Friday, March 4, 2011

Are the Republicans Killing the Recovery, or is Krugman Killing Economic Logic?

Once upon a time, economists were taught logic, as they had to use it in presenting their material. Over time, the study of logic -- and the attendant fallacies that good students learn in order to recognize good arguments over fallacious ones -- was replaced by multi-variable calculus and statistics.

Places like MIT (where Paul Krugman received his Ph.D.) promoted a mathematically-rigorous economics graduate program, and most everywhere else followed at one level or another. "Doing economics" became creating mathematical models that either were supposed to emulate either what individuals do (microeconomics) or an entire economy (macroeconomics) and then "solving" the mathematical equations and presenting one's results as an economic application.

The most famous of the MIT professors was Paul Samuelson, who not only was successful in transforming academic economics from one of logical constructs to aping the "language of physics," but also promoting Keynesian "economics" in the United States. Like his student after him, Samuelson also received the Nobel in economics.

Why the long introduction? I do it because Krugman once again abandons economics for circular logic in his latest column. We get such gems as:
So we’ve gone through years of high unemployment and inadequate growth. Despite the pain, however, American families have gradually improved their financial position. And in the past few months there have been signs of an emerging virtuous circle. As families have repaired their finances, they have increased their spending; as consumer demand has started to revive, businesses have become more willing to invest; and all this has led to an expanding economy, which further improves families’ financial situation.
Before the Doctrines of Samuelson had taken hold, such a statement immediately would have been recognized as an example of circular logic, or, more specifically, the informal logical fallacy of "begging the question." Today, unfortunately, this is what passes for economic wisdom.

Every once in a while Krugman has a column full of such economic gems, and this is one of them. At the present time, the Republicans are proposing about $60 billion in cuts -- this with a proposed budget deficit of approximately $1.5 TRILLION -- and Krugman is claiming that such cuts will "kill" the current economic recovery.

I'd like to say that on its face, such a statement falls into the "howler" category, but this gives authentic howlers a bad name. This comes from the same guy who still wants us to believe that had the "stimulus" passed in 2009 been $1.2 trillion instead of $800 billion, that we would have had a full recovery. Yeah, all it took was another $400 of paving roads, and we would have been in clover.

However, when Krugman writes a Really Rich Column, he throws in lots and lots of howlers. So, we get this one:
But it’s (the recovery) still a fragile process, especially given the effects of rising oil and food prices. These price rises have little to do with U.S. policy; they’re mainly because of growing demand from China and other emerging markets, on one side, and disruption of supply from political turmoil and terrible weather on the other. But they’re a hit to purchasing power at an especially awkward time. And things will be much worse if the Federal Reserve and other central banks mistakenly respond to higher headline inflation by raising interest rates.
Yep, Krugman pulls his best Jake Blues act by trying to claim that the rise in oil and food prices has nothing to do with the fact that Ben Bernanke has been showering the world with dollars. Yeah, commodity prices are volatile and we have had bad weather, and so on and so on.

The fact that the currency used to pay for oil worldwide is the dollar is irrelevant in Krugman's political world, but it is relevant in the real world. When there is a movement afoot to use something other than the dollar to pay for international oil sales, I don't think it is because the Republicans want to cut 1.7 percent from Obama's current budget.

However, we are supposed to ignore this and accept Krugman's politically-convenient "bad weather and everyone else is getting richer" explanation. That is not economics, nor is it even mediocre economic logic. No, it is the application of pure, political partisanship in an attempt to circumvent sound economic thinking. Yep, that's Paul Krugman.


Daniel Hewitt said...

Regarding the second Krugman quote, the exact criticism of the QE2 initiative was that it would increase the prices of commodities before it would increases the prices of labor (aka wages).

Sounds like a way to retard recovery, not accelerate it.

Oh yeah, consumer goods. Price increases for consumer goods will be after commodities and before wage increases.

Dan said...

Wow...if I hear the terms "showering the world with dollars" or "warming up the printing presses" one more time I'm gonna puke.

The vast majority of M2 growth is in bank reserves and will likely remain there as long as unemployment remains high. The amount of real currency in circulation has been rising about to trend. Do you just completely ignore this small inconvenience? You people have been screaming hyperinflation for years now.

