Is Krugman a Keynesian?
I had toyed with the idea of mentioning that the day after I mentioned here that Austrians theory could explain a stock market crash better than the Keynesians, the stock market fell more than 2 percent. But I think some of my critics wouldn’t have realized I was being humorous, so I rejected the idea…
Anyway, today Krugman illustrates exactly what I was getting at. In a post entitled, “Awesome Wrongness” Krugman writes:
About a year and a half ago, all the Very Serious People said that it was time for a pivot in economic policy. Recovery was underway, so no more efforts to stimulate demand; the big threat was the bond market vigilantes, so it was urgent to slash the deficit now now now.
Then Krugman goes on to show that the employment situation is still bad, and that interest rates are still low.
Now in fairness, Krugman does have a point about interest rates–people (including me) have been worried about spiking rates, and thus far that hasn’t materialized.
But regarding unemployment, an innocent bystander would get the idea from Krugman’s writing that the “Very Serious People” have been heeded and that the nutjob Tea Party people have slashed spending, thus stalling the recovery. (It’s true, he didn’t literally say that, but that’s definitely the message he conveys.)
In other words, I think many of Krugman’s fans would conclude that we had some big deficit spending for a while there, things started to turn around, and then dangit we’ve begun repeating those awful mistakes of 1937, which Krugman has repeatedly warned about, including today.
So for the record, here is “Net Federal Government Saving” (meaning a negative number is a deficit) for the past few years. Do you see a big surge in deficit spending that averted another Great Depression, but then a big drop starting some point after “a year and a half ago” because the Very Serious People got their way?
2008-01-01 -376.7
2008-04-01 -761.6
2008-07-01 -646.7
2008-10-01 -680.0
2009-01-01 -1003.2
2009-04-01 -1336.8
2009-07-01 -1356.7
2009-10-01 -1310.3
2010-01-01 -1314.2
2010-04-01 -1336.5
2010-07-01 -1343.4
2010-10-01 -1339.7
2011-01-01 -1288.4
(To handle a possible objection: Yes state and local spending fell during this period, but the fall happened early on. Total government deficits were virtually identical in 1q 2010 and 1q 2011.)
Perhaps I’m being dim, but I’m not entirely clear on how a stock market crash would be explained by ABCT. Isn’t the Austrian idea that a boom comes before the bust? Are we currently in a boom?
Yes, I think so BA, relative to where we would have been. I’m not making that justification up on the fly, either. I have said several times over the past 2 years that I thought this was artificial prosperity, and that’s how bad things are.
1. Government does bad bad things
2. ?????
3. Bust!
Number 2 is, “Interest rates actually perform a function in a market economy. Pushing them down to zero can give a false appearance of wealth in certain sectors. Printing up more than a trillion dollars and buying assets in order to keep major firms from going bankrupt doesn’t actually fix the problem.”
I can understand why Paul Krugman and other critics of laissez-faire wouldn’t agree, but I am still amazed at how many free-market economists think the stuff going on the last two years should just mean a sluggish recovery.
I’m not accusing you of trying to pull a fast one here; I know what you’re saying now has been your position all along. But…
On the one hand you’re saying that things would be even worse without the government interventions.
On the other hand, I thought the Austrian position was that it was the government interventions that were preventing recovery.
Is it that one set of interventions are holding us down while another set are propping us up, or what?
> On the one hand you’re saying that things would be even worse without the government interventions.
We would have a painful restructuring. This is a prerequisite for any subsequent “real” recovery.
> On the other hand, I thought the Austrian position was that it was the government interventions that were preventing recovery.
They attempt to prevent the painful restructuring. This indeed prevents recovery.
Rick,
Saying that government intervention prevented us from hitting rock bottom doesn’t explain why we haven’t seen a recovery.
Suppose that in the absence of government intervention housing prices would have fallen even further and you would have had 20% peak unemployment instead of the actual 10%. Austrians presumably would say that this 20% would have soon found jobs in other sectors, and after two years we would be back at full employment. Because the government intervened, therefore, we still have approximately 10% of the workforce in the wrong sectors, and it is only a matter of time before this continuing mismatch causes major problems.
I understand that. What I don’t understand is why in this scenario the 10% of workers who did go through the painful restructuring would still be unemployed. For those workers the situation is basically the same as it would be in without the government intervention. If anything, it should be easier for them to find jobs since their are fewer other unemployed for them to compete with.
It’s a bit too late for me to be commentating, but I appreciate your thoughtful reply to my somewhat glib breakdown.
> Suppose that in the absence of government intervention housing prices would have fallen even further and you would have had 20% peak unemployment instead of the actual 10%
Sure. But to an Austrian, that percentage number leaves out a metric buttload of information. We can’t distill the amount of pain to a number that will fix things. We would prefer a painless restructuring.
But the point is, restructuring is needed. Lifestyles, demographics, geographics, careers, etc.
