Friday, July 16, 2010

Krugman: Post Hoc Ergo Propter Hoc

The Post Hoc Ergo Propter Hoc Fallacy is an important tool in Paul Krugman's arsenal of arguments that he presents from his page in the New York Times. In his column today, he argues in a roundabout fashion that if the Congress permits the so-called Bush Tax Cuts to expire in 2011, that we can expect economic recovery to follow.

No, he does not say that, but he does make this point:
When Bill Clinton raised taxes on top incomes, conservatives predicted economic disaster; what actually followed was an economic boom and a remarkable swing from budget deficit to surplus. Then the Bush tax cuts came along, helping turn that surplus into a persistent deficit, even before the crash.
Everything he says there is true, but he also leaves out some important things. First, the economic boom of the 1990s did not happen until the latter part of the decade, with the nation's rate of unemployment dipping below five percent in 1997. That boom, of course, produced a huge stock market bubble, something Krugman leaves out (since it does not fit his narrative), and Americans found out in 2001 that much of that "prosperity" was phony.

Second, when Krugman refers to the "crash," he is not speaking of the crash of the stock market (and especially the NASDAQ) in late 2000 and early 2001, which was part of the Clinton presidency. Indeed, even had tax rates remained the same as they were before Congress cut the rates in 2001, the phony surplus quickly would have morphed into deficit, which is what happens during recessions.

Just as Krugman indicates (in a backdoor approach) that had tax rates not been cut in 1981, that there would have been no recession, Krugman now is trying to tell us that there only will be positive effects when the Bush tax cuts expire next year.

Since he insists upon using partisan political talking points ("tax cuts for the wealthy"), perhaps some perspective is in order. When the tax cuts expire, we are not looking at just the top rates going back to 39.6 percent. No, we are looking at ALL rates going back up, as the lowest rate jumps from 10 percent to 15 percent and so on.

In other words, every person reading these words today will see his or her federal income taxes go up next year, and you can bet that the tax increases for some of you will be much higher than you had believed. After all, Krugman has insisted that ONLY the wealthy received tax relief, and you are going to find out that Krugman was wrong.

Now, I must add that I am not defending the talking points from Republicans. When we have a federal government invading other countries and jacking up spending (when Republicans controlled the White House AND Congress) at levels that would have made Lyndon Johnson proud, we are not talking about a "low tax" environment. There really is no free lunch, and higher government spending equates to people bearing a greater burden of deadweight losses imposed by the state. There is no way around it, and I have no intention of repeating Republican talking points about "dynamic scoring" or anything else about cutting tax rates.

One of my graduate school professors, Robert Ekelund, wrote this article six years ago about the record of Republicans in office, and it is instructive to anyone who believes that even if Congress changes hands next year that we are going to see any relief. I have no confidence in the current Congress, and will have none in the next, no matter what the political rhetoric might be.

So, will higher taxes lead to more prosperity, as Krugman seems to insist? We shall see, but the last major tax increase during a depression took place in 1932 under Herbert Hoover. We know how that move turned out.


Anonymous said...

the only way out of this hole is:
1. labor not debt backed community economic activity
2. press for admission of and subsequent deletion of, dissolution of the holders of, or allowing decline of and/or dismemberment of holders of

$530 Trillion to $6 Quadrillion in derivatives.

Anonymous said...

This is coming from the same man saying that Krugman does not deserve his Nobel Prize. Krugman, "the most celebrated economist of his generation", is a staunch liberal, you guys are conservative- he may be wrong sometimes but because he is a liberal does not mean he does not deserve his Nobel Prize. You said he won it for his semi-discombobulated trade theories. This is laughable. As if Krugman is not a brillaint. He changed the way economist look at the world. They have given the prize to conservatives like Milton Friedman and that was also controversial. Krugman won the Nobel Prize in Economics for his work explaining the patterns of international trade and the geographic concentration of wealth, by examining the impact of economies of scale and of consumer preferences for diverse goods and services. Krugman is known in academia for his work on international economics (including trade theory, economic geography, and international finance). His work has made him one of the most influential economists in the world, and he is among the 12 most widely cited economists He was voted sixth in a 2005 global poll of the world's top 100 intellectuals by Prospect. Attack on substance- don't say he did not deserve the prize.

