Krugman’s Views on Supply Have More Holes Than Swiss Cheese
Where could I possibly be going with a title like that? Remember yesterday I was astounded that Paul Krugman wrote: “We do know that demand curves generally slope down; it’s a lot harder to give good examples of supply curves that slope up (as a textbook author, believe me, I’ve looked)…”
So today I heard a story on NPR. Here is the article going along with it (which has more information than the NPR radio piece):
The Emmental Show Dairy has cranked out tons of cheese for years. But now it’s in trouble — production is down by a third and the company fears it may be forced to cut back to just a few wheels a day, enough to show tourists.
The dramatic slide in sales of Emmental, popularly known as “Swiss cheese” in North America, is caused by the strength of the Swiss franc, a financial phenomenon that is driving down profits in sectors across all of export-driven Switzerland.
Adrian Zehnder, the dairy’s business manager, says the company is earning 5.49 Swiss francs ($6.92) per kilo, down from 7.80 francs per kilo last year. Most of the cheese is exported to Europe, mainly Italy.
“We are really coming close to our break-even point, which is around 5.30 francs. Then we really have to think about stopping our production,” Zehnder said, on the rolling green hills in central Switzerland where cows graze within view of the snow-flecked Bernese Alps.
Imagine that! When the Swiss franc appreciates against the euro, driving down the effective market price at which the producer can sell Swiss cheese, the seller cuts back on production. Intriguing! Someone should do a dissertation on this odd result.
(Later on in the article–though they didn’t mention this in the radio piece–there is something about producers usually boosting output to deal with a small price drop. But that messes up my blog post, so ignore it.)
I’ve got some other examples. Various outlets often solicit me to write online articles for them. Guess what, Dr. Krugman? If they pay me as much (or more) than my current gigs, I accept. But if they offer me a lot less–or nothing at all–I typically decline, unless it’s a big-exposure website with demographics who would like my worldview. Isn’t that puzzling?
Haven’t you noticed the same thing with your public speaking engagements? If someone offers you $500 to give an after-dinner talk on moronic Chicago School guys, you probably turn them down. Yet if you’re offered $25,000, I bet you strongly consider it. Ishn’t zhat veird?
Or when I was a student manager in the cafeteria in college. It was always a pain to get enough people to sign up for the Sunday brunches. (People were hungover and plus the meal was a lot longer than the other meals.) So I asked the boss if we could give a 10- or 15-cent per hour premium for everybody who volunteered for those shifts, so that I wasn’t having to cajole people with sob stories about how understaffed we were on Sunday. As it turned out, the boss was a cheapskate and didn’t do it. But I have no doubt it would have been easier to get people to work Sunday brunch, for higher pay.
OK I think I’ll stop now. I think this episode should give us pause when Krugman says he looks out at the world today, and sees nothing but evidence that the recession is demand-driven. If Krugman, when writing a textbook, can’t even find a single good example of an upward sloping supply curve, then no wonder he thinks it’s absurd when free-market guys talk about the crippling effects of higher tax rates or the regime uncertainty of ObamaCare.
Last point: Unlike your discussion of the liquidity trap, Dr. Krugman, upward sloping supply curves really are Econ 101.
Al Sharpton (and Others) Discuss the “Prophet” Ron Paul
I can’t believe this is happening. People on MSNBC are talking about Friedrich Hayek, Ludwig von Mises, the gold standard, and Ron Paul as a prophet. If they bring up David Gordon, I’m going to pass out.
Must…Respond…to…Yglesias
There is something delicious in a guy who hates everything about my worldview and yet is quite new to the material. His critiques come out of left field, and it takes me a minute to figure out what is wrong with them. Anyway, here’s Yglesias on the gold standard:
I was asked to offer a brief explanation of what’s wrong with the gold standard.
The simplest way to see this is to think about what’s not wrong with the current system. Suppose that you have a pile of U.S. dollars. One hundred thousand of them. And you think that you have a problem. Inflationistas at the Fed are going to reduce the value of your pile. You think the solution to this is to take away the Fed’s discretion over the supply of dollars, and mandate that each dollar be backed by a specific quantity of gold. This, you think, will protect the value of your dollar stockpile by linking it to long-run trends in the supply of and demand for gold. Maybe you’re right that a pile of fiat dollars is a worse investment than a pile of gold-backed dollars and maybe you’re wrong. But if this is your issue, nobody is stopping you from trading your fiat money for gold. Other people who would rather have fiat money than gold will sell it to you. I promise. This exchange of fiat money for gold happens every day, and you, too, can participate in it.