> Austrians presumably would say that this 20% would have soon found jobs in other sectors, and after two years we would be back at full employment.
I wouldn’t. It may take a while to restructure. That doesn’t make it any less necessary.
I have written and deleted much more, but it’s entirely too late for me.
Cheers!
The Austrian position is “the government interventions give the appearance that things are better than they are, no government interventions would have revealed the bare truth ages ago and the bad stuff would already be purged.”
I don’t see how you can equate “the government interventions give the *appearance* that things are better than they are” to “government interferences *actually* made things better” and I think even you can understand this, you’re just playing devil’s advocate all the time which I guess is your job here.
Arvam,
My goal here is to understand the Austrian theory better. If you want to call that playing devil’s advocate that’s fine with me (presumably Austrians should want to be able to answer the devil’s arguments!)
Are we currently in a boom
Have you seen the S&P surge the last couple years?
http://research.stlouisfed.org/fred2/graph/?id=SP500
S&P/GDP is still lower that prior to the crisis.
The Ponzi scheme can go on for some more time, unless government cuts its spending.
Looks like a bubble forming to me:
http://slopeofhope.typepad.com/.a/6a00e009898222883301538ecd5082970b-800wi
I don’t understand how the PE ratios can be sustained that high in this economy.
Yes, a new bubble is forming. The problem with Austrians is the disproportional focus on the bust, when by their own theory they should be focusing on the problematic boom. Austrians are always making dire predictions that fail to materialize almost always. Moreover, bubbles last a very long time, a lot longer than most skeptics realize. Could this time be different? possible, but not likely.
“they should be focusing on the problematic boom”
Booms are “problematic” insofar as they are caused by artificial inflation via currency manipulation and fiscal and monetary policy. they are in no way “problematic” outside of that context, not unless you are one of those anti-industrialist environmentalists who won’t be satisfied until people are driven back into living in caves, wearing bear skins and eating raw meat, then, in that sense, a boom that increases the general standard of living could be considered as “problematic”.
“Austrians are always making dire predictions that fail to materialize”
Except that they do in fact materialize and are met with an even greater amount of market distorting policies that does nothing but kick the can down the road for the next generation and thereby exacerbating the problem. Eventually the bill will come due and someone will have to pay for it.
Contrary to popular Nobel Lauriat economists, government policy does not magically endow politicians with the ability to distribute and consume free lunches before can appropriate it from those who have produced them.
That is just a simple fact that no amount of flim flam ideology can get around.
Except that they do in fact materialize
I’m an Austrian sympathizer. I do believe ABCT is useful framework to think about business cycles. But I will disagree with the above statement of yours.
My interest in economics got piqued in late 2004 because of the housing bubble. Having lived through the dotcom bust in Silicon Valley, I was amazed at the speed with which housing mania replaced dotcom mania. I started reading a lot of housing doom, which naturally led me to Austrian econ sites by early to mid 2005. I also read a few heterodox Keynesians who were making dire predictions. I felt a connection with Austrian explanation more than I did the Keynesian one. So I am sympathetic to your views and those of Bob.
What I find not true about Austrians is the dire forecasts about currency collapse, social disorder, government collapse, end of America, Hyperinflation etc. I also realized that this is a constant beat of the Austrians since, at least, the great depression – that the next bust is going to the mother of all busts – the greater depression.
I very rarely hear Austrians say in the middle of the recession, for example, that Fed is setting of an unsustainable boom that could last for the next 6-8 years.
Yes, Austrians do tend to bring up things like hyperinflation, but they do not talk of it as if it is a certain conclusion, only that if government continues to inflate, then that is the logical conclusion. However, many Austrians also agree that the future cannot be foreseen, so there may be changes in Fed policy, the government, or the market. They also talk of a long malaise such as what happened during the depression being a possibility. But, overall Austrians agree that whatever happens in an interventionist environment, it is not due to true market forces, but are rather the reaction of the market to intervention. The only reason that Austrians never talk of deflation being a possibility is because they automatically assume that the central bank will not allow it to happen, and will create as much money is necessary to put it off; though they see deflation as a natural market adjustment to past distortions.
@ sandre,
“What I find not true about Austrians is the dire forecasts about currency collapse, social disorder, government collapse, end of America, Hyperinflation etc”
As long as the dollar keeps its place as the worlds reserve currency, then the spending party can go on and you can keep putting off the dire predictions that dont seem to materialize however, what you get is this:
http://www.usdebtclock.org/
and at some point which I would agree is very hard to pin down, there will come a time when people are unwilling to accept dollars in exchange for goods and all of those dire predictions will come true faster than anyone, least of all Fed and co, will be able to fix it.
I’m not an orthodox Austrian or an anything really, but the way I interpert things is that its sort of like shearing sheep. Basically the fed and the inner circle are the farmers, and everyone is the sheep. They shear you all the time and its bad but its not terrible, but at all times there is the risk that they will make a mistake and they will slice your throat.
