Thursday, May 2, 2013

Yes, Krugman, Empower the Inflation Fairy

Lest anyone think that Paul Krugman is an economist, his latest column bemoaning the lack of hardcore inflation presents every reason as to why he is a crank, although a famous crank. Yes, the Inflation Fairy has the answer: sprinkle magic dust and watch it turn into money, lots of money. We'll all be rich!

Let us read Krugman in his own words:
...at this point, inflation — at barely above 1 percent by the Fed’s favored measure — is dangerously low.

Why is low inflation a problem? One answer is that it discourages borrowing and spending and encourages sitting on cash. Since our biggest economic problem is an overall lack of demand, falling inflation makes that problem worse.

Low inflation also makes it harder to pay down debt, worsening the private-sector debt troubles that are a main reason overall demand is too low.
But it gets better:
So why is inflation falling? The answer is the economy’s persistent weakness, which keeps workers from bargaining for higher wages and forces many businesses to cut prices. And if you think about it for a minute, you realize that this is a vicious circle, in which a weak economy leads to too-low inflation, which perpetuates the economy’s weakness.

And this brings us to a broader point: the utter folly of not acting to boost the economy, now.
One can surmise that Krugman really believes that if Ben Bernanke were to unload his proverbial helicopter and shower Americans with lots of money to the tune of, say, a million dollars apiece, then the economy would have plenty of demand and everyone would be rich. It would be so easy. Granted, the Inflation Fairy would have a beard and her wings would look like helicopter rotors, but she still could turn magic dust into money.

There is another reason I say Krugman is no economist, and the following statement demonstrates my point:
From the beginning, it was or at least should have been obvious that the financial crisis had plunged us into a “liquidity trap,” a situation in which many people figure that they might just as well sit on cash. America spent most of the 1930s in a liquidity trap; Japan has been in one since the mid-1990s. And we’re in one now.

Economists who had studied such traps — a group that included Ben Bernanke and, well, me — knew that some of the usual rules of economics are in abeyance as long as the trap lasts. Budget deficits, for example, don’t drive up interest rates; printing money isn’t inflationary; slashing government spending has really destructive effects on incomes and employment.
Perhaps the most important "rules" of economics to be "suspended" by a "liquidity trap" is the Law of Opportunity Cost and the Law of Scarcity, or so Krugman would have us believe. Interestingly, he wants us to believe that by the simple act of printing lots of money, government essentially is creating real wealth, as in Krugman's view, governments self-generate wealth.

For all of the Keynesians out there who believe that the real problem is "idle resources" that can be "stimulated" by government doling out lots and lots of new cash, one must remember that after the new money has been farmed out to the economy, people will act, whether they pay down debts or use it to spend on consumption goods.

However, what they want us to believe is that after the Inflation Fairy unloads her magic dust and people have gone on a spending spree, somehow the economy then will magically arise and move forward. All that was needed was some "pump priming"!

But why should that be the case. Why should the act of dumping a lot of new money on people give long-term revival to the economy? How is it that a bunch of new money the first time around would awaken the owners of those "idle resources" but not be needed for round two and beyond? Krugman writes of the economy "gaining traction," but he never explains what it means.

This last point is important, for Krugman and his followers want us to believe that after a massive round of distributing new money (and the new money always goes to those most in need), the prosperity that follows will move into ever-widening circles and spreads employment to the unemployed. In other words, Krugman wants us to believe at least a little bit more inflation will bring hope:
I wrote recently about how, by allowing long-term unemployment to persist, we’re creating a permanent class of unemployed Americans. The problem of too-low inflation is very different in detail, but similar in its implications: here, too, by letting short-run economic problems fester we’re setting ourselves up for a long-run, perhaps permanent, pattern of economic failure.
It has been a long time since an economist was publicly willing to claim that inflation would bring prosperity, give that a lot of us still remember the huge inflation that occurred around 1980, and it was not a wonder drug. (Krugman would argue that we were not in a liquidity trap, so the laws of economics were different.)

But here is the problem: over time, a new bounce in the economy becomes dependent upon yet another round of inflation. At first, inflation seems to be a miracle cure, as no doubt a bunch of new money in the hands of at least some people will make them better off relative to others. They will spend or maybe pay off some debts and be able to purchase things at prices that reflect the time before the surge of new money. (It takes a while for the money to work its way through the economy and finally push up prices, although the process of increasing prices will be uneven.)

