Murphy on Rogoff and Krugman

Bob Murphy always has interesting points on his blog, and he has a couple of posts that make for good reading and thinking.

In this one, he takes a hard look at the whole kerfuffle regarding Rogoff's nonexistent endorsement of "austerity," and in this one, he exposes Keynesian Logic (an oxymoron if ever there was one) for the fraud that it is.

I would like to add that Krugman really wants us to believe that Europe has been imposing an "unprecedented" policy of "austerity," although from what I can tell, Krugman defines "austerity" as not massively increasing government spending.

Raise that Teenage Unemployment Rate

If one were to read only Paul Krugman's column and blog, the reader would find many interesting things about economics. That would include things like governments make economies grow by printing money (we call that "creating demand"), only government regulators can accurately read price signals (and know the future), and that the U.S. economy as a whole behaves exactly as an alleged babysitting co-op in Washington, D.C.

Today, however, we find yet another gem in the Krugman lexicon: forcing wages above the market level not only will have no effect on employment of low-skill workers and raises real wages overall, but will be an overall plus to the economy because...it supposedly "corrects" a glitch in the earned income tax credit. Oh, and forcing up the minimum wage is "good economics."

To his credit, Krugman does not rely on the fallacy of confusing marginal measurements for total measurements, something I have heard on NPR and read in various editorials and columns. (That fallacy is to assume that if the government raises the minimum wage, then it has raised overall income, which gives people more money to spend, which creates prosperity. Yes, people have been making that argument, which is based upon the Fallacy of Composition, but I think Krugman understands that if he does try to do that, he would be jettisoning the entire Diamond-Water Paradox explanation of value which has under-girded neoclassical economics since the late 19th Century.)

In fact, Krugman anticipates the Reductio ad absurdum response by declaring:

Well, Economics 101 tells us to be very cautious about attempts to legislate market outcomes. Every textbook — mine included — lays out the unintended consequences that flow from policies like rent controls or agricultural price supports. And even most liberal economists would, I suspect, agree that setting a minimum wage of, say, $20 an hour would create a lot of problems.

Now, I am not sure why $20 an hour would be bad, at least if one depended upon the reasoning I have heard on NPR, the NY Times, and from other pundits, if they are insisting that it increases aggregate demand. The obvious reason -- and Krugman does not want to stray altogether from an a priori view of the laws of economics -- is that $20 an hour would have the same effect as a big agricultural price support but instead of there being a huge surplus of wheat, there would be a huge surplus of low-skilled workers not being able to find legal employment. (I am sure that my mentioning of a priori analysis is going to set off the Usual Suspects who want us to believe that there is no Law of Scarcity at all because government can do away with scarcity simply by printing and borrowing, but we should face it that when Krugman does allude to real supply-and-demand functions and how they behave, he is engaging in a priori.)

Instead, Krugman is trying apparently to make the claim that the present $7.25 an hour minimum wage probably is below true market levels and that employers are able to hire on the cheap. He declares:

First of all, the current level of the minimum wage is very low by any reasonable standard. For about four decades, increases in the minimum wage have consistently fallen behind inflation, so that in real terms the minimum wage is substantially lower than it was in the 1960s. Meanwhile, worker productivity has doubled. Isn’t it time for a raise?

There are a couple points I need to make here. First, he is saying that inflation effectively cuts wages, something nearly every economist, including John Maynard Keynes, would say and Keynes even advocated inflation precisely for its wage-cutting effects. However, Krugman in recent years also wants us to believe that inflation has a wealth-enhancing effect in that it "stimulates" economic activity and actually is necessary for economic growth.

We have a logical disconnect here. If the very thing that helps to bring about economic growth also has the bad effect of putting whole classes of workers behind, then we need to ask if economic growth is occurring at all, or if people are better off without the growth, or if economic growth as we know it is nothing more than a transfer of wealth from lower-income people to higher-income people.

Time and again we have read not only from Krugman, but also from many other "liberal" sources that over the past 30 years, income inequality has increased demonstrably and that (according to Krugman's statements on numerous occasions) real wages for the vast majority of Americans have fallen relative to where they were before 1980. For that matter, Krugman makes that argument here, along with implying that the minimum wage workers of 30 years ago are the same people working minimum wage jobs now.

