The Keynesian fallacies live on and on, and are present twice a week from Paul Krugman. Today, our Hero tells us why falling wages (and, by assertion, all falling prices) are harmful. The Great One writes:
Things get even worse if businesses and consumers expect wages to fall further in the future. John Maynard Keynes put it clearly, more than 70 years ago: “The effect of an expectation that wages are going to sag by, say, 2 percent in the coming year will be roughly equivalent to the effect of a rise of 2 percent in the amount of interest payable for the same period.” And a rise in the effective interest rate is the last thing this economy needs.
You see, Krugman believes that there should be no consequences to an unsustainable boom, and that once a bubble bursts, then the spending that occurred during the boom must be continued at all costs. That is not economics, folks. That is nonsense.
The boom was especially pernicious because foreigners were willing to accept U.S. Dollars sight on seen and to buy massive amounts of U.S. Government debt. Thus, Americans could borrow at will, refinance their houses, purchase new cars, take vacations and buy all sorts of things, all based on the imagined “equity” on their houses. This could not continue.
Yet, Krugman now insists that we have to keep borrowing to keep up this frenetic pace of consumer spending. If consumers are maxed out, well, it is up to the government to do it, and if no one accepts U.S. debt, then the Fed needs to print, print, print.
This is utter foolishness. To Krugman, there are no “fundamentals” in an economy. Instead, it is just a Big Blob in which capital magically appears and goods just fly onto our shelves. Furthermore, he cannot even differentiate between nominal and real wages. The guy is hopeless, and it tells us something about the state of “elite” economics in the academic world.
{ 16 comments }
Krugman is a genuine fool. I am thrilled that you tirelessly refute his crazy assertions.
I believe that the idiom is “sight unseen” rather than “sight on seen”
Two quick questions:
Is there a place where can I see clear refutations of past Krugman columns, or see them on an ongoing basis in the future?
Is there a pattern to his thinking that can be summarized as a set of falacies?
Krugman’s cure for a hangover is to never stop drinking, if you run out of your own booze then the taxpayer should give you free booze. If you die from excessive drinking then it’s the free markets fault for not coming up with alcohol that does not destroy your liver if you drink two bottles of scotch a day
I think Krugman is actually a brilliant guy, though I’m very skeptical of his arguments. So I’d like to see somebody from the Mises/Hayek/Friedman world really take him to task, publicly.
There is a free market in ideas too, Krugman is just selling to a willing audience of people who either are willing to give up their freedom with the expectation that they will obtain more from redistribution by the state or can not understand the basic principles so just listen to those who seem to be more “caring” for their needs. As there is a market for wrestling, there is a market for Krugman commentaries and both are similarly truthful.
msgnet – I’m sure if you can get Krugman to agree to a fairly moderated, structured, debate on the role of Government in the Economy, there would be 10 volunteers from Mises willing to jump on the chance to devour him.
As far as a complete list of refutations: just check the blog posts here from every Monday and Friday – pretty much every single article by Krugman is disgusting enough to warrant a response by a great writer here.
Wages are FALLING? Well, I thought wages were ‘sticky’ !
Maybe this is why they think falling wages are bad. It makes them look like the idiots they are.
Krugman has many correct ideas, superficially speaking. But IMHO they are almost always substantively wrong. He is far from being alone. Most of what Krugman, Bernanke, and all the other neo-Keynesians spout is nonsense.
What about the idea that the LAST thing this economy needs is rising interest rates?
This idea may actually be false. Saving has been getting the short end of the stick for some time. We need to save, Paradox of Saving or no such paradox. Besides the time to avoid such a paradox is BEFORE it is created (because, make no mistake, it IS created by our policies, not by some act of God).
By Krugmanian logic what we need is dropping interest rates and more Debt — and yet almost every thinking American knows in their heart that this cannot possibly be true.
Maybe what we WILL get is actually what we really need. All thanks to having living on borrowed money and borrowed time.
The watchwords of our era are Expediency and Consequentialism. And let us not leave out Ignorance. One great book I read was called GREENSPAN’S BUBBLES: THE AGE OF IGNORANCE AT THE FEDERAL RESERVE by William Fleckenstein. No punches are pulled, nor do they deserve to be.
There is a good reason why most Central Banks —other than Zimbabwe’s Central Bank and the U.S. Federal Reserve — don’t try to monetize their respective countries’ debt by printing lots of paper money and then using that “funny money” to buy their own Government’s Treasury Bonds.
