I’m mostly posting this to make a note to myself…
I am not certain he has me in mind, since I haven’t been following the comments on his earlier posts, but it is entirely possible I am the anonymous target today in Krugman’s post on “Barbarous Economics.” For your convenience, let me reproduce the steps in the argument, and then you’ll understand why I claim Krugman just refuted himself.
(1) Way back in December 1998, Krugman apparently blew up the “hangover theory” of depressions with the following argument (among others):
Here’s the problem: As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa). So if people decide to spend less on investment goods, doesn’t that mean that they must be deciding to spend more on consumption goods—implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?
(2) In October 2008, in my “sushi article,” I responded to Krugman like this:
I have done my best to paraphrase what I understand to be Krugman’s [point]. I must confess that even while typing out the above, the non sequitur in [the] objection jumped out at me. …Krugman[‘s] argument relies on a static conception of income and spending. Just using that accounting tautology — without indexing for time — Krugman could also argue that real income can never change in an economy, even if the government announced that the most productive 10% of workers in every firm would be shot. (After all, total income would still equal total spending.)
(3) Yesterday, Krugman linked to that very same sushi article, and said I was interesting but dead wrong (and a partisan hack).
(4) Today, Krugman writes of Barbarous Economics:
So I see a number of people saying things along the lines of, “If income always equals spending, then real income can’t possibly change” — and imagining that they’re being wise! More evidence of our descent into a Dark Age of macroeconomics.
To see what’s wrong with this, read a good intro text (pdf) (much updated in new edition, but this gives the flavor). Anyone who believes the above statement literally doesn’t understand the first thing about the subject. Just saying.
Does everyone see how funny this is? Not Chris Rock funny, I grant you. But for macroeconomics, it’s chortle-worthy.