Paul Krugman in the Sunday Denver Post, “Obama needs to tell it straight with stimulus,” is again using faculty economic theory and an erroneous interpretation of economic history to persuade the political establishment that the current stimulus package is not working, not because it was misguided, ineffective by design, and failed to meet the administrations own guidelines for a good stimulus package; timely, targeted, and temporary, but because it was too small. The huge, nearly $800 billion, did not increase government spending by enough!
Let’s remember, however, over 200 prominent university economists, in a Cato Institute sponsored add (http://www.cato.org/fiscalreality) run in numerous newspapers across the country in late January 2009, correctly argued,
“we … do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the U.S. economy out of the Great Depression in the 1930s. More government spending also did not solve Japan’s ‘lost decade’ in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the United States today.”
The job loss and continuing economic decline has been driven by lack of business confidence and ‘regime uncertainty’ as exhibited by the precipitous drop in Gross Private Domestic Investment of nearly 30% from its most recent peak. Economic performance and job growth will not rebound without a rebound in business investment.
The prospects for such a rebound are bleak in the current policy environment. We see massive expansion of government spending and huge deficits as far as the eye can see, a guaranteed massive tax increase when the 2001-2003 tax cuts expire automatically in 2010, threatened (and actual in some states already) tax increases on the rich (those making over $250,000), a proposed cap-and-trade policy to fight global warming, which is in fact a massive tax increase on production and on any consumption activity that uses fossil-fuel-based energy. Instead of privatization, we see major government takeovers of private business in the automotive and financial sectors, which are often conducted in ways that violate contracts and supersede the rule of law. We see wasteful government mis-directions of production through subsidies and directives such as an energy policy that promises “green jobs,” but is an energy policy missing one key ingredient: delivery of affordable reliable energy. What we have is a significant assault on freedom and the market, which has predictable short and long-run negative impacts on the economy.
The way to recovery was correctly highlighted by the above mentioned economists, “To improve the economy, policy makers should focus on reforms that remove impediments to work, saving, investment, and production. Lower tax rates and a reduction of the burden of government are the best ways to use fiscal policy to boost growth.”
If we are going to make another attempt, let’s please get it right!
{ 23 comments }
Krugman’s economic philosophy is essential Keynes with a backhoe. Build a bigger hole. If we build it, prosperity will come.
“Krugman [...] is again using faculty economic theory” is a trenchant Freudian typo.
http://www.economicthought.net/?p=18
The problem with Krugman is that he doesn’t realize that government aid is inevitably malinvested because it delivers distorted information.
Does anybody really believe that policy makers want to fix the economy? Are they not doing exactly what is required to favour special interests and transfer wealth to their cronies? It is hard to believe that even semi intelligent people could so confound logic to believe in the stimulus.
How did this idiot win a Nobel? Did he do real work a long time ago or something?
“We see wasteful government mis-directions of production through subsidies and directives such as an energy policy that promises “green jobs,” ”
You can create even more jobs by blocking out the sun.
Paul Krugman received The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel
for his analysis of trade patterns and location of economic activity. Nothing very interesting if you ask me. He has a static vision of what good and bad jobs are and he favors industrial policy.
His appeal derives from the need by politicians to justify their power grabs. That’s all. And remember, most voters are not informed well on these subjects, even worse, they are misinformed on these subjects.
“The problem with Krugman is that he doesn’t realize that government aid is inevitably malinvested because it delivers distorted information.”
I think he understands that. He just doesn’t see it as a problem from his aggregate perch.
It goes to show what a PhD is really worth… (nothing).
“It goes to show what a PhD is really worth… (nothing).”
Yeah, I would love to do something other than getting one.
To understand why he got the prize, you need look no further than who it is that created and decides on the prize:
“The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, was instituted by Sweden’s central bank in 1968 and first awarded in 1969.” -Wikipedia
Fred writes, “Does anybody really believe that policy makers want to fix the economy?”
They shouldn’t. Faulty economic theories or not, these are very smart people. A disinterested observer can only come to the conclusion that the US economy has been deliberately monkeywrenched. The reason is that US consumption must be lowered and global standards of living equalized if the demographic constumption potential of China and India is to be realized.