So, we are left with an interesting chicken-and-egg question: does economic growth occur because of this increase in inequality, or does it occur despite the advent of economic growth? If it is because of the former, then economic growth by itself would be deemed immoral by any standards of human decency. If it is the latter, then the only logical conclusion one can reach is that overall standards of living have risen, but that the very wealthy benefit more from growth than do others.

In order to make the argument using the first point of view, one would have to demonstrate that since the advent of capitalism more than 200 years ago, standards of living for the vast majority of people have fallen, given we have seen nothing more than a wealth transfer from the poor to the rich. Not even Paul Krugman is willing to make that argument.

For that matter, he would have to say that standards of living (as measured by real wages) for the vast majority of Americans have fallen in the past 30 years ever since the top federal income tax rate was moved from 70 percent (a rate Krugman personally told me in 2004 was "insane") to 50, then 28, then 33, then 39.6, then 35, then 39.6 percent. I'm not sure that Krugman is going to try to claim that most Americans actually are poorer than they were three decades ago, but from what I see, that is his only logical conclusion. Since Krugman has argued elsewhere that the various economic "classes" in this country are rigidly stratified, and that there is little economic mobility, I don't see how he gets out of this jam.

If he uses the second argument I presented -- that overall living standards have risen, but the class of wealthy people has done better than everyone else -- then he simply is trying to say that we have had economic growth, but it has been somewhat uneven, and that goes against his own liberal sense of "fairness." But elsewhere he and others (especially Robert Reich and Joseph Stiglitz) have argued that inequality has blocked economic growth, so we are in a quandary, as Krugman and others have tried to argue against themselves -- but manage to get away with it because they are the darlings of the current political classes and their adoring media.

I have no idea how Krugman can justify logically holding to conflicting and mutually-exclusive viewpoints, but in the end he does not try to do so. Instead, he uses both arguments and expects the readers to believe both.

His second point is while logic might propose that raising the minimum wage above market levels would increase unemployment, we don't see that happening, which means that arguments against raising the minimum wage are wrong:

Now, you might argue that even if the current minimum wage seems low, raising it would cost jobs. But there’s evidence on that question — lots and lots of evidence, because the minimum wage is one of the most studied issues in all of economics. U.S. experience, it turns out, offers many “natural experiments” here, in which one state raises its minimum wage while others do not. And while there are dissenters, as there always are, the great preponderance of the evidence from these natural experiments points to little if any negative effect of minimum wage increases on employment.

Why is this true? That’s a subject of continuing research, but one theme in all the explanations is that workers aren’t bushels of wheat or even Manhattan apartments; they’re human beings, and the human relationships involved in hiring and firing are inevitably more complex than markets for mere commodities. And one byproduct of this human complexity seems to be that modest increases in wages for the least-paid don’t necessarily reduce the number of jobs.

What this means, in turn, is that the main effect of a rise in minimum wages is a rise in the incomes of hard-working but low-paid Americans — which is, of course, what we’re trying to accomplish.

His explanation (seen in the second paragraph) is a non sequitur. Yes, human beings can be complex, but either the Law of Demand, the Law of Opportunity Cost, and the Law of Scarcity hold or they do not. If a government edict calling for a rise in the minimum wage essentially can eliminate opportunity cost, then we have discovered the pathway to riches.

For that matter, if his "humans-are-complex-creatures" explanation is valid for explaining away why "studies" have shown raising the minimum wage -- even "modest" ones -- has no effect on unemployment, then why not $20 or $50 or even $100 an hour instead of the measly $9 an hour? If Krugman makes an appeal to the Law of Demand and supply-and-demand functions, then the only logical explanation would be that American employers are paying less than market wages and getting away with it.

If that is the case, then he needs to explain why they can get away with it. Instead, he offers mutually-exclusive explanations and expects readers to be awed by them, and in the last paragraph of his quote, he then tries to use the "it-raises-overall-incomes" argument. Again, this makes sense only if the current minimum wage is less than the market or "equilibrium" rate or if the current employment situation is such that the current demand for low-wage labor is inelastic.

