Tuesday, May 31, 2011

Against learned economic laws

In a recent column, Paul Krugman rightly calls unemployment a "terrible scourge" across our country and much of Europe. And as usual, Krugman not only misdiagnoses the problem, but he then calls for a "solution" that will make matters worse.

Why are people unemployed? What can be done? Krugman explains:
Bear in mind that the unemployed aren’t jobless because they don’t want to work, or because they lack the necessary skills. There’s nothing wrong with our workers — remember, just four years ago the unemployment rate was below 5 percent.

The core of our economic problem is, instead, the debt — mainly mortgage debt — that households ran up during the bubble years of the last decade. Now that the bubble has burst, that debt is acting as a persistent drag on the economy, preventing any real recovery in employment. And once you realize that the overhang of private debt is the problem, you realize that there are a number of things that could be done about it.

For example, we could have W.P.A.-type programs putting the unemployed to work doing useful things like repairing roads — which would also, by raising incomes, make it easier for households to pay down debt. We could have a serious program of mortgage modification, reducing the debts of troubled homeowners. We could try to get inflation back up to the 4 percent rate that prevailed during Ronald Reagan’s second term, which would help to reduce the real burden of debt.
Krugman is correct that the bursting of the housing bubble unleashed a lot of the problem, but once again he fails to understand the larger and more underlying problems. First, while I doubt that even Krugman would want a return of the housing bubble, he still refuses to see it as an economic "correction," but rather just a temporary bump in the onward march of "aggregate demand." In other words, he refuses to admit that vast amount of resources were malinvested, and that we cannot have a meaningful recovery until most of these malinvestments either have been liquidated or moved to other uses.

Instead, he claims that the government should give us "a serious program of mortgage modification," although he fails to mention that the Obama administration already has thrown billions of dollars into housing, yet the slump continues as it has for the past four years. Maybe his claim would be that the current program is "not serious" or that maybe someone like Krugman should have developed it. As I see it, however, any program that attempts to prop up prices that are going to fall no matter what is not going to be successful.

Second, I would hope that we someday could move beyond the notion that the WPA was a great and wonderful program. As numerous researchers have pointed out, it was politics-ridden and mostly involved make-work jobs that did not move the economy to recovery. Yes, Krugman has claimed that the WPA was pure and absolutely uncorrupted, but the facts speak otherwise, not that Krugman ever would misrepresent history.

Yes, I am sure that turning every unemployed person into a road-crew worker would result in some better roads, although I am not sure from where Krugman believes the resources to finance all of this, other than more borrowed money. (Oh, I forgot. All we have to do is to raise the top rate on all incomes above $250K a year to 39.6 percent from 35 percent, and the economy magically will jump back into shape.)

In the end, he resorts to calling for inflation. After all, he reasons, if inflation was 4 percent during Ronald Reagan's second term, then we should be willing to accept it, as though inflation is a good thing. Yes, I know that Krugman really believes that by inflating the currency and reducing the value of the monetary holdings of most people, government can bring about economic recovery, but once again, we see that he never addresses some of the real issues of unemployment.

Thank goodness, there is Robert Murphy. His recent article on unemployment sheds some light on the subject and is a wonderful antidote to Krugman's latest screed.

Krugman ends with this:
So there are policies we could be pursuing to bring unemployment down. These policies would be unorthodox — but so are the economic problems we face. And those who warn about the risks of action must explain why these risks should worry us more than the certainty of continued mass suffering if we do nothing.
In other words, because the economy is in what Krugman claims is a "liquidity trap," we can dispense with the Law of Opportunity Cost and just pretend we are prosperous by printing and borrowing money and spending as though we were in a time of prosperity. Economics does not work that way.

25 comments:

AP Lerner said...

"he still refuses to see it as an economic "correction," but rather just a temporary bump in the onward march of "aggregate demand." "

This is false, and a complete misunderstanding, or misrepresentation of Krugman's view.

"or that maybe someone like Krugman should have developed it"

Thoughtful, intelligent, and well supported statement.

"As numerous researchers have pointed out, it was politics-ridden and mostly involved make-work jobs that did not move the economy to recovery"

Care to share a link or some other supporting data, or should we just take your word for it?

"Yes, Krugman has claimed that the WPA was pure and absolutely uncorrupted"

Care to share a link or some other supporting data, or should we just take your word for it?