Sorry, I will take that back — Zimbabwe’s Central Bank has just recently stopped doing this. This leaves Ben Bernanke’s FED as the world’s primary expositor and promoter of “Quantitative Easing”.
That ‘good reason’ of course is that this technique cannot work.
The Federal Reserve’s money charlatans and counterfeiters create a mirage and expect that mirage to fool the people.
A huge increase in the money supply — with nothing else happening — cannot fail to have an extremely negative effect on the cost of borrowed money (that is, the charged interest rate on Debt, i.e., on Bonds).
Indeed by willy-nilly creating new money with nothing to back it up — no extra economic growth for example — the FED practically guarantees an upcoming explosion in “aversion to holding debt”.
This is not yet apparent. But much like the housing boom did not seem to have any inherent problems while it was still ongoing, so too does the coming Debt Bust seem unlikely today. Indeed many surmise that if it does happen it will largely be something relatively innocuous. I cannot agree with this.
Neither apparently can Doug Noland agree with this.
Mr. Noland writes in his Credit Bubble Bulletin of May 1, 2009 that “it’s the massive inflation of non-productive Credit that ensures the unavoidable crisis of confidence. Can the underlying economic structure service the mounting debt load or, instead, is it the massively inflating debt load that is sustaining a vulnerable economy? And it is in this vein that I fear the Government Finance Bubble is on track to destroy the Creditworthiness of the entire economy.”
Please see http://www.prudentbear.com/index.php/creditbubblebulletinview?art_id=10221
The cost of money is the implicit interest rate that American Treasury bonds pay out. This is not the nominal rate or face value interest rate, but the current yield that those bonds sell at today in the market.
That is to say that the price of bonds inevitably drops when their supply goes up, especially as drastically as this supply has grown recently. And of course the effective interest rate (the yield) goes up as bond prices drop. This is just the law of supply and demand playing out in the debt market.
It is hard to understand why the FED is so inconsistent. In Ben Bernanke’s own words “Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply.”
Nevertheless the FED goes ahead and issues more and more dollars. On the one hand, the FED says that dollars only retain their relative worth if the FED doesn’t issue too many of them. On the other, it then spits them out of their printing presses like they were watermelon seeds.
When Bernanke writes that the U.S. dollars have value only to the extent that they are strictly limited in supply, he is saying that prevailing interest rates will stay low — or that the relative value of debt and the American currency will stay high — ONLY IF the FED does not print too many dollars.
So as soon as the FED prints all those extra dollars, should not Dr. Ben Bernanke — from his own words — EXPECT that interest rates will go UP? That is, that the value of currency, bonds, and thus debt, will drop?
I repeat, how can the FED say two different things from 2 sides of the same mouth? This is inconsistent and just plain stupid.
http://www.federalreserve.gov/boardDocs/speeches/2002/20021121/default.htm
If I was from the speak-plain state of Missouri in the heartland of America, right about now, I would say “Show Me!”
And maybe also quote the Missouri state motto: Salus populi suprema lex esto (Translated from Latin: “Let the welfare of the people be the supreme law”).
http://en.wikipedia.org/wiki/Missouri
The FED is completely out-of-control. The Federal Reserve is acting AGAINST the best interests of the American (and the world’s) people. Can anyone actually trust a Central Bank with the following motto?
“But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”
The Federal Reserve continues to MASSIVELY increase money in circulation — by just printing more and more AND MORE of it — and then by buying bonds that the Government itself just prints and prints AND PRINTS.
This can have only ONE OUTCOME. The relative value of ALL outstanding bonds denominated in American dollars will eventually DROP. The implicit yield has nowhere to go but up.
The FED vainly tries to counteract this by on its own buying up bonds in the bond market — with more printed money. This can work for a short time. The FED can set a floor on the price of bonds and thus a ceiling on the interest rates for a while, but not for long.
This is because the bond market simply does not buy into Bernanke’s magical-mushroom “mirage”. People will no longer buy something that will soon be worthless. That will give them NO RETURN. In fact bond owners will start to turn in the bonds they already hold to this buyer-of-last-resort, to this pawnshop (the FED).
Ben Bernanke is deluded if he thinks that his wonderful new invention called the Magic Mystery Money Printing Press will solve his problems.
There is a corollary puzzle here also. That is, why would Dr. Bernanke expect other financial instruments’ interest rates to go down even if the FED somehow really could print TRILLIONS of net-new American dollars and thus keep Treasury rates low (for a short time)?