Interestingly, what won’t give you the security you crave is the adoption of a gold standard. If a federal law mandates that $1,000 be worth a certain amount of gold, there’s nothing stopping congress from changing the law later. If you want the alleged security of gold, there’s no substitute for gold. A gold standard is neither necessary nor sufficient.
I love this rhetorical move of casting the gold standard as government price-fixing (Yglesias does it more explicitly in his critique of the woman-hater Ron Paul). So let’s deal with that first.
The classical gold standard doesn’t involve a price control in the same way that, say, New York City imposes rent control, or the federal government has a floor on wages. It’s not even akin to a tinpot dictator putting in place “currency controls.” On a gold standard, you can buy and sell gold at whatever price you want. The point is, at least one party to the transaction would be stupid to do so, if the price deviated significantly from the official parity. For example, in 1932 the Treasury stood prepared to give people an ounce of gold in exchange for $20.67 in currency (plus a small margin). If Jim Smith tried to sell Joe Blow an ounce of gold for $25, the police wouldn’t care–it’s just that Joe Blow would be an idiot to pay $25, when he could get an ounce of gold for $20.67 from the U.S. government.
So even if we think of “the gold standard” as involving merely a formal peg, where the Fed targets the price of gold instead of (say) “core inflation” or “nominal GDP” or some other metric, then this isn’t price fixing in the usual sense of the term. Given that there is a Fed that is taking prices into consideration at all when it makes policy, that is “price fixing” and hence un-libertarian on Yglesias’ usage. (And yes, for what it’s worth, Ron Paul and every Austro-libertarian I know, would prefer that the government get totally out of money and banking altogether. So this is no contradiction in their worldview.)
What’s more, the truly hardcore Misesian/Rothbardian types don’t want a mere target–where the Fed announces its intentions to keep the price of gold in a certain range, much as it currently says it will keep core inflation in a certain range–but they actually want the Fed/Treasury to stockpile gold to back up the pledge. In other words, it’s not merely a pledge, it’s an offer of full redeemability. In this article, I explained Mises’ very clever plan to gradually go from our current system back to one of full redeemability. Thus we see yet another way in which Yglesias’ claim–that the gold standard is un-libertarian because it involves government price-fixing–is nonsense.
But let’s go back to Yglesias’ quotation above. There is something even more fundamentally wrong with it. Here goes:
The problem is that Yglesias is setting up an opponent he wants to sit on a pile of dollar bills as an investment, and is concerned that future inflation will erode the value of his dollars. (At least Yglesias apparently agrees with me that cash balances are a form of savings!) Yet that’s not really the issue, or at least, that’s hardly the main issue.
The point of the gold standard is to severely limit the government’s ability to inflate the monetary unit. As Yglesias and other critics of “goldbugs” have said repeatedly, right now the common medium of exchange in the United States is the dollar, not gold. You can’t walk into the grocery store and pay with gold, or at least, you’d have to first talk to a manager. You can’t go online and pay your utility bill with gold, etc.
Yes, someone who fears the collapse of the dollar can partially protect himself by stocking up on physical gold. But such a person is hardly “made whole” by this move. It is still going to be awful if the (paper) currency collapses.
Here’s Mises:
It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.
So if I were to take Yglesias’ move with respect to the gold standard, and apply it to (say) the freedom of speech, it would go like this:
Let’s say you are a critic of the U.S. government. You’ve written an essay that you think the authorities are going to throw you in jail over. You may be right, you may be wrong, but that’s what you’re worried about.
Now some people think that the way to protect yourself is to have the government endorse a Bill of Rights, in which the freedom of speech is considered a very sacred thing. Yet that’s nonsense. The true way to protect yourself is to move to another country, such as China, where the U.S. government doesn’t have a good means of getting at you, and where the authorities won’t mind if you criticize the American regime.
Really, faith in a paper Bill of Rights is useless. The government might promise that they won’t throw you in jail for criticizing them, but they might change their mind down the road. A Bill of Rights in the U.S. is neither necessary nor sufficient for feeling safe in criticizing the U.S. government. Libertarians should stop whining about this “sacred right” that’s really an obsolete throwback to an old view of the proper role of government.
So, would Yglesias like the argument above? If not, then he should admit his critique of the gold standard is goofy too.