Consider the following quote from Larry Summers:
The global imbalances have to add up to zero and so, if the US is going to be less the consumer importer of last resort, then other countries are going to need to be in different positions as well.” On this possibility, Summers is bullish. “The very great enthusiasm for accumulating reserves that one saw globally is likely to be a smaller factor over the next decade than it has been in recent years,” he predicts.”
The CFR crowd is uncertain of the short term effects of their policies but clearly are optimistic that their plan to substitute US consumption for foreign will pay off. I already knew this was their agenda but it’s nice to see one of their minions declare it, without irony. Personally I think all of them should be tried for treason.
http://www.ft.com/cms/s/2/6ac06592-6ce0-11de-af56-00144feabdc0.html
How do Austrians explain the fact that the economy has continued to crater even though the actual stimulus money spent is something like 6% of the 800 billion, really just a drop in the bucket of the overall economy?
Is it fear by the private sector of the ravages of the coming government splurge, or something else? Is this alll distorted by the massive takeover of failing banks and industries?
It seems to me from an Austrian point of view, the fact that the stimulus has not really been spent is a good thing, but it has not manifested itself in any economic upturn. It is a little disengenuous to mock the stimulus as foolish while at the same time not aknowledging that it has not gotten out of the gate. If it is foolish, and has not been spent, where is the “natural” recovery
BTW, I believe the whole stimulus is an unmitigated disaster, just looking to for an explanation for the disconnect.
“How do Austrians explain the fact that the economy has continued to crater even though the actual stimulus money spent is something like 6% of the 800 billion, really just a drop in the bucket of the overall economy?”
The bubble popped and the economy is still suffering form that, and an overbearing burden of government.
“Is it fear by the private sector of the ravages of the coming government splurge, or something else? Is this alll distorted by the massive takeover of failing banks and industries?”
Personally, I think this has a lot to do with it. If the government couldn’t have a large impact on the economy, people would not be worried about what the government might or might not do. Many investors have lost money, not just because of the bubble popping, but because of arbitrary government decisions to prop up banks. For instance, if the fundamentals of a bank are weak, and you trade stocks, and have every reason to believe the share price will drop, you will short it. Just as your offer goes through, the government agrees to bailout the bank, and you are out a lot of money.
The stock market is very quick to react to change and big government action. The government plans to keep taking action, and people don’t know what to do. These are times of great, great uncertainty.
Savings (the bane of the Keynesians) help to hedge against uncertainty. We have very little to no savings. We are scared of he uncertainty in front of us. On top of that, the government can do what it wants, when it wants, putting more fear and uncertainty into people.
“How do Austrians explain the fact that the economy has continued to crater even though the actual stimulus money spent is something like 6% of the 800 billion, really just a drop in the bucket of the overall economy?”
The government won’t allow its malinvestments to be liquidated. The Federal Reserve keeps printing more money to bail out failing businesses. A “stimulus” just mean MORE malinvestments.
“Is it fear by the private sector of the ravages of the coming government splurge”
In a word, yes.
Ph.D. = Piled Higher and Deeper
Welcome to America’s lost decade.
Bill: “How do Austrians explain the fact that the economy has continued to crater…”
The length of time it takes the economy to recover naturally depends mostly on the extent of the previous inflation that caused the boom. The longer the credit induced boom lasted, the greater was the damage to the structure of the economy. Structural adjustments take a long time. The bigger the mess, the longer it takes to clean up.
People need to rebuild savings, prices need to fall and people need to pay off debt. Those without jobs in auto, finance and housing need to be retrained and find new jobs in completely different industries. When prices quit falling and people have rebuilt savings, businesses will begin to invest in new production and slowly absorb idle workers.
The Fed’s low interest rates and the government’s stimuli, even if small, work against all of those processes of natural recovery because the Feds are trying to keep prices from falling and prevent people from rebuilding their savings.
In addition, state stimuli increase demand for consumer goods, but not capital goods. The greatest unemployment is in the capital goods sector. Capital goods makers need consumer goods makers to order new equipment, but they won’t as long as labor remains cheap relative to sales. State stimuli increase demand for consumer goods that are scarce, so the prices of consumer goods rise. Wages become cheaper relative to sales, so naturally, businessmen use more labor and don’t buy equipment. That’s basic micro econ. Hayek called it the Ricardo Effect.
But the demand for consumer goods doesn’t increase demand for capital goods where the majority of unemployed are. Consumer goods makers can increase production by having existing workers work overtime. Meanwhile, wages remain high relative to sales in the capital goods sectors, so unemployment remains high.
