03 Apr 2014

Krugman Elaborates on His Alien Invasion Thought Experiment

Economics, Krugman 39 Comments

I have never said, “Paul Krugman thinks it would be good for the authorities to fake an alien invasion, ha ha what an idiot.” I knew from Day One that he was trying to be cheeky and provocative, and was merely saying that such a policy would be better than the status quo. Hence, if you can “see” the truth of his thought experiment, then you should all the more so embrace government deficit spending on things that are actually useful, like bridges and shelters for kittens.

Yet even though I have been trying to be fair to Krugman on this point, in the last post some commenters led me to believe that they really didn’t understand just how far some Keynesians have pushed this idea that completely useless spending is better than nothing. So let’s let Krugman explain it himself:

[UPDATE: I originally threw in Krugman’s clip on Bill Maher, but realized afterwards that he was being slippery. In the original version above, Krugman is clearly saying that totally useless government military expenditures will be good for the economy, relative to doing nothing. Yet in the Bill Maher account, Krugman makes it sound as if he has been calling for high speed rail and genuinely useful things. Now maybe the difference is that he’s “kidding” in the CNN appearance, but by Bill Maher it has morphed into his “serious” proposal. Who knows. In any event, in the original CNN appearance, he is clearly saying totally useless spending will boost the economy; the interviewer is right when he asks isn’t this what Keynes himself thought.]

So Wieland isn’t putting words in the Keynesians’ mouths. Their position really does entail that supply disruptions–like an oil shock or even an earthquake–should boost output, if they occur during a liquidity trap. (That doesn’t mean it will increase wealth on net.)

Look, one of the papers Wieland cites–to motivate his empirical exploration–is Eggertsson and Krugman (2011). From that paper, I quickly found the following paragraph:

[T]he “paradox of toil,” first identified by Eggertsson (2010b)…appearing here in a starker, simpler form than in the original exposition, where it depended on expectational effects. Suppose that aggregate supply shifts out, for whatever reason – a rise in willingness to work, a change in tax rates inducing more work effort, a rise in productivity, whatever. As shown in Figure 2, this shifts the aggregate supply curve AS to the right, which would ordinarily translate into higher actual output. But the rise in aggregate supply leads to a fall in prices – and in the face of a backward-sloping AD curve, this price decline is contractionary via the Fisher effect. So more willingness and/or ability to work ends up reducing the amount of work being done.

I have other things to do with my life than to continually explain, “Krugman really did say that,” so I will leave it to readers to see if they can find Krugman saying the inverse to the above–that less willingness and/or ability to work ends up increasing the amount of work being done. But I hope I’ve given enough so that the fair reader can see this isn’t a strawman; Krugman has been advancing this stuff for years.

39 Responses to “Krugman Elaborates on His Alien Invasion Thought Experiment”

  1. joe says:

    A fake alien invasion is not a supply disruption–like an oil shock or even an earthquake. How about getting fake inflation the way Shadowstats and Peter Schiff do?

    • Bob Murphy says:

      joe you’re slipping. You’re supposed to accuse us of HYPERinflation.

    • Andrew' says:

      Some of us think Schiff could be wrong about hyperinflation and especially timing…but that’s not a win for the government or Keynesians…because it is because of debt deflation- caused by government and vulgar perma-stim Keynesians.

      Still, Schiff is one of a handful of people who predicted the big rocks of the piss jar we find ourselves in. This puts him ahead of thousands if not all Keynesians and along side people even joe should respect like Shiller, Baker, and Keen.

      • Andrew' says:

        I get the feeling he also under-estimated the flight to safety. The US government will do whatever it takes to pay its bondholders. It’s an odd thing to gloat over.

        And setting everyone else’s house on fire and then watching the panic is an odd thing to gloat over.

  2. Transformer says:

    Bob,

    While obviously entertaining for your fans to keep bringing up Krugman and space aliens – I at least would be interested in a more serious analysis of why the alleged “paradox of toil” is actually wrong. The paper you cite makes logical sense on this point – where is the analysis faulty ?

    Some of your most memorable posts featured magic gnomes (if I remember correctly) – I challenge you to do an equally memorable post showing whats wrong with the “paradox of toil”.

    • Andrew' says:

      “So more willingness and/or ability to work ends up reducing the amount of work being done.”

      Start here, the price only declines if the more work was actually done.

