Thus, he centers on an editorial that is more than three years old to claim that EVERYONE who might disagree with his wisdom is a false prophet. No, he doesn't want them stoned to death, just removed from any meaningful social contact with anyone. His theme is simple: anyone who predicted that the massive expansion of the Fed's balance sheets and attempts to monetize U.S. debt and deficits would lead to an increase in interest rates is an idiot:
...we cannot and will not persuade these people to reconsider their views in the light of the evidence. All we can do is stop paying attention. It’s going to be difficult, because many members of the deficit cult seem highly respectable. But they’ve been hugely, absurdly wrong for years on end, and it’s time to stop taking them seriously.Krugman points out that as long "as the economy is depressed," interest rates will remain low. Unfortunately, he wants to claim that this is a market phenomenon instead of something that is being done by Ben Bernanke, an effect of the bad economy. Yet, what should help revive the economy? You guessed it: low interest rates.
So, what is it? Are interest rates an effect of a bad economy, or do they ward off a bad economy? There is a problem of causality, as Krugman wants it both ways. We shall see in the coming year what actually happens. If Krugman is correct, the government's vast intervention into the economy is finally going to bear real fruit, as most sectors will rebound nicely and President Obama will have that real recovery that he deserves.
On the other hand, Krugman has been wrong before, not that he ever admits it. The Krugman paradigm is this: when the economy is depressed, government should suppress interest rates, create lots of new money, try to initiate inflation, and then borrow and spend lots of money. This will bring about a real recovery.
Since the financial crisis became painfully obvious in 2008 (and, really, more than a year before that), government has done all of these things, including bailing out banks, financial houses, and much of the domestic auto industry. The Fed's balance sheet has grown exponentially, and it seems that if nothing else, Bernanke is hellbent on making sure that no big bank goes out of business.
On the other hand, the real economy is not doing so well. If we see the kind of recovery Krugman predicts in the next four years, then Krugman will be able to claim victory, although he has a habit of claiming victory even when he is wrong. The problem is that, like most Progressives, he believes that leftist government is so magical that it can do away with the Law of Opportunity Cost by printing money.
I don't believe that economics is an "empirical" science. Instead, economic theory must submit to the laws of nature, not the laws made up by a British sexual pervert. That means a priori, and anything else is metaphysics, as far as I am concerned. So, we shall see in the end who is the false prophet.
"So, what is it? Are interest rates an effect of a bad economy, or do they ward off a bad economy? There is a problem of causality, as Krugman wants it both ways"
Well, lets think about this one. A bad economy would lead to less economic activity, meaning less borrowing, meaning banks would be chasing smaller pool of borrowers, which is something they would do by offering lower interest rates.
At the same time, the Fed may want to encourage spending by making borrowing even cheaper (and saving less remunerative) by pushing rates even lower than the already low market rates of interest.
So exactly where do you see a problem of causality?
@JG: I think you've described the "liquidity trap" problem well. But what Krugman consistently ignores, as Dr. Anderson points out, is the role of the Fed in suppressing interest rates. The Fed has provided a huge secondary market for Treasury issuance, on which long-term (mortgage) rates are based, by some estimates buying up as much as 70% of all issuance since QE1. The Fed doesn't care what interest rates it receives, since it conjures up the money to buy Treasury bonds and remits (net of operating costs) the interest it supposedly is "paid" by the Treasury right back to the Treasury. It's hard to believe that this ridiculous loop does not have a downward effect on rates, since the Primary Dealers, especially, know they will never be stuck with low-yielding bonds if the market turns. What would happen to the Treasury market if the Fed stopped this circularity? That's a question that Krugman never touches. This is another way that Krugman attempts to have it both ways: proclaiming the U.S. does not have a "fiscal crisis" while studiously ignoring the rigged market which allows this cheap borrowing to continue.
You are claiming that a change in the price of something will increase demand for the same good. That is not possible.
Changes in the own price will create changes in quantity demanded, not demand, and there is a huge difference. The effect of one thing cannot be lumped into the "cause" category of the same thing: economic activity. Sorry, but you are claiming the economy can run uphill and downhill at the same time.