"other than more borrowed money. "

Still waiting for you to explain why an issuer of a currency needs to borrow said currency, and how the issuer can borrow and/or tax a currency without spending first. You still have a fundamental misunderstanding of the monetary system.

"Thank goodness, there is Robert Murphy"

Yes, thank goodness for Mr. Murphy. http://consultingbyrpm.com/blog/2011/05/ap-lerner-explains-alleged-crowding-out-chart.html

"His recent article on unemployment sheds some light on the subject and is a wonderful antidote to Krugman's latest screed"

Folks, don't bother reading the article. I'll sum it for you. It's all the governments fault. End of article.

Bob Roddis said...

1. When is AP "Catallactics Don't Matter" Lerner going to explain why catallactics don’t matter anymore and when is he going to explain where all the stuff is going to come from to satisfy our unpayable debt? I’ve been waiting since last August.

2. Is Krugman going Austrian on us? “Obvious misalignment” sounds suspiciously like “Austrian malinvestment”.

http://tinyurl.com/3btwnjp

3. We could try to get inflation back up to the 4 percent rate that prevailed during Ronald Reagan’s second term, which would help to reduce the real burden of debt.

How and why is it the government’s job to alter the terms of contracts extra-judicially and without due process?

ekeyra said...

"It's all the governments fault. "

Thats the smartest thing ive ever seen you post. We can all play this game.

Mike Cheel said...

@AP 'It's all the governments fault.'

Whose fault is it then?

The blame is on the government because they are constantly meddling in the markets. They constantly create a hostile business environment for small folk entrepreneurs and non-favorites. They skewer the playing field with rules that only favor their friends. And they do it in the name of helping the economy.

And you believe them. And you defend them.

Does it really take an economic interest in MMT or Keynesian philosophy to NOT see this? Do you honestly think they have the good of the people in mind?

james c said...

The issue is debt-people built up too much and are now trying to pay it down. You have to be wilfully blind not to see the de-levarging.

LK said...

It's rich indeed to see Anderson's attack on Krugman, when Anderson's "solution" to unemployment would be massive cuts in government spending or (if Anderson is anarcho-capitalist) complete abolition of government - policies that would collapse the economy and result in even higher unemployment.

I suspect this is why Anderson - and other Austrians like him - never give us "their" solutions.

Mike Cheel said...

@LK "I suspect this is why Anderson - and other Austrians like him - never give us "their" solutions."

The solution is to allow malinvestment and bad business to reach its logical conclusion, remove all central economic planning and stop acting like a handful of politicians \ bureaucrats can know better than the free market hive mind.

You don't even need to be an Austrian to know this.

William L. Anderson said...

I guess what LK is saying is that government spending always will be a net plus. In his view, an economy is little more than a mixture into which government pours money and something magically appears (the usual Keynesian view).

I'll make LK and AP even angrier: the economy has not gone into recession because people slowed their spending; people have slowed their spending because the economy has gone into recession.

By trying to prop up bad investments and by forcing us to pay billions of dollars for things like wind power (subsidy farms) and corn-based ethanol (which hits us in the pocketbook and damages our vehicles), government just makes things worse.

Yes, yes, I know. Government is the creator of all wealth. By fiat, government can create prosperity. Government is God.

jason h said...

... complete abolition of government - policies that would collapse the economy and result in even higher unemployment.[citation needed]

Pray tell, how making it infinitely easier and cheaper to do business in this country will collapse the economy.

Maybe you're right...we need the gov't around to lock up Amish dairy farmers, grope small children, and bomb brown people in far away lands into oblivion.

AP Lerner said...

Mr. Anderson, did you see where the 10 year closed today? Would now be the appropriate time to remind you of this post

http://krugman-in-wonderland.blogspot.com/2010/06/commentary-on-current-bond-rates.html

Hmmm...maybe Austrian 'economists' don't understand the monetary system after all.

"And you believe them. And you defend them."

Uh, no. You hear what you want to hear, not what I'm saying.

"the economy has not gone into recession because people slowed their spending; people have slowed their spending because the economy has gone into recession."

Right. And it's the gas pedal that makes the car go forward, not the driver pushing on the pedal.

"By trying to prop up bad investments and by forcing us to pay billions of dollars for things like wind power (subsidy farms) and corn-based ethanol (which hits us in the pocketbook and damages our vehicles), government just makes things worse."