Should current demand for that labor be elastic, then forcing up the minimum wage would result in lower overall incomes for those unskilled workers making that lowest wage. However, the current state of the economy is such that it is hard to make an argument that the demand for current labor is inelastic, for if that is the case, then there would have to be another explanation for the high levels of unemployment we see in this country.

Again, Krugman simultaneously is trying to argue two mutually-exclusive points and claiming both are true. His next argument says that raising the minimum wage has a synergistic effect with the Earned Income Tax Credit, making it work better:

Finally, it’s important to understand how the minimum wage interacts with other policies aimed at helping lower-paid workers, in particular the earned-income tax credit, which helps low-income families who help themselves. The tax credit — which has traditionally had bipartisan support, although that may be ending — is also good policy. But it has a well-known defect: Some of its benefits end up flowing not to workers but to employers, in the form of lower wages. And guess what? An increase in the minimum wage helps correct this defect. It turns out that the tax credit and the minimum wage aren’t competing policies, they’re complementary policies that work best in tandem.

This is not an economic argument, because it does not say whether or not the EIC has economic merit or not. He only says that since people of both parties support it, then it must be a good thing, which is an appeal to the ad populum fallacy. Furthermore, when one examines his argument, he is saying that something that might harm an employer is good for the worker, but that assumes that workers and employers are in competition with each other, which violates another basic tenet of economic analysis.

Moreover, there is nothing in the EIC argument that would mitigate the Great Wonders of imposing a significantly higher minimum wage than $9 an hour. If a little bit of harm to employers is a good thing, then would not a great amount of harm be great?

Unfortunately, he then comes up with a fourth argument, one that is tried-and-true in the NYT: We should raise the minimum wage because evil Republicans hate low-wage workers and are trying to keep them in poverty. He writes:

So Mr. Obama’s wage proposal is good economics. It’s also good politics: a wage increase is supported by an overwhelming majority of voters, including a strong majority of self-identified Republican women (but not men). Yet G.O.P. leaders in Congress are opposed to any rise. Why? They say that they’re concerned about the people who might lose their jobs, never mind the evidence that this won’t actually happen. But this isn’t credible.

For today’s Republican leaders clearly feel disdain for low-wage workers. Bear in mind that such workers, even if they work full time, by and large don’t pay income taxes (although they pay plenty in payroll and sales taxes), while they may receive benefits like Medicaid and food stamps. And you know what this makes them, in the eyes of the G.O.P.: “takers,” members of the contemptible 47 percent who, as Mitt Romney said to nods of approval, won’t take responsibility for their own lives.

This is not an economic argument. Instead, it is yet another cheap political appeal that is based on any number of logical fallacies. His syllogism works as such:

• Premise A: Republicans hate nearly everyone, and they especially hate low-wage workers;
• Premise B: Republicans are against raising the minimum wage to $9 an hour;
• Conclusion: Therefore, raising the minimum wage to $9 an hour won't increase unemployment of low-wage workers. 

He second syllogism operates this way:

• Republicans are evil;
• Republicans oppose raising the minimum wage to $9 an hour;
• Therefore, anyone who opposes raising the minimum wage to $9 is evil, or at least one's belief that it is a bad thing is motivated by evil.

This is the kind of logic one expects to hear from a politician on the stump, not economic analysis from an academic economist who has received the highest honors his profession can give. However, there is even more, as economist Robert Murphy has demonstrated.

Murphy's Law?

Robert Murphy, in a couple of blog posts, takes issue with Krugman on two fronts. In this post, he notes that a Krugman vs. Krugman battle presently is brewing, as it seems that Krugman not long ago was making essentially the classic economic arguments against raising the minimum wage. (That must have been the John Bates Clark winner Krugman, which only could mean that he no longer holds to the economic views he believed when he won that award.)

In a second post, Murphy looks at the empirical arguments claimed by Krugman and others: that states that have raised their minimum wages above the national level have not experienced any problems in unemployment of low-wage workers. Murphy's post includes the unemployment rates for people in the 16-19 age bracket (and who most likely would qualify for minimum-wage jobs), comparing the rates in those states that have wage minimums above federal minimum, and those that do not.