      • Andrew' says:

        Please respond “but people expect the work to be done!!” so I can have a good chuckle.

    • Bob Murphy says:

      Transformer wrote:

      While obviously entertaining for your fans to keep bringing up Krugman and space aliens – I at least would be interested in a more serious analysis of why the alleged “paradox of toil” is actually wrong. The paper you cite makes logical sense on this point – where is the analysis faulty ?

      Holy crap Transformer, in the previous post you said that a Keynesian would tell me only an idiot would believe that a reduction in capacity would lead to an increase in output.

      So to satisfy you, I give a quote where Krugman says (the mirror image of) just that.

      Now you tell me, “Yeah that makes perfect sense, where’s the flaw in the reasoning Murphy you punk?!”

      • Transformer says:

        I think there are two totally different issues here:

        1. Do New Keynesian think that at the ZLB supply shock are a good thing?
        2. Are New Keynesians correct to see flexible wages as a bad thing at the ZLB when nominal debt levels are high?

        Only the first one has anything to do with a decline in capacity leading to an increase in output (as far as I can see).

        The theory behind the second thing (paradox of toil) can be modeled quite easily (as it is in the paper). It seems perfectly valid to ask what is wrong with that model that would stop it being applied to the real world.

        I therefore fail to see the relevance of your reply.

        • Bob Murphy says:

          Transformer, OK, at this point I don’t want to be snarky, I want to make sure you are seeing what Krugman is saying here. In the quote above he isn’t talking about wage flexibility. That’s the next “paradox” he discusses in the paper.

          No, he quite clearly is talking about a rightward shift in Aggregate Supply “for whatever reason” (his term)–and he explicitly includes a positive shock to productivity, so it’s not just policy changes. Then that rightward shift in Aggregate Supply (in a debt-strapped depressed economy which is stuck because it’s at the ZLB) actually leads to a fall in the equilibrium level of work being done. (In the quotation Krugman flips, apparently interchangeably, between “output” and “work being done,” when arguably those are different concepts especially if we’re talking about a boost in worker productivity.)

          Now to say, “So is Krugman saying a negative supply shock at ZLB is a good thing?” is trickier to answer, because there’s more to life than boosting real GDP. Obviously if a natural disaster kills some people, then Krugman could say “that’s horrible even though it reduced unemployment.”

          But the question is whether reducing the economy’s capacity to produce output (when at the ZLB blah blah blah), leads the economy to produce more output. Krugman’s 2011 model with Eggertsson says yes it would, and once we understand why, we can see why fiscal stimulus is such an obviously good thing right now.

          • Transformer says:

            OK, I think I see what you saying.

            In the paper Krugman is talking about a rightward shift in Aggregate Supply which would be a positive supply shock. In his model this would actually have negative effects on output. If in this model a positive supply shock is bad, a negative supply shock must be good, which of course is the idea JC is ridiculing in his post you referenced yesterday. In both case inflation expectations appear to be the key.

            So now (I think) I understand your view better I see why “the question is whether reducing the economy’s capacity to produce output (when at the ZLB blah blah blah), leads the economy to produce more output. ” is relevant.

            But if the answer is “yes” then the policy recommendation isn’t “lets engineer a supply shock” but “how do we raise inflation expectations without reducing productive capacity? “.

            It just seems kind of cheap to imply that just because Krugman thinks he has identified a paradox he is in favor of exploiting it when that is clearly not the case.

            • Transformer says:

              And while in this post you have explicitly moved away from accusing Krugman of actually proposing supply shocks as a stimulus measure this is not true of the comments section of the previous post where you said

              “Transformer, Krugman has explicitly said that in a liquidity trap, environmental regulations that make companies throw out existing equipment etc. and replace it with new, compliant stuff will boost employment and output (whereas in a normal economy it wouldn’t, it would just reduce harmful climate change).”

              This seems pretty close to such an accusation (I assume that Krugman does indeed support such environmental controls).

              • Bob Murphy says:

                Transformer do you see how weird it is for you to be mad that I’m accusing Krugman of proposing things…that he has in fact proposed?

                What I’m saying is that Krugman doesn’t explicitly call for capacity-destroying measures *for their own sake*. He supports the environmental regulations because (he thinks) they will spare future generations damage from climate change. He would support them even if they lowered GDP in the present, because he thinks the benefits in the form of reduced future climate-change damages would be higher.

