it when people believe that thier the only ones that can run a business and make a profit and somehow if they quit no one is capable to take their place. Go ahead and quit I betting you wont be missed.

Mike M said...

Actually Macroman you are dead wrong. Most of the people I speak of are ones that I personally know their financial position. They are not exaggerating. They continue to do what they do for the time being because motivated by love of the business or desire to keep it going for the next generation. However there are limits and many are questioning those limits. There is another group out there that but for the financial train wreck of 2008 etal, would have punched out because of the aggravation factor.

Anonymous 8:17 The ignorance in your statement illustrates my point. You assume a statement of arrogance when it is a statement about the present state of mind of those that possess entrepreneurial skills, ambition and a risk taking personality. The alleged people you speak of taking their place must have the same skill set to be successful. All of them share a common angst.
Throughout my entire career I have encountered lots of people that think they are or can be entrepreneurs, yet it is only a small fraction of the business population. The streets are littered with corporate executives who tried and for every 10 employees that think it is easy, over half fail by year five and three quarters by year 10. And that was when credit was easy

You think the small business owner and risk taking entrepreneur won’t be missed? You have no ideas of what you speak. Go start a business and come back here in a few years. Then your words will have some credibility.

Anonymous said...

Mike your state of mind is arrogant. How could you speak for all the small business owners? Of course the times are tough; were in the middle of the worst recession since the great depression but even in tough times some entreprenuers will find a way to succeed.And if you, and the fellows you speak of, decide to stop your business others will undoubtly take your place if there is a profit to be made.

Anonymous said...

From Bogart:

Actually, Krugman's concept is far far worse than it seems on the surface. Rothbard said that inflation WILL reduce the value of the currency BUT MAY NOT/PROBABLY WILL NOT reduce the demand for cash or cash equivalents because the individual wanted to store buying power not currency. Because Krugman is so focused on the aggregates and fails to examine why corporate managers and wealthy individuals want to keep cash instead of using it, it is likely that this whole scheme will backfire and lead to these same folks either storing more cash or storing a substitute like gold.

Mike M said...

Anonymous you are not reading and understanding

macroman said...

Mike M, If you have visited this blog enough, you will know that, according to impeccable Austrian logic, there is no involuntary unemployment. People are not working, according to this way of thinking, because not working is their best option.

What is wrong with your clients that they don't take their best option and lie on a beach? Where's their initiative? They can't make a little effort to improve their position (i.e. towards the supine)?

Mike M said...

Macro, you sarcasm regarding Austrian aside, you’re so wrapped up in your predisposition of criticizing an academic theory, you’re not listening to the pulse of the real world. All decisions by the rational mind are a cost /benefit analysis against another opportunity whether conscious or unconscious. What I am seeing is the entrepreneurs, with the characteristics I’ve defined, are increasingly questioning the value proposition. They are seeing the winners being loaded with those political connections or close to the government spigot. I used “lie on the beach as a metaphor.” That should have been obvious.

You said “They can't make a little effort to improve their position (i.e. towards the supine)?” Here you highlight you lack of understanding the plight of the small business person. It is the compounded aggregate of the “little efforts” cumulatively now not them no longer little. Second, the reward is becoming not sufficient with the “effort”. We don’t live in the world illustrated the high school business and economics class.