But then what? Because it was the inflation that produced the temporary surge in activity, the only way to replicate the economic bounce is to inject another round of new money. This time, the "good" effects are not quite as good and the "bad" effects become a little more pronounced. One can understand what happens as this process is repeated time and again.

When the 1960s began, even though the economy was in a recession, nonetheless times overall were pretty good and inflation was low. As the government began to grow massively during the next decade and the American military venture into Vietnam metastasized, the government, through the Fed, turned to more and more inflation. By 1965, all silver coins were gone (although the government insisted that the new "sandwich" coins were just as valuable as the old silver ones), and by 1971, there was a monetary crisis.

The theme of Krugman's column is that inflation itself can bring prosperity to an economy languishing in a "liquidity trap." I have no doubt that a massive injection of money into the hands of people like me would have a stimulative effect -- at first. As I noted before, this would not be real prosperity, but rather a trap. Unfortunately, Krugman really does believe that inflation -- the debasing of the marginal unit of money -- is the key to a new prosperity.

And it all comes out in three words: not enough inflation. It is better spoken in two words: Inflation Fairy. Or maybe it is better spoken in one word: insanity.

55 comments:

ayassos said...

It certainly worked, so I hear, at the Washington D.C. babysitting co-op. The babysitters got traction; why not the entire American economy? They're virtually identical, or will be when the babysitting gets offshored to China.

Cato said...

Krugman writes of the economy "gaining traction," but he never explains what it means.

Exactly. Krugman never discusses logistics, for precisely the reasons Anderson points out.

But what we see in place of logistics is the kind of attempts at intimidation of his readers that we expect from an academic who cannot flunk or fire anyone who disagrees with him.

If you are a reader that has a question, just remember that about this subject only stupid/evil people have questions ("as should have been obvious"), and that there is no one whose word you are better qualified to take than his ("a group that included Ben Bernanke and, well, me").

Anderson has trouble seeing Krugman as an economist. I have trouble seeing him as a three-dimensional adult.

Anonymous said...

Hi Professor Anderson,

You refer to the "Law of Opportunity Cost" and the "Law of Scarcity".

To help me better understand this post, can you please provide your definitions of these terms? Thanks.

William L. Anderson said...

Opportunity cost can seen here:

http://en.wikipedia.org/wiki/Opportunity_cost

Scarcity here:

http://en.wikipedia.org/wiki/Scarcity

Krugman assumes that because resources are "idle," the government through "costless" or "near-costless" borrowing and money printing can make those resources employed.

Keynesians say that lack of "aggregate demand" causes such unemployment while Austrians look to malinvestments (at first) and then see how government actions actually raise the cost of employing those resources.

Anonymous said...

I'm with Cato. I'm tired of giving Krugman the benefit of the doubt of being anything remotely resembling an intellectual, an economist, or anything similar....

He's incredibly myopic, naive, dishonest, and well, you get the idea.

Anonymous said...

There's this guy at the following blog that goes by the name dcpetterson (he's both an author/editor and regular commenter) who is making some wildly inaccurate and wholly outlandish claims about Austrian Economic Theory. I'm no longer welcome there, but it'd sure be nice if someone would step in and take him and his friends down a notch or three. See for yourself the childish BS he's been spewing.


http://www.logarchism.com/2013/04/28/the-error-heard-round-the-world/#comments

Bob Roddis said...

I continue to maintain that the vast majority has no clue that inflation is not an unchangeable mysterious force of nature but a purposeful government policy with the intended purpose of stealing their purchasing power. Getting that message out so that the public has an instanteous understanding of it is essential but perhaps sufficient to defeat the Keynesians. But it is still necessary and such understanding still has not yet occurred.

Anonymous said...

Bob, I wholeheartedly agree. My view on Deflation is that it is simply the Market's way to bring prices in line with what people can afford in a depressed economy. The Government tries to make us think this is a problem, and steals this purchasing power. If falling prices really kept people from buying things nobody would own a computer or a cell phone.

Pulverized Concepts said...

