Thursday, June 14, 2012

Krugman: We Don't Need No Cause-and-Effect

Why no real recovery? Paul Krugman has the answer. According to his latest bout of economic wisdom, we are still in a depression because not enough people are employed by government. Yes, that has been a constant theme of his lately, and he takes another bite of the apple in a recent column:
Conservatives would have you believe that our disappointing economic performance has somehow been caused by excessive government spending, which crowds out private job creation. But the reality is that private-sector job growth has more or less matched the recoveries from the last two recessions; the big difference this time is an unprecedented fall in public employment, which is now about 1.4 million jobs less than it would be if it had grown as fast as it did under President George W. Bush.

And, if we had those extra jobs, the unemployment rate would be much lower than it is — something like 7.3 percent instead of 8.2 percent. It sure looks as if cutting government when the economy is deeply depressed hurts rather than helps the American people. 
 First, let us get something straight. The "private sector" hardly is thriving. Yes, we are hearing about "record profits" from some businesses, but these are not the best of times for business and a lot of people understand that the foundations are quite shaky.

Second, governments do not generate wealth on their own. Everything that they spend ultimately comes from something that has been produced in the business world. (Sorry, Keynesians. Newly-printed money is not wealth. It is newly-printed money.) Thus, if state and local governments are hurting, they are hurting because businesses and individuals do not have the revenues to support the kind of spending that many states have enjoyed.

This last point is important, because Krugman in effect is declaring that state government spending is the source of wealth for much of the economy. After all, if businesses were doing as well as Krugman and the Democrats are claiming, and if millionaires abound, then there should be no problem in raising the tax revenues necessary for the funding of police, firefighters, and teachers.

Krugman, of course, would claim that the way to generate new funds would be for the federal government to ramp up its borrowing, and then give the money to state governments. Not that this is sustainable, but at least he would have a plan.

However, that still does not solve Krugman's "cause-and-effect" issue. The gathering of tax revenues by state and local governments is what allows these governments to spend, and they only can gain revenues by taxing businesses and individuals. Yet, Krugman wants us to believe that the causal chain runs the other way: state spending generates wealth; in fact, it is the originator of wealth.

Once upon a time, academic economists actually were taught things like cause-and-effect. However, in Macroworld, effect becomes cause.

David Gordon Schools Krugman

David Gordon has a scathing review of Krugman's new book, End This Depression Now!, in which Gordon writes that Krugman has a "cartoon version of Keynesianism." Gordon writes:
Krugman does not so much as mention the pioneering work of Robert Higgs, Depression, War, and Cold War, which decisively challenges the contention that World War II ended the Great Depression. Higgs convincingly shows that prosperity returned only after the war ended. But let us, very much contrary to fact, suppose that Krugman is correct about the effects of government spending in the years after 1940. His defense of Keynes would still be grossly deficient.

What he is in effect saying is this: "Instances that appear to confirm the claim that government spending ends depressions count in favor of Keynes. But cases that go against Keynes do not count, because we cannot rule out the possibility that greater spending would have worked."
What Keynes's friend Piero Sraffa, who cannot be suspected of bias in favor of the Austrian School, wrote in his copy of Keynes's General Theory applies to Krugman as well: "as usual, heads I win, tails you lose."
 I believe that is a fair commentary on how Krugman presents his material, and his method of arguing his point. If you agree, it is because you are good; those who disagree do so because of the evil lurking in their hearts and souls.

15 comments:

Tom E. Snyder said...

"...they only can gain revenues by taxing businesses and individuals."

Businesses don't pay taxes, individuals do: either labor (in lower wages), stockholders (in lower dividends), and/or customers (in higher prices).

Matthew M. said...

"as usual, heads I win, tails you lose."

That just hit the nail on the head, and it absolutely applies to Krugman. David Gordon does the best reviews...

Tel said...

However, in Macroworld, effect becomes cause.

Actually, in any feedback system (including economies) there is fundamental and unavoidable entanglement of cause and effect.

That's why nearly 100 years of cybernetics research has been devoted to studying things like stability, loop gain, and loop frequency response... because those concepts are more useful in a feedback system.

Publius said...

"I believe that is a fair commentary on how Krugman presents his material, and his method of arguing his point. If you agree, it is because you are good; those who disagree do so because of the evil lurking in their hearts and souls. " - W.A.

You forgot the other option: stupidity. If you don't agree with Krugsy, you are either a) evil or 2) stupid.

terry freeman said...

Tel, I'm going to file your resort to cybernetics under "a little knowledge is a dangerous thing." It's very interesting to look at the system as a set of interacting feedback loops, but unless the government is engaged in actual production (operating mines and factories, perhaps), it depends upon taxes; it does not generate actual wealth. Those businesses which depend upon government payments are living (at least in part) off the productivity of others. What exactly does the government, as middleman, contribute? The vaunted expertise of governments at entrepreneurial decision-making? The very next example of such expertise might well be the very first.