Something we can finally agree on. I, nor anyone that supports or understands the monetary system of the US supports policies like these. It's about providing surpluses to the private sector, not allocating the surpluses. Higher deficit via a payroll tax relief would be more beneficial than the above. And if you had the intellectual curiosity to read some of Mosler's earlier work, he was way ahead of these kind of nonsense polices. The reality is MMT is more market oriented than what you preach, hands down.

"Government is the creator of all wealth."

For you, yes, that's true. The government is your employer after all. For me? I allocate capital w/ out the assistance of the government. But yes, if my payroll taxes were lowered, I would have a higher net worth. Do you even have a point with this statement?

"By fiat, government can create prosperity."

Like Cheel, you hear what you want to hear, and not what others are saying. This is what happens when you become a spokesperson for a faulty ideology. When the facts are not in your favor, you suddenly have selective hearing.

Abba Lerner Economic Bafoon said...

AP Lerner-

That post was from June 2010 prior to the Fed anouncing QEII. Has it occurred to you that if the fed is buying US Treasury's (aka "money printing") it has the power to keep interest rates artificially low in perpetuity?

What a dolt.

Methinks said...

Abba,

I don't agree that the Fed has the power to keep rates low in perpetuity.

The Fed's money printing is inflationary and inflation raises the nominal rate. As a single entity, the Fed hasn't the ability to keep the rates at any level if the dominant opinion in the bond market is otherwise.

So far we've been lucky - the rest of the world looks to be worse off than we are. We're the least bad off of the losers.

Abba Lerner Economic Bafoon said...

The fed has the ability to keep nominal rates low in perpetuity.

Didn't the fed specifically say that's what the purpose of QEII was?

Real rates are negative. Let's see how this plays out. Methinks the the problems will continue...

John Arly said...

This blog and the articles seem to be about whether the "govment" is utiopia or a commie scam. Whether or not you like Krugman, he presents data to support arguments - here there are only sacred beliefs - and those make little sense. Among one of Robert Murphy's assumptions about unemployment is that the millions of people without work are just hanging out until their unemployment insurance runs out. The reality is that on planet Earth people whose former income has been reduced by a large amount by loosing their jobs and medical insurance do not just hang out but freak out and trying to find employment. A second is that if the minimum wage had not been raised or if we scrapped it, millions of jobs for $ 6/hour would suddenly open up - the problem is that the US has no use for highly paid over $ 8/hour employees as it once did all of 3 years ago. It is absolute garbage on the face of it, and supported by no measurable data.

Calgacus said...

Methinks, if you think that the Fed does not have the power to set rates at whatever it wants, you just don't understand money, banking and the counterfeiting laws. There are only a finite amount of bonds. The fed has the ability and legal authority to buy whatever bonds are out there.

The government is the monopolist of its currency and bonds. It is like being the only grocery store in town, which has an infinite number of apples (=bonds) and dollar bills too. If you sell the apples at $1, and offer $1 to buy "the market's" apples, the price of apples will damn well be $1.

And the evidence is that this kind of "money printing" "quantitative easing" low interest rate policy is deflationary in the long run, not inflationary.

LK said...

"I guess what LK is saying is that government spending always will be a net plus."

I don't assume any such thing. Humans are humans. There are bound to be some poor spending decisions sometimes.

And you evade the question: what is your recommendation now?

Are you (1) a small state Classical liberal Misesian or (2) an anarcho-capitalist?

Either way what you advocate would collapse the economy and cause a much greater amount of human suffering than what's going on at the moment.

Tell us your "solution" or be an intellectual coward.

Bob Roddis said...

My quick solution:

1. End the empire, bring ALL the troops home now. Save $1 trillion right away and every year in the future.

2. Deregulate the medical industry. Rely on freedom of contract. Save tons of $$ now and over the long haul. Supply meets demand.

3. End the drug war. End crime.

4. Abolish the public schools and compulsory education.

5. Allow private neighborhoods with their own private streets and schools and rules. Really end crime and vice. End public school sponsored mass stupidity.

6. Abolish legal tender laws. End all taxes on trades of foreign currencies, gold and silver and all non-fed issued money.

7. Abolish all labor laws. Rely on freedom of contract.

8. Slash tax rates and government spending.

9. Abolish the Fed and imprison its leaders for treason. Or execute them. Limit Congressional power to setting uniform weights and purity for gold and silver coins as they are constrained by the Constitution.