The nation/state needs funds to purchase the votes of citizens by putting them to work welding up aircraft carriers, counting unwed mothers and teaching adolescents that the government has all the answers. Stealing the wealth of the productive through taxation, or even bond sales, can't supply all the money necessary to buy those votes so they must enpixelate even more. Sane people feel that money must represent wealth, Keynesians don't see the relationship. To them, the money itself is wealth, even though as more is enpixelated it comes to represent fewer assets. And that's the real point, the money itself has value only in its relationship to an asset. Those who own the assets, land, cattle, oil, coal, etc. will be wealthy regardless of the purchasing power of money. Eventually, if Steve Schwartzman doesn't convert his bank deposits to real asset ownership, he'll be just as broke as the homeless guy with the cardboard sign down on the corner.

Bala said...

Prof. Anderson,

Please note that he says that injecting money into the economy will not be inflationary. I am pointing to the fact that he considers inflation to be price rise rather than the increase in the money supply itself. That's a rather big and fundamental difference that I thought merits being pointed out.

Unknown said...

This article is mind blowing I read it and enjoyed. I always find this type of article to learn and gather knowledge.

Elektrownia sloneczna

Obat Bius said...

nice post mrs

Robert Welain said...

That's quite intriguing, you know. Please, spend some of your time and check this entry, my friends.

speedy paper discount code said...

Thank you for this post. This is very interesting information for me.

EssayOnTime said...

Please keep sharing more such article. I've really like your blog and inspire me in many ways.

Lucille F. Parham said...

I like the helpful information you provide on your articles. Racing Games

Anonymous said...
This comment has been removed by the author.
Anonymous said...

We are highly expert in air duct cleaning and also expert in Air Duct Cleaning Service Denver perform a detailed and comprehensive plan to remove the dirt within the air ducting and improve the air quality. We have highly trained and skilled technicians. Therefore, we are the best in the business.

john said...

gutter cleaning services are essential for your home protection and better curb appeal. At Max Serv Corp, our team of professionals come to your home with the training, equipment, and safety procedures needed to securely and effectively clean your gutters.

alex said...

Are you building another home or Woodstock GA business? Do you need to replace your property’s current garage door? Same Day Garage Door Services will expertly install Woodstock New Garage Door or garage door repair woodstock for you

william said...

we end up thinking about it a lot. If you find yourself needing a new commode or Toilet Installation and Repair

alexandra said...

Commercial Cleaning Dallas, an expert Commercial Cleaning dallas eliminates the essential germs and allergens found on work areas, PCs, consoles, lounge tables, and covers.

jake said...

We are committed to bringing a new horizon of expertise in COMMERCIAL ROOFING SERVICES IN MARYSVILLE and our project work says a lot about our work.

noah said...

The goal of our team is to help you save money. We do our best to fix, improve and repair your broken or faulty systems, we provide system installations and repair in cucamonga

james said...

A piece of great news for the residents of Millis , as we are rendering our washing and residential home cleaning services millis at an amazing discounted late and budgeted friendly.

lucas said...

We work on all kinds of car models, lock models, and key types as we have lock experts who are trained to handle all the brands.that why we are Professional Locksmith Company in Jacksonville FL

henry said...

Our professionals are exceptionally experienced specialists who know all about, tile and grout cleaning strategies. They've been cleaning from years. We have completed thousands of successful projects as we utilize grout, tile and stone cleaning devices that ensure the services of the highest quality. We are Provide This Service tile and grout cleaning phoenix

david said...

Make an informed decision with our licensed home inspectors on the house. Our comprehensive home study discusses concerns that need to be changed. We provide home inspection service southington

Anonymous said...

If your concrete has a little bit of wear and tear, we can resurface it before we perform staining. It will get you rid of the imperfections and uneven pavements.
Reach out to our team for professional concrete coating in Belmont. We provide restoration in belmont.

Anonymous said...

Due to the amazing variation of colors, its size, impact, and craft the stone makes the ring attractive and impressive. We have collection of Aqeeq Rings For Men

Smith said...

When it comes to clean your PC, it can be beneficial for you in numerous ways. As the dirt inside has its direct dependency on the speed and condition of its software and hardware. Check This tips and benefits of cleaning pc.

Smith said...

When it comes to clean your PC, it can be beneficial for you in numerous ways. As the dirt inside has its direct dependency on the speed and condition of its software and hardware. Check This tips and benefits of cleaning pc.

Anonymous said...