Anonymous said...

Anonymous, just wanted to correct you: I don't think anyone on this blog is a conservative.

Anonymous said...

Okay, Libertarian, which is clearly vastly different then Liberal. But why criticize Krugman's innovative work in international trade??? Instead of saying Krugman is stupid, hes not a real economist, his "discombobulated work in international trade". attack him on substance. Krugman is clearly a genius.

William L. Anderson said...

Yeah, Krugman is so brilliant that he believes that capital is homogeneous, and that an economy is an entity into which you just stir money and everything magically appears.

True, Krugman did innovative stuff on trade theory, but the timing of the prize made it clear that his criticisms of Bush and his shilling for Obama was the real reason he won. Now, Bush did a lot of damage, and you cannot find anything in my files anywhere in which I praised the guy, but nonetheless just because he is intelligent does not mean he understands opportunity cost.

William L. Anderson said...

Correction. I did not mean that Bush is intelligent, but rather was referring to Krugman.

Anonymous said...

Prof. Krugman is a vocal critic of Obama. McCain said the fundamentals of the economy are sound and was clearly out of touch (even he said that the economy is not his strong point) so Krugman logically pointed out that Obama is the better choice. As I said, Friedman won the prize and that also controversial. Dr. Krugman clearly deserved the prize for his important work- I guess changing the way economist look at the world thanks to the New Trade Theory and the New Economic Geography is not good enough? I guess this crucial theories are semi-discombobulated? That was offensive and untrue! Attack on substance- just because he is a staunch liberal who believes in intervention to ensure market stability does not mean he knows nothing about economics. If your so much smarter then him why do you teach at Frostburg State when he has taught at Yale, MIT, UC Berkeley, the London School of Economics, and Stanford University before joining Princeton University as professor of economics and international affairs if he does? Look, I respect many of your views (ending the war on drugs) and think your a noble guy but Krugman is a gentle soul who is a brilliant economist/thinker (yes brilliant people are wrong sometimes). Krugman was right about Bush- most of the country feels the same way and the fact that Krugman was so vocal against Bush is the reason that Luskin and others attack him. Bush turned Clinton's 237 billion dollar surplus into a well over trillion dollar deficit. I believe in civil liberties like you- I don't want the gov. to arrest people for smoking marijuana and abortion, in a free society, would also be legal.

Anonymous said...

Indebtedness rose under Reagan and Bush but fell under Clinton who balanced the budget. Until conservatives and people of the right condemn Bush and Reagan for spending way to much money, then they can not claim to be the fiscally responsible party? Reagan cut taxes and significantly spent more on defense which is why the deficit exploded (and spending lots of money arresting people for marijuana). He also signed the Garn St. Germain which caused the S&L crisis. The middle class did not do that well under Reagan- the rich did. the poverty rate rose also rose..

William L. Anderson said...

You need to know that this "You only teach at Frostburg but Krugman teaches at Princeton" really rolls off my back. I'll go further: I LIKE being at Frostburg, and I enjoy my work very much and am very glad to have this job.

Look at the Ivy-educated "geniuses" that have wrecked the economy. Just because someone has a degree from Princeton or Hahvuhd does not mean that person somehow can do the undoable: run the economy.

By the way, the word is "you're," not "your." So, if you are going to tell me I am stupid, you might at least want to use correct spelling while doing it.

Rick Teller said...

"He also signed the Garn St. Germain which caused the S&L crisis."

Garn St. Germain was indeed a stupid idea, as was everything the government has ever done to stampede people into buying houses, rather than let them buy or rent as they pleased according to their circumstances (financial, stability of their jobs, whatever) without being influenced by subsidies and tax incentives. But it was just one of many things that set up the S&L crisis and the more recent housing bust. Tax deductions for mortgage interest and massive subsidies to Fannie Mae and Freddie Mac had a much bigger impact on the booms that led to the busts.