Krugman's ignoring of government activity, whether it be in creating the unsustainable boom or in bringing down interest rates, is standard. What he does is attribute any good effects to government and any bad effects to "unregulated" markets.
In Krugman's world, entrepreneurs do not follow price signals at all. Instead, they are purely governed by "animal spirits" that make them run blind all of the time. Only government agents (and Keynesian economists) have real foresight.
"...economic theory must submit to the laws of nature, not the laws made up by a British sexual pervert."
Equal parts class and charm. That's why I keep coming back to this blog.
Would interest rates increase from the current near-zero rates if the Fed stopped buying treasuries and other debt instruments? Of course they would. Would that herald in the era of Greek-style higher rates from a vengeful bond market? No, not when the weakened economy has suppressed the overall demand for borrowing. And this is the point Krugman makes in his column, that for the past 4 years the deficit scolds have been predicting Euro-style inflation and sky-high interest rates, which has not happened. Sure, the Fed has helped suppresses rates even more that would normally have happened but even without the Fed buying bonds the lack of borrowing from the depressed economy would have kept rates low anyway, albeit probably slightly higher than the near-zero rates the Fed has engineered.
JG: I take your point, and I agree that the depressed economy would hold down interest rates even in the absence of Fed manipulation. However, Krugman reminds me of the guy falling past the 50th floor of the Empire State Bldg and telling everyone that he's okay so far. Japan has been playing this game for over 20 years now. The sheer volume of debt built up at these zero interest rates means that at some point (Japan is reaching it now), any fluctuation in interest rates, even 1%, will result in the entire federal budget being devoted to debt service. Kyle Bass has been very astute on this point - look for one of his YouTube videos. Krugman's encouragement of the fed. govt. to incur 20 or 30 trillion in debt (the current deficit is $1 trillion, and he wants it to be $2 trillion, so it will not take long at his urging)will bring us to the same point. It's premised on the idea that "things will turn around." They have not turned around in Japan in 20 years. Krugman's ideas will work until they don't, and then he'll revise his own history again.
"I don't believe that economics is an "empirical" science.
In other words, you follow the apriorism of Mises, whose views on economic method led to him to utter gems like this:
“What assigns economics its peculiar and unique position in the orbit both of pure knowledge and of the practical utilization of knowledge is the fact that
its particular theorems are not open to any verification or falsification on the ground of experience.” (Mises, L. 1998 . Human Action: A Treatise on Economics, Ludwig von Mises Institute, Auburn, Ala. p. 858).
Whenever you meet someone who does social sciences, and tells you that their theories are "not open to any verification or falsification on the ground of experience", you know the people in question are holding a methodology in the same camp as Freudian or Marxist lunatics.
Curiously, even Hayek thought this too about apriorism in the social sciences:
... Instead, economic theory must submit to the laws of nature"
Except economics "laws" are not like laws of nature. Anyone who has done even an undergrad degree in economics knows that the law of demand isn't really universal, e.g., Veblen goods and Giffen goods already invalidate its claim to universality.
And that is before you get to very serious problems identified in the higher-level literature where it is quite clear that income effects can swamp substitution effects, meaning that supply and demand curves do not necessarily have to behave in the way described in textbooks.
As has already eloquently been said, statists believe if things are improving it's because the government is doing the right thing; if things are getting worse, it's because the government isn't doing enough.
How can you win?
Yeah, I figured you would weigh in on that comment LK. That is why I put it in. And, given Keynes' sexual predilections, I'd say I was just about on target.
(And if Mises had demonstrated the same kind of behavior, I am sure that his detractors would have included that in any discussion of Austrian theory.)
"Veblen goods and Giffen goods already invalidate its claim to universality. "
Anyone who talks of Veblen and Giffen goods as exceptions that demonstrate the non-universal nature of the Law of Demand is on very shaky economic foundations. If you do not even recognise the difference between the "good" and the "thing", you shouldn't be talking of economics. You have demonstrated many a time that you do not understand economics. Thanks for demonstrating it yet again.
