Even though Paul Krugman on many occasions has trashed Austrian Economics, nonetheless he is not afraid to take an a priori position on his “pet stimulus.” Unfortunately, he refers to “Okun’s Law” which really is no “law” at all, but rather a empirical proposition based upon government-created aggregates.
Furthermore, he that government spend even more money than Obama has proposed because “Okun’s Law” states that the more government spends, the better off the economy:
The starting point for this discussion is Okun’s Law, the relationship between changes in real GDP and changes in the unemployment rate. Estimates of the Okun’s Law coefficient range from 2 to 3. I’ll use 2, which is an optimistic estimate for current purposes: it says that you have to raise real GDP by 2 percent from what it would otherwise have been to reduce the unemployment rate 1 percentage point from what it would otherwise have been. Since GDP is roughly $15 trillion, this means that you have to raise GDP by $300 billion per year to reduce unemployment by 1 percentage point.
Now, what we’re hearing about the Obama plan is that it calls for $775 billion over two years, with $300 billion in tax cuts and the rest in spending. Call that $150 billion per year in tax cuts, $240 billion each year in spending.
How much do tax cuts and spending raise GDP? The widely cited estimates of Mark Zandi of Economy.com indicate a multiplier of around 1.5 for spending, with widely varying estimates for tax cuts. Payroll tax cuts, which make up about half the Obama proposal, are pretty good, with a multiplier of 1.29; business tax cuts, which make up the rest, are much less effective.
Unfortunately those Evil Republicans are trying to stop all of this goodness, according to Krugman:
And that gets us to politics. This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan’s perceived failure, if it’s spun that way, will be placed on Democrats.
I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”
Of course, the entire “stimulus” is a fraud. Krugman is assuming that all government spending is good, and is even better when the economy is in the tank. (Keynesians believe that opportunity cost disappears when the unemployment rate gets above five percent.) But, hey, Krugman has the “law” on his side.
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Hasn’t Zimbabwe already tried this? Why, with all of the obvious flaws, are mainstream economists so obsessed with GDP?
If govt spending has such a positive impact then why not spend 10 trillion or a 100 trillion? Sometimes I can’t believe anybody takes this guy seriously.
No, they have not. They were printing money. We are not printing money! Jeez, don’t you understand, its stimulus! It will help the economy to have more dollars chasing the same amount of goods! That way who ever gets the money first will be able to purchase goods at pre-inflation prices! Its great for them, but wait! What happens to the rest of us?? Oh shucks, I guess we will just have to be patriotic and let the government take our money. The magnanimous, altruistic, ever caring, omniscient nation-state. The sociopolitical machine in America has totally brainwashed society into thinking we can truly get something for nothing. Oh well. I am moving to…wait….its still worse everywhere else. That is the very sad thing….people in power, all they want is more power. I think we are going to return to something closer to oligarchy and fascism than true freedom.
How dare any of you blashpeme the great Econoprophet of the Hallowed New York Times! Do you not realize that every word he writes is inspired by the holy one, J.M. Keynes? If it weren’t for you Austrians and libertarians preaching your heretical views of praxeology, free markets, and non-aggression among other apostasies which my statist fingers cannot type, utopia would already have arrived and we could be contemplating the higher goals of life.
I recall that even one of my econometrics professor, who was and is a full-time econometrician, ripped on Okun’s “Law” for being so illegitimate. Every time Krugman refers to technical economics, I think he loses more and more credibility amongst economists.
LOL @ Shane. I was just about to say that, according to Krugman, Zimbabwe should be the economic powerhouse of the world. Instead it’s a cesspool where inflation is at over 1 million percent, unemployment is at 85%, and people have to eat rats off the street in order to survive.
BTW, has anyone here seen this hysterical parody of Krugman?
http://www.thepeoplescube.com/red/viewforum.php?f=23
I find it interesting that no one actually challenges Krugman’s argument. If more money is spent on these stimuli, then it will put money into the pocket of workers and consumers, who will then spend it and raise prices. When prices rise, it will encourage producers to produce more, thereby lifting the economy.
There is no opportunity cost for government spending when the economy is below full employment. The key is to jumpstart spending, and by extension to raise prices and increase production to it’s full employment level.
The more fundamental point that it would be nice to ask all of the Keynesians (Krugman especially) is that if the government can spend on things to generate positive economic activity, then why doesn’t the government simply run the whole economy? Why doesn’t the government direct which industries are favored and how goods and services should be allocated to people? The Keynesians never follow their logic all the way through to realize that they will end up at full on socialism (though I suppose some of them might prefer Soviet Russia to mixed-economy USA). I present this very argument against Obama’s government “job creation” here: http://socialistsatthegate.blogspot.com/2009/01/obamas-job-creation-in-abstract.html
socialistsatthegate.blogspot.com
I find it interesting that no one actually challenges Krugman’s argument. If more money is spent on these stimuli, then it will put money into the pocket of workers and consumers, who will then spend it and raise prices. When prices rise, it will encourage producers to produce more, thereby lifting the economy.
Sorry, I thought the flaw was obvious. First of all, where does the government get the money that it spends? Taxes, borrowing, and printing. Taxes merely reshuffles money that consumers would have spent elsewhere in the economy and spends it where government wants it to spend. No net increase, and due to the taxation system, actually a net loss. Borrowing means taking money from future taxation. Seems painless now, but hurts more in the future. Printing money has the same problem it always has. Yes, it is inflationary and will cause prices to rise, but without real capital savings, the means necessary to actually produce more doesn’t exist, thus causing the business boom and bust cycle, and malinvestment into things that consumers actually don’t want to buy.