Interestingly, of the top eight states in teenage unemployment, six have higher-than-national minimum wages, led by California. Now, one has to be careful with simple empirics like this because one cannot assume that minimum wage is the only factor in teenage unemployment, but certainly one would assume that it would be statistically significant.

Krugman: Playing Fantasy Economics

I originally started out critiquing Paul Krugman's latest political screed, but decided, instead to defer to Bob Murphy and others. After all, unlike Krugman, Murphy is an economist.

If Krugman has a column Monday, then I will have commentary. If not, Merry Christmas, everyone!

Robert Murphy's new "Krugman and Keynes" course

Robert Murphy, perhaps the best Krugman critic out there, will be teaching a new course, Keynes, Krugman, and the Crisis. Writes Murphy:

The class is designed to give students of the Austrian School a fair understanding of the worldview of John Maynard Keynes and his best-known living proponent, Paul Krugman, in the specific context of economic booms and busts. After reading source material from Keynes and Krugman, we will discuss Austrian critiques of their approach.

Commenting on Krugman, Murphy says:

Whatever else one may think of him, Krugman always offers a snappy argument for his views, backed up by an appeal to a formal model. My main goal in this section of the course is to equip students to "think like Krugman." For example, he has a ready response for critics who object, "So why don't we just run trillion-dollar deficits forever, if they're so good?" or who ask, "Why didn't your advice work in Zimbabwe?" Naturally, I don't agree with Krugman's worldview, but the point is that he has a fairly consistent, complex theoretical structure. Ultimately, it takes more than one-sentence zingers to give his views the thorough refutation that they deserve.

Anyone interested in the course can find more information about it here.

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.

Krugman's Climate of Dishonesty

In reading Paul Krugman's column today on the Arizona shooting -- a very predictable column, I might add, given Krugman's political views -- I am struck by the fact that we have a mathematical economist who adds 2 + 2 and gets 5. Not only is his theme dishonest, but he also goes about presenting the information dishonestly.

When he first heard about what happened, Krugman said the following on his blog Saturday:

We don’t have proof yet that this was political, but the odds are that it was. She’s been the target of violence before. And for those wondering why a Blue Dog Democrat, the kind Republicans might be able to work with, might be a target, the answer is that she’s a Democrat who survived what was otherwise a GOP sweep in Arizona, precisely because the Republicans nominated a Tea Party activist. (Her father says that “the whole Tea Party” was her enemy.) And yes, she was on Sarah Palin’s infamous “crosshairs” list.

So, he right away assumes that some Angry White Male Who Belonged To The Tea Party carried out the shooting. Furthermore, he claims that the ONLY angry rhetoric directed against her was coming from the right, yet he apparently ignores (and one wonders if he is doing this on purpose) the hateful rhetoric that was directed at her from the Daily Kos, which is a hard-left Democrat website that adores Paul Krugman.

(The post quickly was taken down after the shooting, as the Kos wanted to make sure that Sarah Palin received the blame. I checked the site this morning and there is no reference to anything the Daily Kos had from its own side, and it once again is blaming Palin and the Usual Suspects from the Tea Party, as well as a quote from Krugman. Gabrielle Giffords, it seems, committed the sin of voting for John Lewis for speaker instead of Nancy Pelosi. Obviously, according to the Daily Kos, that alone was worthy of death.)

Since the shooting occurred, we have found much more information about the shooter, Jared Lougher. Apparently, the guy was somewhat a person of the Left, and it is quite doubtful that Sarah Palin influenced him to do anything. He apparently is someone whose behavior has been growing increasingly bizarre and disruptive. Furthermore, it is abundantly clear that he has had nothing to do with the Tea Party or any of the other protest movements.

All of that information is known to us, and it was available when Krugman wrote today's column. Thus, I come down hard on him precisely because he purposely ignores the facts. Krugman writes:

...there has, in fact, been a rising tide of threats and vandalism aimed at elected officials, including both Judge John Roll, who was killed Saturday, and Representative Gabrielle Giffords. One of these days, someone was bound to take it to the next level. And now someone has.

It’s true that the shooter in Arizona appears to have been mentally troubled. But that doesn’t mean that his act can or should be treated as an isolated event, having nothing to do with the national climate. (Emphasis mine)

In other words, after first having claimed Saturday that the shooter MUST have been tied to the Tea Party, Krugman now ignores the guy's background and life circumstances. Why? It does not fit Krugman's narrative.