Perhaps the biggest factor was FDIC and FSLIC guarantees, which allowed depositors to not care how well or badly the financial institutions into which they deposited their money invested it. You just placed your money wherever you could get the highest rates, and as long as your deposit was below the insured limits, if the S&L used the money to fund an idiotic condo project put up by the CEO's brother in law, why should you care? Either stupid loans paid off for the financial institution, in which case you would get your principal and interest back, or they wouldn't, in which case you would STILL get all your money back from the federal guarantors. The highest interest was always offered by the most crooked or incompetent financial institutions, and our system encouraged depositors to direct money there rather than to cautious or sound banks or S&Ls, who made lower risk investments, couldn't charge as much interest on those loans, and therefore couldn't offer as high rates to depositors. Until savers have to face some consequences for a bank's failure, they have no reason to care how the bank is run. I'm not saying abolish the FDIC, and a depositor shouldn't be wiped out if a bank failed, but having the FDIC pay only 80% or 90% of a deposit if a bank went under might be enough to induce banks to compete for deposits on soundness as well as rates paid, not just the latter.

Anonymous said...

Frostburg state is a fine school and as I said early, I think your a smart, decent guy but why would call the New Trade Theory and New Economic Geography semi-discombobulated? Thats intellectually dishonest, wrong and offensive. You basically called Krugman stupid by saying Krugman is such a genius that he thinks blah blag blag... By saying that he teaches at princeton, yale, mit, and that he won the Nobel Prize, I was pointing out that he is nowhere near stupid and is a brilliant thinker/economist...Yes, he is wrong sometimes like everyone!!!!

Anonymous said...

I'm not just saying this but I would love to have you as a professor- you seem to have many views that I can relate to. Frostburg is a decent school but by calling Krugman names and by saying that he won the Nobel Prize for discomboluated theories is wrong! I did not mean to hurt your feelings about the university but sometimes I get the impression that you think you are much smarter and a better economist then Krugman. Regardless of his political beliefs, I'm not going to say it again, Krugman is a renowned economist.

Brent said...


Regardless of Krugman's work 20 years ago on international trade patterns, he is a vulgar Keynesian in his public commentary. Which means that Krugman, whether he knows it or not, is ultimately using ancient fallacies, long discredited by serious students of economic thought, as the basis for his public policy prescriptions to fix the economy. It is a joke.

Why your argument turns to "but Bush/Reagan,Nixon/Eisenhower/Hoover/Coolidge/Harding were bad" is beyond me. You are proving you aren't serious.

Anonymous said...

Yes Harding and Hoover were bad? Eisenhower, the socialist, had a 90 percent tax rate for the wealthy. Spending money when the economy is bad is a joke? When FDR cut spending and raised taxes the economy went back down! So was the WPA/CCC a bad idea? They kept people treading water. Should medicare, medicaid, and social security be repealed? Also, I apologize to professor Anderson, I get very passionate and I do like Krugman. I do, however, agree with you on many issues and yes, your students are lucky to have you in class. But why call Krugman names? Why question his intelligence? Why say the New Trade Theory is discombobulated? Its fair to call him out b/c you think he is wrong but by calling a Yale guy stupid ( who got a PhD from MIT who teaches at Princeton and who won the Nobel Prize and John Bates Clark Medal (he is also one of the most widely cited economist) it is unfair, lazy, untrue, and can not be taken seriously. Paul Krugman who writes about income inequality is evil? He is not an ecnomist? Who are you to say Nobel-Prize winning economist Dr. Prof. Paul Krugman is not an economist. Stick to substance....

Brent said...

You refuse to debate substance. No, I take that back. You, like Krugman, refuse to consider that Keynesian thought (really, just ancient fallacies pre-dating Keynes by hundreds of years) is not the beginning and the end of every macroeconomic argument.