@Everyone who says the prefer LK and AP Lerner to myself...tough luck...those guys are dorks who have nothing better to do than sit around posting links and arguing philosophy with you numbnuts all day. I, on the other hand, recognize that the premise of your arguments is completely insane, so I spend my time here trying to expose you for the hypocrites that you are.

For an example, see Prof. Anderson's admission that he is a tax feeder and Mike Cheel's admission that he worked for LA public transit.

James E. Miller said...

Dan is right in a few regards, yet further disproves his premise. While some continue to call for hyperinflation of the dollar, it won't happen when most major currencies are pegged to it and devalue at much of the same rate as the dollar does.

And yeah, hearing about how Bernanke is printing money like crazy is getting a bit tiring. He isn't physically printing money, just adding to bank reserves and M2. Dan points this out but I have yet to see him admit that this process enriches the Primary dealers first that buy directly for the Fed while the rest of us wait for the money to trickle down.

James E. Miller said...

Sorry for the mispell, I meant to say "directly from the Fed"

Daniel Hewitt said...

Primary dealers first that buy directly for the Fed while the rest of us wait for the money to trickle down.

What is important to realize is that economists like Krugman and DeLong are really corporate shills who believe in trickle down economics. They defend TARP, they defend Obamacare, they defend the Fed. Yet somehow they convince their followers that they are for the "little guy".

AP Lerner said...

“@Everyone who says the prefer LK and AP Lerner to myself...tough luck...those guys are dorks “
Get over yourself dude…if this was a contest to see who could expose Prof. Anderson’s ignorance and hypocrisy, I won 12 months ago.  Ask him to explain why interest rates remain despite the pending stagflation, printing, etc… he goes on and on about.  That was a real howler of a response.  Comical, and kind of sad... 
“Dan points this out but I have yet to see him admit that this process enriches the Primary dealers first that buy directly for the Fed while the rest of us wait for the money to trickle down”
The primary dealers are required to participate in every auction.  It’s required, by law.  The better question is why does the US issue debt at all?  The US is a monopoly supplier of its own currency, and interest payments on its securities are nothing more than yet another hand out required by law.  You would think smart Austrian economists would recognize this FACT and get on board with ending this nonsense, but they are so blinded by their ideology they fail to recognize the reality that bond issuance funds exactly 0% of spending, and works as nothing more than a reserve drain.  Thus, Austrians that insist the US continue to issue securities, are supporting hand outs.  Period.

Bala said...

Yeah AP!!

If government didn't spend it first, money wouldn't come into existence would it?

I'm still reeling from that lightning bolt of your intelligence!!

James E. Miller said...

I never contested that primary dealers must participate by law. Who was the genius that decided that there should be 20 primary dealers? And why were those 20 specifically chosen?

The list of primary dealers for the NY Fed can be found here:

I haven't quite figured you out AP Lerner, are you really not supporting the continued issue of securities by the U.S. Treasury? And what Austrian economists insist they should do so as well?

Bob Roddis said...

Let's not forget that our current problems were caused by Clinton's SURPLUS! Government surplus causes depressions!

“Deficit spending creates surpluses in the private sector. Net new financial assets can only be created via deficit spending.”

Just Dr. Hut Tax Lerner.

We would all die without the donut-eater state there to create funny money and debt for us! No theory, just facts!

Hey, Dr. Hut Tax, where's all the stuff going to come from to satisfy our unpayable debt (for the 1,237th time)?

Daniel Hewitt said...


Get over yourself dude

Good reply. Your dissent is much more welcome than Dan's. Now we just need to work on your humility ;)

The primary dealers are required to participate in every auction. It’s required, by law.

Is rent-seeking that has been codified into the law still rent-seeking?

Lord Keynes said...

The vast majority of M2 growth is in bank reserves and will likely remain there as long as unemployment remains high.

M2 excludes bank reserves, as does M1 or M3.

Only M0 (= base money) measures bank reserves.

I think what you are trying to say is that growth rates in M1 and M2 have not been that large at all - they are well within historical trends.

The spike in M1 in 2008-2009, for example, for not much greater than the spike in M1 in 1986 under Reagan. M3 actually contracted from 2009-2010.

Mike M said...