As one who does not watch television -- and especially the political talk shows like those on MSNBC with Keith Olbermann and Rachel Maddow and the ones on the right on Fox News -- I have no idea if the rhetoric is comparable or not between right and left. However, when I read the following from Krugman, I have to wonder how a Nobel Prize winning economist can stretch language with a straight face:

And there’s a huge contrast in the media. Listen to Rachel Maddow or Keith Olbermann, and you’ll hear a lot of caustic remarks and mockery aimed at Republicans. But you won’t hear jokes about shooting government officials or beheading a journalist at The Washington Post. Listen to Glenn Beck or Bill O’Reilly, and you will.

Now, I really doubt that either Beck or O'Reilly (neither of whom I respect) have called for political opponents to be shot and killed. I HAVE seen (on YouTube) some of the hateful rhetoric that Olbermann has directed toward Ron Paul. On this segment, he accuses Paul of treason, which carries the death penalty. No doubt, if O'Reilly were to accuse someone of treason, Krugman would claim he was trying to have that person killed.

In other words, with Krugman it is "heads I win, tails you lose." Anyone who disagrees with Krugman and his friends and makes that disagreement public is a traitor and an inciter of hate. Now, this is the same Paul Krugman who has smeared other economists with hateful rhetoric, calling them "zombies." (Robert Murphy lays out the Krugman theme in this insightful article.)

So, in the end, Krugman jumps into what clearly is a tragic situation and throws around partisan rhetoric, makes up his own narrative, and ignores the facts. Had Sarah Palin written that Rep. Giffords was "dead to me" on her website, would Krugman have pretended she never said anything like that?

Right. Years ago, I wrote that Krugman was not an economist, but rather was a political operative. I have not changed that opinion a whit, and Krugman's column today proves my point.

It is one thing for political hacks like Olbermann or Beck or even the people at the Daily Kos to frame everything that happens in political terms and ignore pertinent facts. I expect that kind of behavior from them.

However, when a decorated academic economist does the same -- and calls it careful analysis -- I draw the line. I NEVER have seen or heard hateful rhetoric coming from other Nobel Prize winning economists, ever, and I have spent hours with many of them. Yet, with Paul Krugman, it seems that all we get is hate and name-calling and political talking points. I will let you be the judge of that kind of behavior.

Should Paul Krugman and Robert Murphy Debate?

Perhaps the best Paul Krugman critic on the web today is Robert Murphy, who has managed to break down a number of Krugman's arguments and point out the Princeton Prof's errors. Obviously, it is time for these two men to debate!

See more on this proposal at this site. Debate!!!!

Are We Really Suffering from a Paradox of Thrift? Two Critics of Keynes (and Krugman)

In a blog post today, Paul Krugman claims that the U.S. economy is suffering from the "Paradox of Thrift," and we cannot hope to have a recovery until people stop saving and start spending. It is another way of saying that what might be rational for an individual is irrational for the entire economy.

Krugman writes:

In normal times, we believe that more saving, private or public, leads to more investment, because it frees up funds. But for that story to work, you have to have some channel through which higher savings increase the incentive to invest. And the way it works in practice, in good times, is that higher savings allow the Fed to cut interest rates, making capital cheaper, and hence on to investment.

But right now we’re up against the zero lower bound — yes, I’ll get the usual complaints about how long-term rates aren’t zero, but the Fed doesn’t have direct control over those rates — so this normal channel doesn’t work.

And what that means is that if people — or the government — try to save more, they only end up depressing the economy. And the weaker economy leads to lower, not higher investment. And this in turn means that attempts to save more don’t help our future prospects. On the contrary, they reduce the economy’s future growth.

In answering this latest missive, I turn to Robert Murphy (again) and Clifford Thies, both of whom are excellent economists and good writers to boot. Murphy writes:

...it will be useful to spell out exactly what happens in a market economy when consumers decide to save more of their income. The first thing to realize is that people do not decide to "spend" or not; rather, they decide whether to spend in the present versus in the future. For example, imagine that thousands of couples in a large city one day decide to skip their weekly restaurant outings in order to save up for a summer cruise. At first, it seems that this would hurt the economy. After all, local restaurants see their sales drop, and so they buy fewer items from their suppliers and lay off some workers. The suppliers and workers in turn have less income to spend, and so sales are hurt elsewhere too.

