Saturday, November 17, 2012

Krugman: Actually PRODUCING a High Standard of Living is a "Zombie" Idea

Like most Keynesians, Paul Krugman has no idea of how societies prosper. In his view, governments borrow, print, and then spend money and out of that comes, like magic, a prosperous economy. If times are hard, then spend even more and, like the Great Pumpkin, prosperity will rise out of the pumpkin patch.

Take his view of what should be done in Europe, for example, and especially for Greece and Spain. As he has written on numerous occasions, instead of facing the fact that the economies of those two nations cannot produce enough wealth in order to support their bloated unionized government workforces and sustain their ridiculous work rules for private employers. Greece and Spain are in trouble not because they are on the euro, but rather because they used the financial and monetary arrangements of the European Union in a way that was not sustainable.

Now, I agree that most "austerity" packages are wrongheaded because the state swallows much of the GDP of the affected nation and then directs that money to the banks (or, as some libertarians call them, "banksters") that foolishly lent money to those nations for things that ultimately went bust, or to pay for simple operating expenses of the various governments. However, there is another aspect of economics and economies that Krugman not only refuses to admit, but belittles it at every turn: societies that consume much also produce much, and that production is the source of their consumption.

To Paul Krugman, such a notion -- that an economy actually has to produce a standard of living -- is a "zombie idea." Every good Keynesian knows that consumption actually creates production, that one consumes first and then produces later. And, no, Keynesian "demand" is NOT the same kind of demand which entrepreneurs anticipate as they try to move resources from lower-valued to higher-valued uses. Keynesian "demand" is nothing more than new money or wealth transfers being directed to politically-connected people who ostensibly will "spend" that money, and out of which is supposed to come general prosperity. Anything to the contrary is nothing more than "Say's Law," which everyone knows has been discredited. (I mean, people really believe that we can have consumption without production? Get real!)

And so, he demands that Congress, the president, and governments at state and local levels ratchet up their spending, and if the economy is not producing enough wealth to pay the taxes necessary to support this blizzard of spending, no worry. Why? The government can manipulate the Federal Reserve Act of 1913 to permit the Fed to purchase U.S. treasuries in the primary market, so if need be, there would be no barriers at all to vast new amounts of spending and if the shower of new money creates an inflationary environment, all the better! Inflation, as Krugman has written, is a great tool for "deleveraging," which in his view would transfer wealth from rich to the poor.

(For those who insist that Krugman is not an apostle of inflation, note that he strongly endorses the views of Mark Thoma, who is a hardcore inflationist. Like so many other Keynesians, Thoma believes that all it takes is for government to inject new money, which will solve problems painlessly and put the economy back on track. The only problem, people like Thoma and Krugman claim, is that governments are too reluctant to aggressively debase their currencies. The "Inflation Fairy" is hard at work.)

So, yes, do you believe that government wealth transfers are a cost and not a boon to the economy? Do you believe that over time, a nation cannot consume more than it produces? Then you, too, are a "zombie." Wear that moniker proudly.


Zachriel said...

William L. Anderson: Like most Keynesians, Paul Krugman has no idea of how societies prosper. In his view, governments borrow, print, and then spend money and out of that comes, like magic, a prosperous economy.

Well, no. Keynesianism is a market-based theory. In brief, markets generate wealth, while government acts to temper the market cycle, while investing in basic infrastructure.

Mike said...

“Inflation, as Krugman has written, is a great tool for "deleveraging," which in his view would transfer wealth from rich to the poor.”

Of all of the errors Krugman makes in his view of the economic world, this one is in the ranks up there near the top. Inflation in fact disproportionally harms the poor. They are locked in a wage structure that doesn’t keep pace or is fixed. The cost of sustenance consumes an ever larger part of their disposable income. The real value of their savings is eroded.

The rich on the other hand have resources and access to insulate them from inflation if not profit from it.

The only deleveraging tool that genuinely helps the poor is debt default.

Zachriel said...

Mike: Inflation in fact disproportionally harms the poor... The real value of their savings is eroded.

The poor are not known for the extent of their savings.

Mike said...

Zac, I’ve demonstrated in the past you’re an intellectual fraud and a shill for the Statists. You evade and obfuscate. Move on and seek help. Oh that’s right your “spam filter” prevented you from this particular post.

Bob Roddis said...

Keynesianism is a central planning based ruse to effectuate the theft of purchasing power without the victims knowing what hit them. When the victims complain, the obscurantist and statist Keynesians insist that the victims deny what they see with their own eyes.

BTW, many of our antagonists have suffered having their brain explode all over the ceiling. Here's Mike Norman's "MMTers War on Women" attacking Lauren Lyster of RT's "Capital Account".

Bob Roddis said...

Also, "Major Freedom" has rigorously posted outstanding critiques of Scott Sumner and "Market Monetarism" on the Sumner blog. Sumner has expressly ignored him (because, IMHO, Sumner does not understand basic Austrian concepts) until this:

Lucas, MF works hard each day to prove that he’s the most tasteless, classless, moronic and petty human being every to walk on the face of the Earth. It’s just my luck that he chose to make a fool of himself on my blog.

Anonymous said...

I'm purely convinced that Paul Krugman is nothing but a trust fund baby and a shill for the Democratic Party and doesn't believe much of what he says or naturally can't help himself. In my opinion, he has sold himself out for The New York Times so he can get a decent paycheck from them and cash in on fooling his readers. He reminds me of someone like Bill O'Reilly or Ed Schultz, who all sound like complete phonies to me.

He came from a pretty well off family in Nassau County and ate up science fiction novels. He went to Yale and MIT and went straight into academia, never having to work in a private job in his life. Maybe that could explain why he's such a craptastic economist who is disconnected from reality even though he clearly is intelligent in other ways. What are your thoughts on this, Professor Anderson?