Thus, instead of “jumpstarting” the economy, government spending is really “short-curcuiting” the economy.
D’oh! “short-circuiting”. But if I can figure this stuff out, why can’t a Nobel-prize winning economist figure it out?
Michael A. Clem said: D’oh! “short-circuiting”. But if I can figure this stuff out, why can’t a Nobel-prize winning economist figure it out?
Because Krugman is a political hack.
Think of him as I think of him: a kind of economic Sean Hannity with better manners and rhetorical skills.
William said “to raise prices and increase production to it’s full employment level.”
There are two things listed there that I don’t want. I don’t want increased prices. I don’t (personally) want full employment. I want time off or no job at all. It’s easy to raise prices and it’s easy to employ everyone! What I want is full production which will bring lowered prices. Unfortunately, the Government plans we have seen to this point reward malinvestment and prevent the market from pruning off inefficient auto manufacturers and bad banks. I could borrow money anywhere. I would like to see true innovation in the auto industry…let a new generation of Henry Fords take the helm. That’s not likely to happen now.
Under Krugman’s plan we will see prices rise. We’ll see the price of corn rise as our dollar buys less of it and China’s yuan buys more. Maybe we’ll have full employment on farms. We can all pull the cultivators when our dollar won’t buy oil on the world market.
The government can put all kinds of money in workers pockets. As much as wants, billions, even, as it can print as much money as it wants to. What it can’t put in their pockets is actual wealth. And since I doubt the “workers” will be mailed envelopes of freshly printed money (which wouldn’t solve anything anyway), what few beneficiaries there might be will be quite distant from those who the stimuli are purported to target.
Krugman’s big concern seems to be that the Democrats will be held responsible if the plan fails. Well, that ‘s how it works: with the power comes the responsibility.
If a full-blown stimulus plan is such a good idea, then the Democrats should just do that without worrying about spreading the responsibility to the Republicans. That way, they can take sole ownership of the inevitable triumph, right? After all, they have enough votes to pass it. The only thing the Republicans can do is filibuster in the Senate which would be political suicide.
I wonder if Krugman really knows that his plan is buncombe and is just trying to pre-establish a Dolchstosslegende for it.
Anyone have any opinions on the best way to own gold?
Mr. Anderson, why oh why oh why do you give frauds like Krugman the respectability that comes by engaging his ideas as being honest, but merely misguided? Instead of the discussion being about his criminal nature, it’s about the idiocy of his ideas, which are MOOT, except for their usage as political levers. Problem is, he gets the leverage from your opposition, never, ever once having to prove his own ideas are not idiotic. He just has to not be like you while sounding intelligent.
I have to wonder just how the world would view Keynes if Mises had not fell into the same trap of ‘rational’ debate of an irrational subject?
Sure, they will label you as someone with an axe to grind, but you’re going to be labeled anyway. Might as well get one that fits the true occasion. Your problem is not the ideas of Krugman, but the man himself and his motives in disseminating them.
Otherwise he’s just another harmless idiot in the crowd.
< <...then it will put money into the pocket of workers and consumers, who will then spend it and raise prices. When prices rise, it will encourage producers to produce more, thereby lifting the economy.>>
As a wise man once said, high prices are great unless you buy stuff.
http://www.amazon.com/review/R1TVURKTRRC9SU/ref=cm_cr_rev_detup_redir?_encoding=UTF8&cdPage=1&newContentID=Mx3SP8ZS0BIT3SC#MxXLTZBZU0T4FD
Anyone want to give Michael a good, well deserved spanking?
Krugman is not an economist he is a bad columnist for the NYT. The only reason he’s popular on the Hill is he offers the solution they want, more government. He wasn’t right about what is going on he just politicizes his economics. If it were Democrats in place of Bush he’d be singing their praises, as he was during the 90′s ignoring the NASDAQ bubble, whereas we Austrians call it as we see it. If government were the answer the American people would have the richest nation on earth as the present administration has made themselves the largest government on earth.
The real problem with all of this is mistaking GDP for a measure of wealth or standard of living. It is nothing of the kind, nor was intended to be such a measure when it was formulated. Does anybody actually believe that government spending equates to economic growth? That doesn’t even address all the ways that the government manipulates the numbers, primarilily through the phoney inflation statistics. GDP is not a measure of wealth partly because it doesn’t address true wealth – assets minus liabilities. The easiest way for the government to raise GDP is to increase the national debt – a decrease in wealth. People saving their money by foregoing consumption – increasing their wealth – is also counted as a decrease in GDP.
Probably the single biggest falacy to come out of mistaking GDP for economic growth is the belief that consumer spending creates economic growth, when the relationship is precisely backwards. This leads to alll manner of economic quackery including “stimulus” plans, quantitative easing, artificially low interest rates, deficit spending and inflation. It also produces this false bias in favor of inflation and a reflexive revulsion to deflation.
Real economic growth comes from one source: productivity – producing more goods and services with the same amount of inputs or producing the same amount of goods and services with fewer inputs. This process should produce a mild, continuous, beneficial deflation where goods and services get gradually cheaper, the value of people’s savings grow and everybody’s real wealth (assets minus liabilities) increases. GDP not only does not register increases in wealth but would show a decline in such a situation.
Krugman must think Robert Mugabe of Zimbabwe is an economic genius because that is exactly what his Government does.
Ok, so when I’m young, if I decide to consume my time in pursuit of present-time leisure instead of saving for later by investing in an education, I should be able to generate serious wisdom multiplier effects that will put me on a level with Keynes and Krugman. Sweet.
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