I think it is completely realistic to have central banks and all these things and for nothing terrible to ever happen. i.e. the farmers never make the slip. I think Murray Rothbard even said as much when talking about a world reserve bank.
@Avram,
“They shear you all the time and its bad but it’s not terrible, but at all times there is the risk that they will make a mistake and they will slice your throat.”
Yes, that is a risk but this analogy overlooks an essential element and that is the fact that the amount of wool those sheep produced is inversely proportional to the amount that is sheered so at some point those “sheep” will stop producing or they will take steps to produce so little that it does not matter what the farmers do. At that point, everyone starves and there are no farmers or sheep.
How is that for a dire prediction?
@RS
It is very dire, however here in the west the farmers have not been as greedy as in the east, and they work more subtley so such things have been avoided.
I actually think that this situation is worse because this way, nothing ever changes, and we all just get sheared forever.
The problem with Austrians is the disproportional focus on the bust,
That isn’t accurate. The Austrian theory of the business cycle is actually primarily a theory of booms.
Austrians are always making dire predictions that fail to materialize almost always.
Nope.
http://www.lewrockwell.com/block/block168.html
Austrians do give lots of attention to the bust, but the thrust of their business cycle theory is on the boom leading to the bust, and that it is inevitable. In fact, most of what is said about the bust in Austrian econ has more to do with the interventions after the bust, rather than the bust itself. A true bust in Austrian econ has mostly to do with correction from the previous boom.
No, he’s not saying VSP have been successful in reducing gov’t spending.
What he’s saying, and you certainly can’t deny it, is that VSP are calling for deficit reduction – and by that, hindering further stimulus, which he thinks would be necessary to reduce unemployment.
I think that if you could read Krugman somewhat dispassionately you would have to agree that he is a brilliant economist and an accurate observer of the going ons politically. He puts his finger on the wound fairly regularly – as here.
Krugman is a far far cry from being “dispassionate” with his own conclusions as to how production and trade improve prosperity, that does not make him a brilliant economist, it makes him great liar and a clever fraud.
People thought Bernie Madoff was a “brilliant” investor, only he got caught.
Krugman is even worse and infinitely more dangerous, since he is the one who gives the veneer of intellectual legitimacy to the demagogues who are trying (and succeeding) to institutionalize Madoff’s Ponzi schemes into the fabric of our entire economy.
Say what?
I know the Austrian School is more of a religion than a science and that Keynesians are the heretics of that religion.
But frauds, Ponzi schemes?
You lost me.
prosperity does not come from wealth redistribution but from wealth production.
Krugman/Keynesians et al would have us believe just the opposite and use economic jargon to couch redistributionist schemes (i.e. Ponzi schemes) in the launguage of production and trade.
that is dishonest and fraudulent.
have I “found” you now?
Prosperity doesn’t come from redistribution – that’s a truism and simplistic.
Show me where they you think they claim that.
Or are you saying graduated income tax is redistribution? That’s not Keynesian.
No, you haven’t found me yet.
printing money is redistribution.
bank bailouts are redistribution.
FDIC insurance is redistribution.
artificially low interest rates is redistribution.
any federal or state stimulous project (shovel ready?) is redistribution.
I could go on but you should get the picture…
Printing money is not redistribution. That’s nonsense.
Bank bailouts isn’t Keynesian; and Bush and Co. did that.
FDIC isn’t Keynesian. Where did you get that?
What do you have against gov’t building and repairing our infrastructure?
“Now in fairness, Krugman does have a point about interest rates–people (including me) have been worried about spiking rates, and thus far that hasn’t materialized.”
This is a perfect example of extreme ignorance. How can rates spike unless the Fed allows them to? lmao
I generally agree with that, which is why we are going to have a perpetual depression for the foreseeable future. Super low rates kill the economy. Thus, there is no place to park your money except lending it to the government. The government spends and spends killing the economy further. On and on it goes. Any rise in rates is going to be too painful to be even considered by the powers that be. Prices can’t rise if people are too poor to buy anything.
How could the fed not be able to control $9 trillion ($7 trillion in notes / bonds) in marketable treasuries out there?
There’s also those tiny Corporate, Muni, and ABS debt markets that they have complete control over.
Oh ya, and like $500 Trillion in notional ($18 Trillion in gross) OTC rate derivatives outstanding.
(just in case: that was all sarcasm)
We might just see how much influence the Fed has on long term rates if Congress doesn’t increase the debt limit and allows the government to default.
BTW, the Fed pretty much controls s/t rates but only influences l/t rates through programs such as QE I and II.
This is a perfect example of extreme ignorance. Central bankers can, and have, “lost control” over interest rates. Now, you could argue that whatever happens to interest rates is a function of what the central bank does, but this is different from saying “If interest rates rise, it’s because the central bank wanted them to rise.”