                But, his point was that during a liquidity trap, those measures that reduce potential GDP in the short run, increase *actual* GDP.

                I will post a link in a new post.

              • Transformer says:

                Well, the only reason I brought this up is because you seemed to be equivocal on this issue of whether Keynesians

                1) actually propose supply shocks as policy

                or

                2) Just have models where in theory supply shocks would be stimulative.

                I guess its defensible to say that because they believe 2) they will end up slipping into 1).

                I was just highlighting that you do sometimes actually accuse them of 1) even though in this post you seem to be saying that generally the issue is 2).

              • Bob Murphy says:

                Transformer, the only time I “sometimes actually accuse them of 1)” is when, in fact, they have proposed 1). So it’s weird for you to be tut-tutting me about it.

                Are you upset that with my sarcastic post that started all of this, you thought I was wink-winking, “Hey everybody, Krugman likes earthquakes, but guess what moron, they’re bad for the economy!” ?

                Because I never actually accused him of supporting an earthquake. What I accused him of, is endorsing an economic model and policy prescriptions that rely on a mechanism that would *also* mean earthquakes (at least mild ones) boost output.

                This isn’t a low blow, because it’s true.

              • Transformer says:

                I suppose I am interested in actually understanding those NK model and what is wrong with them and not just taking the “wow that sounds weird – only an idiot would believe that” .approach.

                Possible unfairly its that latter approach that seemed to be getting airplay in these 2 posts.

                I am not angry however and genuinely appreciate your response to my comments that have helped clarify my views on and understanding of the NK models

              • Bob Murphy says:

                Transformer wrote:

                I suppose I am interested in actually understanding those NK model and what is wrong with them and not just taking the “wow that sounds weird – only an idiot would believe that” .approach.

                Possible unfairly its that latter approach that seemed to be getting airplay in these 2 posts.

                Transformer, I never said, “Only an idiot would believe that.” YOU DID.

              • Transformer says:

                Well, it was actually an imaginary Keynesian I invented whose said that, and the point I was trying to make was “lets address what Keynesian are really saying and not a parody of what they are saying”

                (NOTE: Subsequent to making that comment I actually came to see that the parody and the reality are quite close in this case – so I wouldn’t have made that comment in that way had I grasped that earlier – but the sentiment I think was correct,)

  3. Matt M (Dude Where's My Freedom) says:

    “Krugman is clearly saying that totally useless government military expenditures will be good for the economy, relative to doing nothing”

    When he says “doing nothing” does he mean everyone literally doing nothing, or the government doing nothing. Because even when the government does nothing, stuff still happens. Economic activity continues. I feel like this sort of language trap is something that keynesians do deliberately in order to try and mislead people who don’t know much about economics.

  4. Yancey Ward says:

    Cut through it all, you come down to a single difference in economic philosophy- a Keynesian will tell you there is no difference in output value between a million dollar concrete block sunk into the Atlantic, and a million dollar concrete road connecting two towns, or a million dollar concrete office building.

    • Gamble says:

      So long as the guberment sunk the concrete, all is good.

  5. Major_Freedom says:

    Ugh, Eggertssen and Krugman 2011:

    Suppose that aggregate supply shifts out, for whatever reason – a rise in willingness to work, a change in tax rates inducing more work effort, a rise in productivity, whatever. As shown in Figure 2, this shifts the aggregate supply curve AS to the right, which would ordinarily translate into higher actual output. But the rise in aggregate supply leads to a fall in prices – and in the face of a backward-sloping AD curve, this price decline is contractionary via the Fisher effect.

    A fall in prices does not cause a fall in nominal spending. A fall in prices caused by more productivity is not “contractionary”. When you sell twice the output for half the prices, your revenues are unchanged. There is no downward pressure on profits.

    According to their anti-economic logic, the electronics industry should have “contracted” down to virtually nothing, considering how many years electronics prices have been falling.

    Good grief. This is first year econ fail.

  6. Lord Keynes says:

    “he is clearly saying totally useless spending will boost the economy; the interviewer is right when he asks isn’t this what Keynes himself thought.”

    False. The interviewer says that Keynes thought that if people were employed to dig holes and fill them up, then “that’s fine: they have been productively employed”.

    That is B.S.

    Keynes did not think such things constituted “productive employment”.