Do you know it is essential to keep garage door sensors clean to avoid malfunctioning?
Garage door sensors ensure that your garage door is closed when no one is present under the garage door. If the sensors are not clean, your garage door may not function properly. However, if the sensors are broken or not aligned. if you wanna garage door repair near me.

Anonymous said...

Do you know what's special about our home inspectors in Sugar Land?
Our home inspectors are dedicated to providing you a detailed analysis of your home. They ensure that your home is perfect in every way and safe for you to live in. Our dedicated professionals make sure that you are getting the right value for your money. if you wanna Home Inspector near me.

Anonymous said...

At A&G Touch Cleaning, LLC, we understand that there are few things that can make someone happier than coming home to a clean house. With as much work as there is to be done in a day, the last thing you want to do is clean. if you wanna house washing near me.

Anonymous said...

We provide Commercial Interior Painting in Baltimore a seamless, efficient, and meticulous interior painting job that will make a world of difference to your home’s overall look and impact.

Wilder Perez, Realtor said...

if you’re in the market and looking for a house for sale in Indio CA or looking to sell your current property, you can be confident that Wilder will exceed all of your property buying and selling expectations.

Anonymous said...

You Have A Pest Problem? Aries Pest Control Services have a Pest Solution.If you have a pest problem in your home or commercial property, look no further than Aries Pest Control. We offer a variety of pest control services including bed bug control, termite services, and mosquito treatment. Specializing in Bed Bug Control, Termite Services, Mosquito Treatment, Rodent Control, and More Serving Austin, Round Rock, Georgetown, Leander, Pflugerville, Cedar Park, Hutto, Manor, Buda, Elgin, Kyle, Copperas Cove, Del Valle, Lago Vista, Jarrell, Killeen, and Taylor Visit Here For More Details pest control service in austin tx

Anonymous said...

This is such a great resource that you are providing and you give it away for free. I love seeing blog that understand the value of providing a quality resource for free. It’s time to avail this service Attic Insullation Service in USA visit here for more details.

About Us said...

really infomative and eduvcative article thanks publisher for sharing this info with us furniture flipping secret review
whatsaup flippzilla

Anonymous said...

japan travel tips

Austex Duct Cleaning said...

Austex is a professional air duct cleaning company providing services in Austin and surrounding areas with the aim of bringing you the cleanest air ducts possible. Call now or schedule an appointment online.

Austex Duct Cleaning said...

Very good information which is beneficial for all, thanks for sharing this information!

Uzma said...

May you be blessed with peace of mind, good health and uncountable favors of Allah
jumma mubarak wishes messages
good morning love messages for wife
romantic heart touching love messages
good morning messages for her

gostopsite said...

Fabulous! This is just amazing! Not just high quality, however additionally valuable info. And that is rare to come by nowadays!

totosafesite said...

I wan’t going to comment as this posts a bit old now, but just wanted to say thanks.

gwolf said...


Pretty good post. I have really enjoyed reading your blog posts. Thanks for sharing us

bacarasite said...

I really liked it. I wanted to leave a note. I was reading your website. I also tried to share the site.

sportstoto365 said...


This is the best way to share the great article with everyone one, so that everyone can able to utilize this information

Share Ripple said...

In a competitive startup landscape, differentiation is not an option but a strategic imperative. By identifying your Unique Selling Proposition, studying your competitors, and implementing effective differentiation strategies, you can set your startup apart and capture the attention of your target audience. Success stories like Airbnb, Spotify, and Warby Parker demonstrate that differentiation is a powerful driver of growth and innovation. As you navigate the challenges of building your startup, remember that differentiation is the key to not only surviving but thriving in a crowded market.
How to Differentiate Your Startup in a Competitive Market

Mindful Tales said...

Embracing mobile technology is not a choice but a necessity in today's digital age. Businesses that harness its transformative power can become agile, competitive, and better equipped to thrive in an ever-evolving marketplace. In the grand narrative of business evolution, mobile technology is the protagonist that is revolutionizing how we work, connect, and innovate.
The Business-Transforming Potential of Mobile Technology

casinosite.one said...

Great post with informative content. Thanks for sharing.

casinosite777.top said...

It was so bravely and depth information. I feel so good read to your blog.

casinositeguide.com said...

Great Information. Thanks for your blog! Eagerly waiting for your new updates.

take my course for me said...

Your blog is truly a treasure trove of exceptional writing.