It is entirely indefensible to be a Keynesian and call yourself an economist, because as Dr. Anderson points out again and again, Keynesians throw out the entire idea of opportunity cost by definition. What is economics if we throw out scarcity and choice?

Anonymous said...

The 6 Steps of Left Wing Politics, Unemployment and Inflation.

1.Money is taken from personal savings and productive investment. Almost unlimited reasons and causes for this are put forward. Guilt and moral obligation to various causes is established. Anxiety is also instilled regarding what life would supposedly be like absent the money transfers.

2.The media enjoys reporting on the impressive things government officials can do spending large sums of money. With the money, it purchases goods and services on the market for consumption by certain citizens. Many citizens notice this and in excitement line up for their share, feeling included in the democratic governing process.

3.The money runs out. Those that have become accustomed to it demand more.

4.Personal savings are running out. The consequences of the initial decline in productive investment diminishes the ability of business to hire and produce. Wages fall and the cost of things people need to live rise.

5.Observing the consequent rising prices and lowering of wages, the left wing politician and the media proclaim: MARKET FAILURE! Pouring scorn on the greed of business men, the failure of the free market, and announce the government is coming to the rescue with more spending.

6.The final act in left wing politics is resorting to printing massive quantities of new money, along with attempts at aggressive price controls on consumer goods and wages. Inflation skyrockets as the rapid creation of new money destroys its economic value as money. The attempts to control the economic effects of people rejecting the over printed money, along with diminishing wages resulting from the destruction of business, leads to severe economic chaos, including non availability of essential consumer goods. Politics then becomes volatile. Governments must then resort to ever more extreme propaganda and censorship in order to maintain allegiance and political hegemony.

Anonymous said...

I never called you stupid but you basically called Krugman stupid and you said that he is not an economist and that his trade thories are discombobulated, which is a very stupid/ offensive/ childish claim. How are they semi-discombulated? I look forward to hearing from you (I would Respect you if you say I was wrong, the trade theories were important and Krugman is clearly smart and a very influential and important economist but I just don't happen to agree with him on most things, I disagree with Karl Marx too (No, Krugman is a liberal, not a marxist) but he was also very intelligent.... why can't you say that) ... Here is Krugman on Hayek:
A spectacular find: dueling letters from Keynes and associates, on one side, and Hayek and associates, on the other. First, Hayek was as bad on the Depression as I thought. The claim that “many of the troubles of the world at the present time are due to imprudent borrowing and spending on the part of the public authorities” — in 1932! — is bizarre. The claim that barriers to trade and capital movement were what was preventing recovery is as crazy as … as .. claiming that we’re in a slump because workers decided to take a break in the face of prospective Obama tax hikes.

Second, Keynes pretty much had the policy implications of the General Theory down long before he actually worked out the detailed analysis. I’m especially struck by the way he grasped, right from the start, the point that if higher private spending expands employment in a slump, so does higher public spending.

Third, it’s deeply tragic that we’re having to have this debate all over again, as the world economy slides into deflation and stagnation.
Reading some of the reactions to this post, I realized that quite a few readers believe that protectionism played a major role in causing the Great Depression, and even believe that this is what all the experts believe. Not so. Just to be clear, I don’t think the Smoot-Hawley tariff was a good thing — it was a really bad thing. Nasty protectionism! Bad Smoot-Hawley! Bad! Bad! Bad! But did Smoot-Hawley and other trade restrictions cause the Depression? No.
What protectionism does, according to textbook economics, is to cause a misallocation of resources, reducing the economy’s efficiency. It does not cause mass unemployment of resources — which is what the Depression was about.
But, you say, protectionism led to falling exports! Indeed. Also falling imports. It’s not at all clear what effect all this had on overall demand. Insofar as it did, it was because tariffs were a form of tax increase — but in that case you should be focusing on the whole range of fiscal actions, not just the tariff hikes.
So why do so many people say that protectionism did it? Partly, I think, because the early years of the Depression were marked by a sharp contraction of trade; everyone likes to reprint the famous Kindleberger spiral diagram:
And this picture is often treated as evidence that trade contraction was somehow driving the slump. As it happens, however, we have more recent experience to compare and contract: as Eichengreen and O’Rourke have shown, trade in the first year of the current crisis fell much more than in the Depression, even though there were no major protectionist moves:
More broadly, I’ve written before that the attempt to place blame for the Depression on protectionism is a sort of Noble Lie, an attempt to scare people into trade policy that’s good for other reasons.
But going back to Hayek: attributing the failure to recover to trade restrictions was, in a way, characteristic. Hayek, like his modern followers, never could get his mind wrapped around the fact that the key problem in depressions, and the key observation his theory needed to explain, wasn’t misallocation of labor and other resources — it was mass unemployment. It’s not surprising to see that in the depths of depression he was focused on removing what was, in the end, a minor source of allocative inefficiency. But it’s a stark reminder of the extent to which he really, truly, didn’t get it.