    “In so far as millionaires find their satisfaction in building mighty mansions to contain their bodies when alive and pyramids to shelter them after death, or, repenting of their sins, erect cathedrals and endow monasteries or foreign missions, the day when abundance of capital will interfere with abundance of output may be postponed. ‘To dig holes in the ground,’ paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services. It is not reasonable, however, that a sensible community should be content to remain dependent on such fortuitous and often wasteful mitigations when once we understand the influences upon which effective demand depends.” (Keynes 1964 [1936]: 219–220).

    I.e, such things per se — the holes dug and filled or private sector pyramids — would be wasteful, not productive. No “sensible community” would want such absurd things.

    That is, in a deep depression, with vast idle resources, if millionaires started building pyramids, then that would increase employment, income and output, but what “sensible community” would want private sector millionaire lunatics wasting resources on pyramids?

    Far better to have useful public infrastructure and social spending by government.

    • Andrew says:

      Some sensible communities would also find it wasteful to allow women to be educated.

      They build schools women can’t go to. Build roads women can’t drive on.

      But atleast they don’t have high unemployment for men.

      It is also nice that you admit that people who build things for rich people should be ashamed as they are essentially useless resources.

    • Bob Murphy says:

      Lord Keynes, you are confirming everything I said. I really don’t know what your deal is.

      Keynes (and Krugman) think that in a liquidity trap, if the option is between the government doing nothing versus spending borrowed money on socially useless things, then it’s better to do the latter. Obviously it’s better still to spend borrowed money on socially useful things.

      You are confirming exactly the position I have attributed to Keynes and Krugman.

      • Ken B says:

        That’s how it looks to me.
        I suspect LK is just reacting to the interviewer suggesting Keynes would rest content with hole filling.

    • Major_Freedom says:

      LK:

      “In so far as millionaires find their satisfaction in building mighty mansions to contain their bodies when alive and pyramids to shelter them after death, or, repenting of their sins, erect cathedrals and endow monasteries or foreign missions, the day when abundance of capital will interfere with abundance of output may be postponed. ‘To dig holes in the ground,’ paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services. It is not reasonable, however, that a sensible community should be content to remain dependent on such fortuitous and often wasteful mitigations when once we understand the influences upon which effective demand depends.” (Keynes 1964 [1936]: 219–220)”

      That’s more like it.

    • guest says:


      … or private sector pyramids — would be wasteful, not productive. No “sensible community” would want such absurd things.

      Private sector pyramids WOULD be productive, seeing as they satisfy the specific producer’s preferences for the payment that the specific consumer supplies.

      Communities can’t desire things, so the community, as a collective, is irrelevant.

      Only individuals desire and produce things.

      • Philippe says:

        “Only individuals desire and produce things”

        Who created the language you are currently using to think and write?

    • Gamble says:

      Idle resources is statist propaganda.

    • Bala says:

      Very interesting….

      That is, in a deep depression, with vast idle resources, if millionaires started building pyramids, ……

      Here’s an analogy….

      That is, given that pigs are pigs as we know them, if pigs have wings, they will fly.

      Once again, will someone do something about this troll?

      • Gamble says:

        More to the point. Raise the pigs, kill them, burry them in a hole. Prosperity for all…

        • Bala says:

          The contradiction between “deep depression” and “lunatic millionaires spending on pyramids” was, to me, rather striking. I always thought a deep depression was a period of revelation of mass entrepreneurial error and therefore a period during which just about everyone is racking up a loss. How (and why) during such a phase people in general, even millionaires , would go about spending on building pyramids and consume the already shrinking capital base beats me. I mean, when the capital base is shrinking and all capital is already employed somewhere in the structure of production, where would the capital required to employ these “idle resources” come from? The heavens? Trees? Thin air?

  7. Capt. J Parker says:

    Rogoff blew it. Krugs seemed about to say “Then, if later we found out we really weren’t about be invaded by aliens we’d be back at full employment and everything would be fine.” Rogoff then starts yammering about Orson Wells. Rogoff should have said “Aren’t we in for a major crash when we discover that no one want’s anti-alien weapons anymore?” This is just like when Krugs cheered on a housing boom and just assumed there would be a soft landing at the end of the boom when in fact there was a major bust which led to the Great Recession.

  8. Tel says:

    … a rise in productivity, whatever.

    So more willingness and/or ability to work ends up reducing the amount of work being done.

    More productivity results in less working hours. Well bugger me, how about that?

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