C. Van Carter said...

"an unprecedented fall in public employment, which is now about 1.4 million jobs less than it would be if it had grown as fast as it did under President George W. Bush."

I laughed when I read that.

Dan said...

Heads I win, tail you lose is at the heart of keynsianism. It's no surprise that it's believers are cult like in their defense of it, it's a completely unfalsifiable theory. Oh 1 trillion didn't work, try 2 trillion, oh that didn't work, try 4 trillion and so and so on. They can always move the goal posts and so directly debating them is pointless, they're lost in their statist violent world where they believe if only they ran the world, they could make everybody happy.

Dan R said...

Tel said: "That's why nearly 100 years of cybernetics research has been devoted to studying things like stability, loop gain, and loop frequency response... because those concepts are more useful in a feedback system."

I would submit that even more time has been spent by anti-science minds using half-understood scientific jargon to rationalize ignoring cause-and-effect when convenient.

I.e., Quantum physics says we don't know where the particle is in the wave packet, ergo the Wizard really can get Dorothy back to Kansas. You don't understand the connection? Then again...

Tel said...

Terry Freeman, speaking of "little knowledge", you obviously don't know much about the mining industry if you don't believe the government is very heavily involved in the operation of the mines.

Dan R: You are the one who went off on a tangent about quantum, not me. But if certain things are either difficult or impossible to measure, then depending on those things for your argument essentially destroys the argument.

I never made a statement about whether the Wizard can or cannot get Dorothy back, you threw that in yourself. If you are referring to a story book, they we have one example where he was unable to help, but probably you are using this as an allegory, because you think it somehow makes you clever. Do you care to explain where "Kansas" is, or do we all have to start speaking in code? What makes you think people want to go to "Kansas" anyhow (presuming they could secretly agree amongst themselves what it looked like)?

Pulverized Concepts said...

Wouldn't the logical extension of Krugman economics be a state-operated, centrally planned economy? If some stimulus is good, wouldn't even more stimulus be better yet? Why do we need individualist voluntary transactions when government agents, guided by academics moonlighting as editorial writers, can make the important decisions?

Dan said...

Pulverized, you're right. If only government has the knowledge to allocate resources during a recession to get an economy back to full heath, then why does this magic power disappear if the economy is at full health if the Keynesians are to be believed. If anything, since the government has all this knowledge in the first place, then it should run the entire economy in the first place.

Bob Roddis said...

Speaking of David Gordon, "Philosophy Professor" Tom Hickey writes an MMT critique of David Gordon explaining the philosophical basis of human action without ever mentioning the words "action" "act" or their equivalent.

I point that out in the comments.

http://mikenormaneconomics.blogspot.com/2012/06/reflections-on-david-gordons.html

MMTer Mike Norman, who often appears on CNBC, this week stated ""Euthanize the rentiers!!"

When I noted in the comments that "Mike Norman is now proposing the slaughter of people who own real estate," the result was that people noted that David Gordon's book was RED, just like Abba Lerner's.

http://mikenormaneconomics.blogspot.com/2012/06/landlords-are-doing-extremely-well.html

SRW said...

I think you guys are overlooking Krugman's point about employment. He's not saying that governments somehow generate wealth, he's saying that public sector jobs employ more people, thus putting more money in people's hands to spend, while at the same time providing services that are all the more vital in times of economic depression.

Sure you need taxes to fund these jobs, but you also need to put people to work doing things that need doing and *sometimes* the government can do that better than the private sector--whose incentives all work towards laying people off at the moment.

Whatever your views about Keynes, I don't think there's any to deny that more modest point.

ALima said...

I deny that modest point. In order to employ a government worker you first have to either tax which lowere the tax payers amount he gets to spend or print money which lowers anybody's puchasing powere that holds that money.
How are government workers better at deciding how the money should be spent? This is not true at all because government workers have no incentive to invest in the most productive and profitable activities. He simply works for a wage and has nothing to lose if he fails... Not even his job.
Sorry about ther typos but this interface simply won't let me correct text in the middle.

Calgacus said...

In order to employ a government worker you first have to either tax ... or print money which lowers anybody's puchasing power that holds that money.

No, it does not. "Monetary inflation" does not necessarily cause "price inflation". What it may do is just prevent squandering real resources by unemployment, which is a natural effect of a monetary economy.

An Austrian, laissez-faire economy is going to have some level of unemployment bouncing up & down.
There is no reason to expect that capitalist economies will not have involuntary unemployment, and every theoretical & empirical reason to expect that they will.
This is pure, easily avoidable wealth destruction. A sane Austrian /laissez-faire economy has a job guarantee, so the otherwise unemployed will do productive work.
Maybe the government is not as good as directing resources as the magical free-market.
But it is better than doing nothing & destroying resources.