There is no such thing as a "Veblen Good" (except from the imagination of Thorstein Veblen), and the "Giffen Good" requires a set of conditions that do not invalidate the Law of Demand.
So, LK, are you claiming that Keynesians can invalidate the Law of Scarcity by printing money?
"Anyone who has done even an undergrad degree in economics knows that the law of demand isn't really universal,"
What brilliant use of the word "knows"!! Only a genius like LK can do this. It does take a special idiot to fail to recognise that the word to be used is "learns" and not "knows". That it is taught in undergraduate courses is a fact. That it is faithful to reality and represents a concept relevant to the real world is not a fact. It is a claim. And that claim falls flat on the simple point of the very definition of the concept demand and how the law of demand is identified.
"British sexual pervert"
Dr. Anderson... I've been a longtime fan of your blog but this comment really threw me. Although I generally agree with you I fail to see how ad hominem attacks advance your cause. I'm very disappointed.
Regarding the "British sexual pervert" comment, this doesn't surprise me at all. More often than not, when you scratch a libertarian what you find underneath is a closet conservative.
Please continue to note that Lord Keynes was a serial child rapist who along with his degenerate criminal clique frequented the child sex slave brothels of the Mediterranean, since his lusts were more difficult to slake in the British Isles. Perhaps he ran out of victims.
"More often than not, when you scratch a libertarian what you find underneath is a closet conservative."
What you really find is someone who believes serial rape of children to be wrong, even if the perpetrator is someone whom statists worship and even name themselves after.
I was not aware of these allegations regarding Keynes. However repugnant, I don't see how they bear upon his economic theories. To say that you don't accept his ideas on the economy because he is a "British sexual pervert" does not advance your argument. Let's stick to economics please.
It sounds like just a rumor to me. Are there any sources of whether any of what Anon 1:26 said. Regardless of whether that statement is true or not, let's not bring the personal life of Keynes into these debates and have a civil discussion about economics.
Everyone should read Prof. Anderson’s excellent article on the religious nature of the leftist “progressives”.
While he does not psychoanalyze them, I will. It is essential to their extremely shaky self-image that they have micro-managerial control over the entirety of society via their magic, omniscient and benevolent agent, the government. Note that they are totally unable to self-reflect regarding this bizarre world-view which, if there was such a thing, might be called a “mental illness”.
This explains why they are always unable and unwilling to engage the basic concepts of libertarianism and the Austrian school, the non-aggression principle and economic calculation. Thinking about either would require them to think about how average human beings actually and successfully navigate in the real world without the helping hand of “progressives”. “Progressives” would rather die (or more likely kill you) than think about that. This analysis also explains everything about the motivations of the Keynesians. And it explains why real world facts do not matter to them.
Strange but true: The “progressives” were all Maoists in the 70s but now they are Keynesians. Strange but understandable.
That's right Roddis, Keynesians are violent Maoists, Progressives have poor self image, and Libertarians aren't spiteful malcontents who use the language of freedom to embrace a social darwinist ideology.
Your pop psychology is every bit as enlightening as your amateur musings on economics. Keep up the good work.
There’s no “social Darwinism” in free voluntary exchange and a strict prohibition upon the initiation of force and fraud. The current split between the haves and have-nots is intesified by Keynesian policies of subsidies and Cantillon Effects. “Progressives” so hate average people that they set upon them like a school of piranha at the drop of a hat, whether it be “gun control” or restrictions due to “global warming” or non-existent contrived Keynesian “macro” problems that average people are too dumb to understand and require the “helping hand” of the “progressive” and his SWAT team. “Progressives” are so insecure that they refuse to even process basic Austrian and libertarian concepts nor will they admit that everything they propose requires a SWAT team to force compliance.
Further, my theory explains why “progressives” long supported genocidal mass murderers like Stalin and Mao for decades and why there still aren’t any major motion pictures depicting the various socialist slaughters.
If you want “social Darwinism”, start with democratic socialism in multi-ethnic societies where you will always get ethnic strife (and poverty) and often Rwandan style mass murder.
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