However, so long as the entrepreneurs involved in the cruise industry anticipate the eventual increase in demand for their services, they will exactly offset the above effects when they hire more workers and other items in preparation for the busy summer months. The new savings (which were previously spent on restaurants) drives down interest rates, perhaps allowing the cruise operators to borrow money and pay for an additional liner. Thus the decision to save more doesn't reduce total income or employment, once everyone adjusts to the new spending patterns. It is really no different from a scenario where thousands of people become health conscious and decide to spend their money on vegetables rather than fast food.

Now it's true, in the present circumstances of our financial panic, consumer spending has fallen because of fear, not because of a fundamental shift in the desired timing of consumption. But still, the point remains that people cut back on present consumption in order to be able to "spend money" in the future. The difference between our present situation and the cruise-liner story above is just that people right now aren't sure exactly when, and on what, they will be spending this extra savings.

Even so, the best solution is still for the government to mind its own business and let people work things out voluntarily. The uncertainty isn't phony; people really don't know what's going to happen next month. In this situation, it is entirely appropriate for humans to stop cranking out so many iPods and designer clothes, allowing a temporary build-up of the resources that go into the production of these nonessential items.

What is especially ironic in all of this is that even on his own terms, Krugman's recommendations make no sense. That is to say, even if we put aside all of the real, physical readjustments that must occur to revamp the economy in light of the unsustainable housing boom, it would still be the case that the government ought to do nothing. If the present crisis really were largely the result of irrational panic and hoarding then government activism would only make people more uncertain about the future. In particular, no one has any idea what Paulson & Bernanke will announce next regarding financial companies and mortgages. If we're trying to reassure consumers that everything is normal, why would we resurrect tools from the New Deal playbook?

Thies adds:

The paradox of thrift simply took Keynesian economics to its illogical conclusion. If governments should increase their spending during recessions, why should not households? If there were no principles of "sound finance" for public finance, from where would such principles come for family finance? Eat, drink and be merry, for in the long-run we are all dead.

The Keynesian revolution was about overthrowing the doctrines of balanced budgets and sound money, free international trade, and laissez-faire economics, and adopting instead the doctrines of deficit spending, inflation, and the managed economy. Adherence to the tried and true was to be replaced by trust in the new, self-confident generation of macroeconomists, who were not to be constrained by old-fashioned precepts, but who were to be free to do as they knew best.

Both articles are worth reading in their entirety. The point is that in a Keynesian world of homogeneous factors and "spending" (as opposed to purposeful action by consumers and producers), the "Paradox of Thrift" makes perfect sense. But, if capital and other factors are heterogeneous and the structure of production is complex and must fit the economic patterns set by consumers and producers, then the "Paradox" is not a paradox at all, but rather just another economic fallacy.

Krugman's Willful Distortion of the Austrian Theory of the Business Cycle

Once again, Paul Krugman creates a caricature of the Austrian Theory of the Business Cycle, calling it the "Hangover Theory," and then continues to misrepresent what it says and what its adherents say in their analysis of the boom and bust cycles. His recent blog post continues this dishonesty.

Before dealing directly with his accusations about the ATBC, I will note that both David Gordon and Robert Murphy do credible jobs in debunking Krugman's misrepresentations. I will add briefly to what they already have written.

Krugman declares:

...one more thing struck me: at least some members of the FOMC have bought into the hangover theory — the modern version of liquidationism in which mass unemployment is somehow necessary in the aftermath of a burst bubble....

This is an important point, because while Austrians are adamant that malinvested resources and capital that were created or advanced during the boom are NOT sustainable during the crisis and the subsequent bust. (Krugman, it should be noted, insists on saying that Austrians, such as Nobel-Prize Laureate F.A. Hayek, push an "overinvestment" theory when, in fact, the Austrians have dealt with that very term and have said it is not an appropriate one in the ATBC. In other words, even though Austrians address that very word, Krugman still pretends as though they have not done so.)