William L. Anderson said...

I think I need to make it clear that I don't believe Krugman is stupid. Indeed, the guy is brilliant, and I am sure his IQ is well above mine.

However, just because he can do mathematical models for economic analysis, something that does require intelligence and ability to do math, does not discount for the fact that he is claiming that printing money creates wealth and that an economy is a homogeneous entity to which you just stir in money.

One can be brilliant and believe it. I have known many smart people who were economically illiterate. The issue is understanding opportunity cost and what it means. The Law of Scarcity and the Law of Opportunity Cost are not suspended just because the government central bank is setting a discount rate of near zero. The world does not spin on a different axis because of that fact.

As for the issue of where I teach, you have to understand that it really does not bother me or hurt my feelings when someone gives me the "He is at Princeton and you only are at Frostburg" argument. That is so irrelevant to my thinking as not to have any effect at all, except to give me a good chuckle.

I like what I do and I enjoy working at Frostburg. No, most of my students are not nearly as bright as the ones at Princeton, but nonetheless they are my students, and it is my job not only to teach them economic concepts, but to help make their lives a little bit better.

Anonymous said...

Than you for that reply. I appreciate that and you are a stand up guy. I have heard plenty from the Keynes guys and I would love to take one of your courses because I think you are an interesting guy and a fine economist. Just b/c you do not agree with you, does not give you the right to say Krugman is dumb, hes such a genius that he thinks blah blah blah (being sarcastic), that his important trade theories are semi-discombobulated (without backing it up)...I have read a lot about Krugman and his New Trade Theory and New Economic Geography which is why I was offended when you said that which is why I gave you the Frostburg comment. You have said he's not an economist. So i guess b/c you fundamentally disagree with him makes you feel that hes not an economist. Who are you to tell our brilliant Nobel laureate that hes not an economist. Again, thats why I gave you the Frostburg comment...I would not have said that if you stuck to substance...

Anonymous said...

Also, I would love for Krugman to debate you...The Law of Scarcity and the other stuff you were talking about demonstrates that you know economics...I would love to hear Krugman reply...I am not an economist (at all)..

William L. Anderson said...

It really will be a cold day in Hell before Krugman would be willing to be on the same stage with me. He might let me on, if I were pushing a broom or cleaning toilets in the building, but that would be it!

jgo said...

OK, except that the last I checked the Y2K bust was in 2000 January. The stock market peak/crash 2000-03-10, not "late 2000". The dot-com bust played out from at least 1998 through 2002. Of course, the H-1B expansions in 1998 and 2000 October didn't help the STEM employment situation among US citizen STEM workers, but the employment peak/crash was 2001 April (and employment is almost always a lagging indicator).

And the last major tax increase during a depression was 1937 January, with the advent of FICA, though your point is correct about the earlier one in the same depression.

In a similar manner, I consider this to be the 3rd recession in a more shallow depression going back at least to the stock market drop of 1987, and possibly back to 1983 January.

Overall, however, it seems that the federal government (executive and legislative) has been intent on doing exactly the worst possible things for quite a few years.