That Paul Krugman comment was meant to be a joke, by the way.
Having read it again, it’s so realistic I’m afraid some people will think it’s real!
I think it was also predicted that when the stimulus would fail, the Keynesians would call for an ever larger stimulus with the excuse that the last one wasn’t enough. I predict that when the next stimulus fails, there would be calls for a more “scientific” approach to the stimulus, or that we aren’t spending it on the right things, or that we were too slow. Eventually they might as well cut checks to everybody.
The CFR comment sounds about right. The government politician and policymaker gets a great deal of legitimacy from showing how much better the US is relative to other countries. This gives them the ability to propose yet another interventionist scheme.
And why not? America’s just that good (and powerful enough to get the foreigners to to do their part).
Cheers
John Cochran writes:
“The job loss and continuing economic decline has been driven by lack of business confidence and ‘regime uncertainty’ as exhibited by the precipitous drop in Gross Private Domestic Investment of nearly 30% from its most recent peak.”
Here’s what’s really interesting about this, in Keynes’ original exposition he wrote that in market economy expectations of entrepreneurs are instable and volatile, hence investment spending is also likely to change dramatically depending on the whims of the aforementioned entrepreneurs. Now, what Cochran (correctly) points out is that government action, and Keynesian policy prescription are exactly the sort of factors that can, in certain situations, make entrepreneurs act in such a way.
Some more points, C writes:
“#
To understand why he got the prize, you need look no further than who it is that created and decides on the prize:
“The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, was instituted by Sweden’s central bank in 1968 and first awarded in 1969.” -Wikipedia”
Now, the implications of such a post are obvious, but I don’t think they’re true. I know Hayek’s writings on the denationalization of money came after his winning the nobel prize, but he had already criticized central banking with regard to the business cycle (and indeed, won his prize for these works). And Hayek won the US President Medal of Freedom in 1991.
Also, free market thinkers such as Coase, Buchanan, Friedman, Becker, Tullock, Stigler and others have won the prize. Keep in mind Krugman won the prize not for his op-eds, but his work on international trade theory. Like him or not, I don’t think he was a terrible choice for the prize, even if he certainly wasn’t the best.
Perhaps Alexander Tyler said it best in 1785:
‘A democracy will continue to exist up until the time that voters discover they can vote themselves generous gifts from the public treasury. From that moment on, the majority always vote for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.’
There is no effective economic policy in Obama’s policies or Krugman’s articles. Economics within democracies now has simply become a vehicle — via meaningless tax handouts and inflationary monetary and social policies — to get yourself elected.
And why is it that Krugman, in all his advice, does not put a fixed value to his version of a greater stimulus? And why does Krugman always avoid answering the question: “And how is America to pay back its massive ever-rising fiscal debt?”. The esteemed article above also appears to avoid answering this teensy problem.
Hands up anyone here who still believes that the likes of Russia, China and the Middle-East are happy to continue paying America’s debt forever? If you read the news — particularly concerning Russia and China — they are far from happy to have their own US Treasury savings inflated away by America’s current and dubious monetary policies.
And both these countries(as well as other BRIC countries) are now slowly disentangling from the tragically weak dollar now. And if the dollar falls, so goes the US economy.
In observing Krugman’s recent economic advice, and although benign towards Obama ref his politics, he has criticised the Administration for not engaging in a larger stimulus package — but Krugman has been quite careful to avoid putting an exact value on “Enough Debt” hasn’t he ?
In a time when ordinary US citizens look to such as Krugman for economic advice, I am left thinking, sadly, that perhaps Krugman is only concerned with being safe in his economic views. By blandly and imprecisely saying that “We need a bigger stimulus package”, if the US economy trashed tomorrow then Krugman can shout, “See, I told you so…!!” and if we are saved by the present stimulus, Krugman will no doubt find a way of scraping some personal credit from this too. Either outcome and his brand Keynesian of economics is safe within the hallowed halls of academia…
When further tested and asked,”Well, Mr Krugman, and how would you tend to America’s massive and ever-growing debt?” — Krugman is never around to answer this one.
Ah yes, the old Keynesian “…inflate away” the Treasury debt ploy.
As if China or Russia or the Middle East don’t now realize what’s going on here….
Comments on this entry are closed.