Superlative Sentences of the Day
The funniest thing I read today, from Kevin Williamson (HT2 Jim Manzi):
Scientific disputes are highly specialized, and meaningful participation in them requires a great deal of non-generalist knowledge. I’m generally skeptical of argument from credential, but there’s a time for it. For instance, a great number of scientists have a particular view of global warming. Richard Lindzen has reservations about that view. Professor Lindzen is an atmospheric physicist a full-on professor at MIT. Your average politician is not packing the gear to get in the middle of that fight. I’m not. Chait isn’t, either. Is Lindzen not a real scientist? Is he a kook? Is Jonathan Chait going to make that case? Given two scientists with different opinions about climate forecasting, why exactly ought I to consult Jonathan Chait, or Jon Huntsman? Chait ought to think about seizing one of the many occasions for humility that come his way.
The most surprising thing I read today, from Paul Krugman:
We do know that demand curves generally slope down; it’s a lot harder to give good examples of supply curves that slope up (as a textbook author, believe me, I’ve looked)…
Inventories and GDP Accounting–A Blast From the Past
With all the talk about the pitfalls of GDP accounting (when it comes to natural disasters), I thought it might be good to dig up my article on the absurdity of the mainstream approach when it comes to inventories.
It might be hard for it to “click” at first with some of you, but if you can get what I’m saying, you will be blown away by what the mainstream guys are doing. Here’s a choice quote:
What’s really strange is that the change in inventories [in the 4th quarter of 2009] was fairly small. So the real “contribution” was not even the change in inventories, but the change in the change. In other words, we have moved the analysis one more step into absurdity by explaining the creation of real goods and services by referring to the second derivative of something (inventories) that does not have the power to create goods and services.
If you totally understand what I’m saying in that quotation, then you’ve gotten my point.
The Fight of the Quarter!
Next Friday, September 2, I’m having a one-hour debate on Keynesian policies with Modeled Behavior Karl Smith.
Details here. Insert Krugman references in comments.
Is This the Inflationary Big One?
I elaborate on the trends in excess reserves and money stock that Wenzel first noted. If for no other reason, you should click the link to see the graphic they put with the article.
Krugman Narrowly Escapes My Klutches
Aww, I thought I had him. The thing that’s been bothering me about Krugman’s post-9/11 remarks (which may or may not violate Bastiat’s Broken Window Fallacy, depending on whether or not you liked Paul Krugman going into the column), is that I thought they were evidence of “vulgar Keynesianism” as defined by Krugman himself around that time. So here’s the money quotation from the post-9/11 piece:
It seems almost in bad taste to talk about dollars and cents after an act of mass murder. Nonetheless, we must ask about the economic aftershocks from Tuesday’s horror.
These aftershocks need not be major. Ghastly as it may seem to say this, the terror attack — like the original day of infamy, which brought an end to the Great Depression — could even do some economic good.
Let me pause for a second: Those Krugmanites out there who are shocked, shocked that libertarians could possibly believe that Krugman thinks disasters are good for the economy…are you starting to see why?
Anyway, the thing that wasn’t sitting well with me, concerning the above quotation, is that the economy wasn’t in a liquidity trap at that point. So the way to “fix” it, on Krugman’s terms, wasn’t an exogenous boost in spending, but the Fed lowering of interest rates. I know this because he wrote less than a year earlier, right after Bush/Cheney were declared the winners of the election:
Mr. Cheney suggested — with more confidence in his forecast than any professional economist I know — that we face a looming recession. And this, he argued, means that we should press ahead with that $1.6 trillion tax cut.
Why is this bad news? Let me count the ways.
First, on their face Mr. Cheney’s remarks were those of a vulgar Keynesian — a believer in the now- discredited doctrine that taxes and spending should be routinely twiddled in an attempt to “fine-tune” the economy. Decades of experience shows that this is a bad idea, that when governments try to fight garden-variety recessions by cutting taxes or increasing spending they almost always get it wrong. By the time Congress has finished negotiating who gets what, and puts the new law into effect, the recession is usually past — and the fiscal stimulus arrives just when it is least needed.
Fiscal pump-priming has its place; it’s appropriate in the face of deep and persistent slumps. But otherwise we should make budgets for the long run, and let the Fed deal with short-run problems by adjusting interest rates. It’s disturbing that Mr. Cheney seems unaware of this basic policy rule.
So, I thought I had him really good: “Krugman is OK with pump-priming when it comes from a terrorist attack, but not when it comes from tax cuts!!”
Alas, I think he can wriggle out of it. He is also on record from the same period saying that Greenspan wasn’t cutting interest rates quickly enough. And, as the “vulgar Keynesian” quote says, he was focusing on the delay of the economy getting the actual stimulus, not so much about contrasting fiscal vs. monetary on their own terms (the way a Scott Sumner or Bill Woolsey would).
All in all, I let Krugman go. This time. His views are horrendous, but (in this episode) are not contradictory.
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