Furthermore, Austrians, unlike Keynesians, who believe that factors of production generally are homogeneous and are equally affected by new injections of spending, look carefully at the issues of the factors, for what is where the result of the downturn are concentrated. Furthermore, NO Austrian calls for some sort of "general liquidation" of the economy. Instead, Austrians hold that those investments in capital and other factors that no longer are sustainable should be liquidated or transferred to other uses for which there clearly is consumer demand. This is a far cry from Krugman's point.

I know of NO Austrian who claims that "mass unemployment is somehow necessary in the aftermath of a burst bubble," none. Austrians say that if there is mass unemployment (and especially if that unemployment is chronic) we can look to government intervention as the reason. Rothbard, in America's Great Depression, writes:

If government wishes to see a depression ended as quickly as possible, and the economy returned to normal prosperity, what course should it adopt? The first and clearest injunction is: don't interfere with the market's adjustment process. The more the government intervenes to delay the market's adjustment, the longer and more grueling the depression will be, and the more difficult will be the road to complete recovery. Government hampering aggravates and perpetuates the depression. Yet, government depression policy has always (and would have even more today) aggravated the very evils it has loudly tried to cure. If, in fact, we list logically the various ways that government could hamper market adjustment, we will find that we have precisely listed the favorite "anti-depression" arsenal of government policy. (Emphasis mine)

Rothbard then explains the policies that are most harmful:

1. Prevent or delay liquidation. Lend money to shaky businesses, call on banks to lend further, etc.

2. Inflate further. Further inflation blocks the necessary fall in prices, thus delaying adjustment and prolonging depression. Further credit expansion creates more malinvestments, which, in their turn, will have to be liquidated in some later depression. A government "easy money" policy prevents the market's return to the necessary higher interest rates.

3. Keep wage rates up. Artificial maintenance of wage rates in a depression insures permanent mass unemployment. Furthermore, in a deflation, when prices are falling, keeping the same rate of money wages means that real wage rates have been pushed higher. In the face of falling business demand, this greatly aggravates the unemployment problem.

4. Keep prices up. Keeping prices above their free-market levels will create unsalable surpluses, and prevent a return to prosperity.

5. Stimulate consumption and discourage saving. We have seen that more saving and less consumption would speed recovery; more consumption and less saving aggravate the shortage of saved-capital even further. Government can encourage consumption by "food stamp plans" and relief payments. It can discourage savings and investment by higher taxes, particularly on the wealthy and on corporations and estates. As a matter of fact, any increase of taxes and government spending will discourage saving and investment and stimulate consumption, since government spending is all consumption. Some of the private funds would have been saved and invested; all of the government funds are consumed.[15] Any increase in the relative size of government in the economy, therefore, shifts the societal consumption-investment ratio in favor of consumption, and prolongs the depression.

6. Subsidize unemployment. Any subsidization of unemployment (via unemployment "insurance," relief, etc.) will prolong unemployment indefinitely, and delay the shift of workers to the fields where jobs are available.

Interestingly, ALL of these things listed above are precisely what Krugman claims will END the downturn. Yet, we have seen government do these things in spades, yet the economy continues to tank. Rothbard clearly notes that mass unemployment, and especially mass unemployment over a long period of time, is NOT necessary, but generally occurs because of government intervention, not in spite of it.

So what does Krugman do? He claims that the REAL problem is that government did not spend enough, regulate enough, tax enough, jack up wages past marginal productivity levels, and subsidize enough unproductive industries (i.e. "green" jobs). And when the economy continues to tank, he creates a caricature of the only business cycle theory that accurately explains what is happening, and then builds a series of falsehoods from there. Just another day at the office for Paul Krugman.

Links to Robert Murphy Criticisms of Krugman

Robert Murphy, an excellent economist and writer, writes some criticisms of Krugman's recent columns. In the first one, Murphy writes about Krugman's "solutions" to current budget woes. Definitely worth reading.

In the second article, Murphy explains how Krugman mistakes a Keynesian "identity" on trade with real-live economic analysis. Again, another piece worth reading.

On another note, I am traveling these next few days and will post when I can. Of course, Friday is a day of a regular Krugman column, and I am sure he will not disappoint.