10. Repudiate the federal debt. The money borrowed was spent on illegitimate functions not authorized by the constitution. Call it a “bailout of the taxpayers”.

11. Insert an amendment in the US Constitution forever prohibiting the issuance of fiat money and Keynesian-style management of “aggregate demand” and forbid its repeal. Define any such activities as treasonous and provide for the death penalty for its violation.

12. Once we get to the mini-state, we can then worry about whether going the next step makes any sense.

LK said...

8. Slash tax rates and government spending

9. Abolish the Fed etc ...

10. Repudiate the federal debt.


= total economic collapse and mass unemployment as the US is hit by capital flight and GDP collapse.

At least you're honest.

Bob Roddis said...

Everyone and their money would want to move here and would. Due to our great success, other nations would imitate us, the Keynesians would be routed worldwide (ashamed to show their faces in public). Poverty and war would soon end. Peace and prosperity would revail.

Bala said...

"total economic collapse and mass unemployment as the US is hit by capital flight and GDP collapse."

Mindless assertion, typical of a whatever-Keynesian. Nonsense as usual.

Mike Cheel said...

@AP

"Like Cheel, you hear what you want to hear, and not what others are saying. This is what happens when you become a spokesperson for a faulty ideology. When the facts are not in your favor, you suddenly have selective hearing."

Example please of where I have:

1) Indicated that I am a spokesperson for a faulty ideology (I have said several times I am no economist)?

2) Had selective hearing?

You have met both of those criteria plenty of times.

Bob Roddis said...

When you try to pin down LK to get him to explain how “the market” could conceivably fail in a Keynesian-described manner, he immediately changes the subject and starts ranting that the Rothbardian ideal never existed. Well, Detroit is no Rothbardian ideal and one can still describe individual deaths as caused by murder, accident, old age etc. Austrians claim that depressions are caused by intervention. That the Rothbardian ideal has never been established does not impair one’s ability to conduct a meticulous historical analysis as to whether or not this is true.

Just so we don’t spend another 38 years, five months “debating” simple stuff like “what is intervention?” and “what is the free market?”, the statists just need to read Rothbard’s “Power and Market” starting at page 1057. Rothbard explains the terms that are the starting point of this debate. It’s a bright shiny line. It’s really not that complicated.

http://mises.org/Books/mespm.PDF

Mises also explains the bright line differentiation:

The most important event in the history of the last hundred years is the displacement of liberalism by etatism.

Etatism appears in two forms: socialism and interventionism. Both have in common the goal of subordinating the individual unconditionally to the state, the social apparatus of compulsion and coercion.******

Etatism assigns to the state the task of guiding the citizens and of holding them in tutelage. It aims at restricting the individual’s freedom to act. It seeks to mold his destiny and to vest all initiative in the government alone.*******

The state is a human institution, not a superhuman being. He who says “state” means coercion and compulsion. ******

The thesis of etatism that the members of the government and its assistants are more intelligent than the people, and that they know better what is good for the individual than he himself knows, is pure nonsense.******


http://mises.org/etexts/mises/og/chap3a.asp

Anonymous said...

Being directed to the Murphy paper I went and saw what was there. Murphy repeats the nonsense that is continually repeated by the theocrats.
The minimum wage did it.
Unemployment benefits did it.
Health care did it.
etc. etc. etc.
Anyone who thinks that exchanging a job for unemployment benefits is something that 10 million people did with great joy is not capable of rational thought.

The recession was caused by too little interference from the government - not too much.

Bob Roddis said...

etc. etc. etc.

Apparently there is a law of the universe that says that all critics of the Austrian School can't understand the Austrian School.

Murphy's big point was:

Resources were misallocated during the boom period. In the standard Austrian theory of the business cycle, the boom period leads entrepreneurs to start too many long-term projects, for which there are insufficient real savings. The underlying capital structure of the economy becomes distorted, and it takes time for market forces to clean up the mess after the bubble pops. For certain pockets of the labor force, the "optimal" thing to do is wait it out. (See my "sushi article" for a simple numerical example of how this all can play out.)

In some respects this process is what Keynesians interpret as a "fall in aggregate demand," when businesses and consumers come to believe they are on an unsustainable trajectory and slam on the brakes. Of course, only the Austrians recognize that the boom really is unsustainable, whereas the Keynesian efforts to prop up spending only perpetuate the problem and postpone the genuine recovery.


It is just not that complicated to always be so misconstrued.

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