LK said: “The spike in M1 in 2008-2009, for example, for not much greater than the spike in M1 in 1986 under Reagan. M3 actually contracted from 2009-2010.”
You are missing one important aspect that didn’t exist in 1986. Traditional M1 does not include “sweeps” which a game the banking system started using in the mid 90’s to avoid reserve requirements. “Sweeps” are now about as big a component of M1 as is the currency component.

Lord Keynes said...

And the sweeps are counted in Mike Shdlock's M prime (M') measure of money, which doesn't show a historically unprecedently rise either.

In fact, if you bother to read Shedlock, he doesn't - and didn't - even think these money aggegates are useful predictors of inflation or deflation:

"TMS and M' are clearly superior to M3 by any practical measure that I can come up with. As for measuring inflation or deflation, I do not think any of them will suffice for the simple reason that credit marked to market is plunging and that is the way things need to be looked at."

And the Austrian economist Frank
Shostak (“The Mystery of the Money Supply,” Quarterly Journal of Austrian Economics 3.4 (Winter, 2000): 69–76) does not even think sweeps should be included in the True Money Supply (TMS) measure:

"Since January 1994, banks and other depository financial institutions have initiated sweep programs to lower statutory reserve requirements on demand
deposits. In a sweep program, banks “sweep” funds from demand deposits into money market deposit accounts (MMDA), personal savings deposits under the Federal Reserve’s Regulation D, that have a zero statutory reserve
requirement ratio. By means of a sweep, banks reduce the required reserves they hold against demand deposits. As a result of the sweep program one could argue that the money definition outlined above will not cover the total money supply. This criticism, however, is misplaced, for it has nothing to do with the definition as such, but with the difficulties of measuring money, which was transferred out of demand deposits by banks without the depositors’

Mike Cheel said...

@Dan Just because I worked for public transit doesn't make me a hypocrite. If anything it opened my eyes even more to the government waste that you love to defend.

And I am still waiting for your answers (not the smarmy ones) to my questions from the last comment space where you decided to attack me rather than answer them.

Mike Cheel said...

@Bob Roddis

Totally off topic but you complain all the time that your browser loses comments when posting. I noticed the same thing happens when I use IE. Perhaps try Chrome as I never have the problem when using it.

Mike M said...

LK Yes I know Mish includes “Sweeps” in his M Prime calculation. Yes I have “bothered” to read his material. In fact he acknowledges it makes up a material component of TMS. My point was it is not considered in official M1 figures that you cited Aggregate M1 has risen significantly since the mid 90’s and Sweeps have been a significant accelerator in that measure.
LK may I suggest some self reflection. The vast majority of your posts here are sanctimonious, condescending and Pavlovian-like regurgitations of citations without much thought. I don’t know what it is you think you get from participating in this forum. If you think it is some kind of sport for you then that is sad.

Tel said...

Sounds like Krugman is building the necessary wiggle-room for a failure narrative. I don't think there all that much disagreement (even amongst Austrian economists) that government deficit spending can deliver a short-term boost to the economy (especially as measured in dollar-denominated GDP). The Austrian theory basically says that the short-term boost is highly unlikely to propagate into a long-term virtuous circle unless government just happens to make very excellent resource allocation decisions (please correct me if I'm wrong on the basic theory here).

So the boost from the stimulus package isn't being questioned here, but whether this boost can become self-sustaining is very much in question. If you look at the deeper stats like employment participation rate and job creation figures, they don't look encouraging (even now before the cuts) so Democrats need a way to offload the blame onto someone else.

They have chosen the narrative that the economy is in fact recovering because the short-term stimulus-boosted stats say so (if you don't look too closely) and when it crashes it will be the Tea Party to blame.

Bala said...

@Mike Cheel,

I use Chrome all the time and it still happens to me. Looks like comment-gobbling is not browser dependent.

Mike Cheel said...

@Bala Then I guess it could be Blogger thing. I will say that it just started happening.

Matt S said...

I'm sorry, but I think you've confused circular logic with pointing out a cycle. Krugman did the latter.

For example, if I say that water on earth evaporates, rises into the atmosphere, cools, condenses, and falls back to the ground to refill the lakes and rivers, that is not circular logic; that is identifying the water cycle.

Now, you can take issue with his assumption that American families have been improving their financial position, but you haven't done that.