Thanks for the great article. You remind me of another economist's blog I've read and he uses the words "wealth transfers" himself!

Mike said...

Mike Norman has always been a pseudo intellectual court jester for financial television. He has been wrong on every major theme the last 10 years that he spews an opinion about. The most glaring was the real estate bubble where he ridiculed anyone holding an opposite opinion. He fits the typical profile of being quickly reduced to calling people names because he has no intelligent argument.

You should take it a badge of honor he banned you from posting on this blog.

Anonymous said...

"Well, no. Keynesianism is a market-based theory."

That's a misleading comment. Keynesianism is actually a utopian anti-market theory to be more precise. It purports to prove that free markets are inherently unstable, unfair, exploitive and full of internal contradictions. That's why Keynes advocated the "euthanasia of the rentier" i.e. the mercy killing of the capitalist investor class. How can you have a market based system when the State controls all investment capital?

Keynes advocated that the free market system should be replaced by a centrally planned macro economy which, through manipulation of money, credit, government fiscal policy and a massive Welfare State would provide full employment, optimum aggregate demand, elimination of "idle resources", superabundance of capital and optimum distribution of wealth. That's not really a market system so much as a utopian fantasy for technocratic control freaks.

Zachriel said...

Anonymous: That's why Keynes advocated the "euthanasia of the rentier" i.e. the mercy killing of the capitalist investor class.

Keynes suggested the "the rentier aspect of capitalism" would become obsolete because capital could be increased so that it's value dropped to near zero. However, he did not advocate or think that socialism of the means of production was likewise inevitable, only that having money would cease to be a useful profession. He was wrong on this, of course, as most modern Keynesians recognize.

William L. Anderson said...

Let's see. Keynes actually believed that if government pushed down interest rates and printed lots of money, the opportunity cost of capital would disappear.

And you take the guy seriously? As I have said many, many times, when someone who says he knows something about economics either denies or denigrates the Law of Opportunity Cost, that person simply knows little or nothing about economics. No exceptions.

Tel said...

Mike: The only deleveraging tool that genuinely helps the poor is debt default.

Inflation is a type of debt default... for those people who can get a pay rise out of it. If I'm in the sort of business where I can raise prices to soak up the government printed funny money, but at the same time my mortgage doesn't get any bigger, then I can pay back that mortgage so much quicker.

Of course, not everyone can be so lucky, for the people who lost their jobs it sucks... but then again it is impossible to make a system where all outcomes are equal, and even if it was possible it would be a crap place to live.

Krugman says, "So basically, we must do nothing to fix this horrific market failure, and allow unemployment to fester instead.

It’s really awesome, when you think about — not just that we’re committing this massive act of folly, but that it’s all being done in the name of sound policy."

... but also Krugman says that if only government could run big deficits then everything would be OK. A quick glance at reality would seem to indicate that government is indeed running big deficits, and that's why we are having this whole fiscal cliff / debt ceiling argument again so soon after the last one.

I predict that the Rupublicans will promptly back down and the debt ceiling will shoot up once again. Whether inflation be good or bad, we are going to find out.

Tel said...

Keynes himself said: It is not the ownership of the instruments of production which it is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary.

So he quite clearly had in mind delegated tasks where the state managed national aggregates, and entrepreneurial individuals decided the details of where that investment should be deployed.

Yet, in practice this simply does not happen. The US government now owns a large piece of General Motors. The US government has taken over Fannie Mae, and always the government directly interfered in the housing market: FHA, GNMA, etc.

Then we could discuss the direct government investment into Solynrda and related enterprises. All of these are completely contrary to Keynes original advice.

Now, let's consider interest rates. Rated on a 10 year US government bond are about 1.7% and on an Australian government bond about 3.0% but these low rates are not available to individual entrepreneurial investors. Such low rates are strategically the creation of monetary policy and thus only available for government owned investment. This is precisely the opposite of what Keynes recommended in his General Theory.

As I have always maintained, Keynesian theory and Keynesian practice are completely unrelated topics of study.

Mike said...

I know inflation is a form of debt default but that wasn’t my point. The poor, the working class and the most of the middle class don’t have the resources to benefit from inflation to the degree the lets say, top 10% do. If you have a stable secure income then, yes you can benefit from the reduced real value of your mortgage. But then again that doesn’t occur in a vacuum. The benefit of your mortgage is reduced by the increased cost in other living expenses.

Unless you have the resources and know how to benefit from inflation, you bear the full brunt of the pain. Thus the only true way everyone else benefits is outright default/forgiveness.

Tel said...

Mike, the elderly on fixed income investments are screwed if their investments go bankrupt due to outright default / forgiveness, and they are screwed slightly less if inflation devalues those investments (but still screwed either way).

Point is, we are at the situation where the total of promised goods is much larger than the total of real world goods. Thus, someone somewhere WILL NOT get what they think they were promised. So there will be losers no matter how you cut it. There is no pain-free answer to this.

The longer we argue about that issue, the less productive we become and the bigger the gap gets. Yet we keep arguing because no one wants to bear the brunt of the very necessary deleveraging that must occur.

Mike said...


Correct. I was making an isolated point about the issue. You correctly point out that every action of deleverage has consequences. They will try to "manage" it and invariably screw it up and cause even more harm.

Anonymous said...

Krugman is a better writer cause he sticks to a single main point without extraneous details, like the moscone thing in twinkie land
learn from him
I won't know if you follow my advice, cause after reading this comment, i can safly put you on permanent ignore cause you so obviously mistate what krugman in fact says.

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