The FED can similarly even keep mortgage rates low (for a while) so long as it prints all the money that Freddie and Fannie need to keep buying up all the mortgages that are out there.
But can the FED do this with ALL the other bond classes? Can Bernanke do this with ALL other Debt? This is impossible. The bond market is just too large. The FED will eventually be overwhelmed by its chosen futile task.
There was a fiasco back in 1998 that some people remember that was called the LTCM collapse (Long Term Capital Management). LTCM had Nobel laureates in its organization. LTCM thought that there were “historical relationships” between different bond classes that ALWAYS would be reverted back to — if one could wait long enough. The LTCM business model critically depended on those “historical relationships” returning to the norm.
Well guess what? Those “relationships” did not hold up. This is the sad-sack case today with what the FED is trying to do.
http://en.wikipedia.org/wiki/Long-Term_Capital_Management
So it is with the vain hope that by dropping Treasury rates, the FED can force other interest rates down as well. Bernanke thinks that there are “historical relationships” that will stay in place.
That is, force the government bond rates DOWN and others will DROP AS WELL. This is delusional idiocy.
Dr. Bernanke, this just is not going to happen, no matter how much you hope it will!
As more and more phony money is put into circulation those other bond classes will also have their rates go up — this is because no one in their right mind will buy 30-year bonds at 5% — the inflation rates over the 30-year time period will cause the intrinsic bond values to be so debased so as to cause the final return from those investments to be HUGELY NEGATIVE!
What else can you expect from misusing a “technology, called a printing press… that allows… as many U.S. dollars [to be produced]… at essentially no cost.”
Some “no cost”! This is the final act of the real Barbarians at the Gate. America is dooming her future. There is no exit with such a strategy!
A.Viirlaid said: “Most of what Krugman, Bernanke, and all the other neo-Keynesians spout is nonsense.”
That’s because John Maynard Keynes is to Economics what Jean Dixon is to Astronomy.
It is hard to square today’s essay from Krugman with his belief, stated many, many times, that nominal wages are sticky, which, not surprisingly, is the justification used for inflation- to lower real wages.
However, by this point in time, I should probably quit looking for a internally consistent argument from Krugman.
What I see most often in Krugman’s writing is an inability to recognize restrictions on the free market. I’ve seen him mention, in articles dated many years apart, the same anecdote about a babysitting cooperative. Briefly, the babysitting economy grinds to a halt because there aren’t enough participants willing to pay one coupon for one hour of babysitting, preferring instead to save them for later. Their solution was to issue more coupons, and the point of his story is always to print more money.
What he fails to notice, in either telling, is that they were price fixing, and had they allowed the price of an hour of babysitting to float away from 1 coupon per, they’d never have had to intervene with more coupons.
More generally, I think he often confuses crude abstractions (GDP) with the unquantifiable values they represent (general welfare), and gives predictably bad advice because of it.
He’s a smart guy, but shows precious little understanding of human behavior. He sees the economy just as a complex formula.
I think his frequent contradictions are a result of this. He looks at most every problem in isolation, with no framework to explain why a particular bad thing is happening. He just suggests the most pragmatic approach he can devise to hammer the recalcitrant variable back to a normal value.
Money and Capital are two different things.
Money is medium of exchange that facilitates the exchange of real goods and services. It’s supply is irrelevant. The more or the less isn’t the better.
Capital is real goods that enhance productivity. The more is better.
Deficiency of capital can not be compensated by increasing the supply of money because they are interchangeable.
What causes economic and financial problems is deficiency of capital and the only way to add to capital is to produce and save.
Who ever thinks he can solve capital deficiency problem with monetary means is a charlatan.
“Deficiency of capital can not be compensated by increasing the supply of money because they are NOT interchangeable.”
I just want to make sure everyone has seen this great little nugget from Krugman circa 2002 in reference to the dotcom bubble bursting.
“To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”
http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html?scp=2&sq=paul+krugman+housing+bubble+greenspan&st=nyt&scp=2&sq=%93needs%20soaring%20household%20spending%20to%20offset%20moribund%20business%20investment.%20And%20to%20do%20that,%20as%20Paul%20
How did inflating that housing bubble work for us?
Jeremy, humble thanks, that was priceless.
“Helping Krugman become a better economist: priceless”!
http://www.priceless.com/us/personal/en/pricelesstv/index.html
I just found this piece today…I wrote a piece on falling wages about a year before Krugman published this state propaganda.
http://www.ultimateminority.com/2008/05/14/falling-wages-are-a-good-thing/
Comments on this entry are closed.