Consulting by RPM || Free Advice Blog

Yet Another Krugman Kontradiction

[UPDATE below.]

I think I may have to christen a “YAKK” category on Free Advice.

On October 26, in a post entitled “Do Investors Expect Too Much From Bernanke?”, Krugman had a chart showing how inflation expectations had risen substantially since August, when the market began expecting QE2. This is Krugman’s commentary:

Financial markets seem convinced that quantitative easing will be highly effective at solving at least one problem: inflation running well below the Fed’s 2-percent-or-so target. The chart above shows the difference between interest rates on 5-year inflation-protected bonds (which are now negative) and rates on unprotected bonds; implicitly, the market forecast of inflation over the next five years has risen half a point.

But I really don’t understand this. Granted that QE2 will probably have some positive effect, hopefully bigger than analysis based on the debt-maturity equivalence suggests. Still, the prospect remains that we’ll face multiple years of high unemployment — or, if you prefer, a protracted large output gap (PLOG). And history is clear on what that means: declining inflation…

My guess, then, is that the markets are overreacting; they’re thinking, “The Fed is printing money!”, while forgetting that this ultimately matters, even for inflation, only to the extent that it seriously reduces unemployment.

Everyone got that? The market’s expectations responded just the way Scott Sumner hoped, and so QE2 was “working” on that account. But Krugman was a stick in the mud, saying markets were wrong and that the Fed really wasn’t doing enough.

OK, today (November 23) Krugman writes in a post entitled “Sabotaging QE”:

When short-term interest rates are up against the zero lower bound, whatever power the Fed has to influence the economy comes largely from its ability to affect expectations. This is true even for Bernanke-style quantitative easing: you can’t really push down longer-term yields unless the market believes that you’re going to keep buying until the rates are where you want them. It’s even more true when it comes to credibly raising expected rates of inflation.

So if a large political faction begins yelling and screaming as the Fed attempts QE, this will have the effect of undermining the policy’s effectiveness. And so it’s proving.

The free ride’s over, Paul. A new sheriff is in town. I’ll see you in the ring.

UPDATE: I know this is futile, but let me try to allay one set of objections. I understand that Krugman would say he is being consistent. Why, he was pooh-poohing the expectations of higher inflation, by arguing that his saltwater model said Bernanke wasn’t doing enough.

In contrast, Krugman could continue, the moral reprobates that were “sabotaging QE” were pooh-poohing the expectations of higher inflation by saying that their freshwater models said that Bernanke was doing too much.

So you can see why Krugman is a hero, and the latter group are moral monsters. No contradiction at all.

Murphy vs. Mish

At the behest of several readers, today at Mises.org I tackled once again Mish’s credit-deflation paradigm. Here’s a good excerpt:

When Mish wrote the above, the S&P 500 was 935. As the quote above tells us, at this time Mish was predicting that stocks would then fall down to 600 or maybe even 450. Instead, the “sucker rally” kept going, such that exactly one year later, the S&P 500 stood at 1137. To switch to percentages, this means that in early 2009, Mish was calling for stocks to drop anywhere from 35 percent to 52 percent. Instead, stocks steadily rose 22 percent. That’s a phenomenally bad prediction.

I said it twice in the article, and I’ll say it again here: I am not claiming that the deflationists are totally wrong, and that people like Gary North and me–who have been faithful to our heritage as economists, in worrying about new money creation leading to rising prices–have been totally right.

In fact, Paul Krugman and Scott Sumner could understandably claim that they have called things much better than the Mishian inflationistas or deflationistas.

So, my point in writing this Mish piece was to make sure that his fans understand just how much his mantra has been wrong, since early 2009.

Storm Is Coming

I am surely not the first person to read the Old Testament and see parallels to how his own country is going down the tubes, and in fact is about to reap what it has sown. In the midst of my pessimism, I was very glad to come upon chapter 51 in Isaiah:

1 “Listen to Me, you who follow after righteousness,
You who seek the LORD:
Look to the rock from which you were hewn,
And to the hole of the pit from which you were dug.
2 Look to Abraham your father,
And to Sarah who bore you;
For I called him alone,
And blessed him and increased him.”
3 For the LORD will comfort Zion,
He will comfort all her waste places;
He will make her wilderness like Eden,
And her desert like the garden of the LORD;
Joy and gladness will be found in it,
Thanksgiving and the voice of melody.
4 “ Listen to Me, My people;
And give ear to Me, O My nation:
For law will proceed from Me,
And I will make My justice rest
As a light of the peoples.
5 My righteousness is near,
My salvation has gone forth,
And My arms will judge the peoples;
The coastlands will wait upon Me,
And on My arm they will trust.
6 Lift up your eyes to the heavens,
And look on the earth beneath.
For the heavens will vanish away like smoke,
The earth will grow old like a garment,
And those who dwell in it will die in like manner;
But My salvation will be forever,
And My righteousness will not be abolished.
7 “ Listen to Me, you who know righteousness,
You people in whose heart is My law:
Do not fear the reproach of men,
Nor be afraid of their insults.
8 For the moth will eat them up like a garment,
And the worm will eat them like wool;
But My righteousness will be forever,
And My salvation from generation to generation.”
9 Awake, awake, put on strength,
O arm of the LORD!
Awake as in the ancient days,
In the generations of old.
AreYou not the arm that cut Rahab apart,
And wounded the serpent?
10 Are You not the One who dried up the sea,
The waters of the great deep;
That made the depths of the sea a road
For the redeemed to cross over?
11 So the ransomed of the LORD shall return,
And come to Zion with singing,
With everlasting joy on their heads.
They shall obtain joy and gladness;
Sorrow and sighing shall flee away.
12 “ I, even I, am He who comforts you.
Who are you that you should be afraid
Of a man who will die,
And of the son of a man who will be made like grass?
13 And you forget the LORD your Maker,
Who stretched out the heavens
And laid the foundations of the earth;
You have feared continually every day
Because of the fury of the oppressor,
When he has prepared to destroy.
And where is the fury of the oppressor?
14 The captive exile hastens, that he may be loosed,
That he should not die in the pit,
And that his bread should not fail.
15 But I am the LORD your God,
Who divided the sea whose waves roared—
The LORD of hosts is His name.
16 And I have put My words in your mouth;
I have covered you with the shadow of My hand,
That I may plant the heavens,
Lay the foundations of the earth,
And say to Zion, ‘You are My people.’”
God’s Fury Removed
17 Awake, awake!
Stand up, O Jerusalem,
You who have drunk at the hand of the LORD
The cup of His fury;
You have drunk the dregs of the cup of trembling,
And drained it out.
18 There is no one to guide her
Among all the sons she has brought forth;
Nor is there any who takes her by the hand
Among all the sons she has brought up.
19 These two things have come to you;
Who will be sorry for you?—
Desolation and destruction, famine and sword—
By whom will I comfort you?
20 Your sons have fainted,
They lie at the head of all the streets,
Like an antelope in a net;
They are full of the fury of the LORD,
The rebuke of your God.
21 Therefore please hear this, you afflicted,
And drunk but not with wine.
22 Thus says your Lord,
The LORD and your God,
Who pleads the cause of His people:

“ See, I have taken out of your hand
The cup of trembling,
The dregs of the cup of My fury;
You shall no longer drink it.
23 But I will put it into the hand of those who afflict you,
Who have said to you,[a]

‘ Lie down, that we may walk over you.’
And you have laid your body like the ground,
And as the street, for those who walk over.”

Potpourri

At long last, my crazy traveling schedule is winding down for a few weeks at least. Here are some things of note:

* Yesterday I was a guest on Peter Schiff’s radio show. (I think this link takes you right to the interview. Note that you DON’T have to buy membership to Schiff’s site to listen to the podcast, even though it might look like you do.) Now kids, I don’t recommend this for up-and-coming authors, but I did something quite extraordinary just after the 8:00 mark. Schiff lobbed me a softball, asking me to talk about my books, but instead I launched into an explanation of the “worst mistake of my career.” As I say, this is an advanced move; the conventional wisdom says that when a radio host asks you about your books…you start hawking your books. (Incidentally, I was on a cell phone in a Cracker Barrel parking lot, which is why Schiff and I sometimes were talking over each other.)

* Here’s my recent article on quantitative easing. It has a scary “black swan scenario” at the end.

* Vijay Boyapati is yet another person to discover the power of The Point.

* I’m not saying the last two sentences of this Caplan post are wrong, nor am I saying that this earlier Caplan post is wrong. What I am saying is that they can’t both be right.

* A lot of people are trying to figure out if the Fed is good or bad, in response to this fascinating paper by Selgin, Lastrapes, and White. My favorite reaction was (of course) from Tyler Cowen, who said that the 1929-1932 period showed the dangers of not having a Fed. (At least Cowen conceded that this was an odd statement to make, since the Fed was established in 1913.) Say what you will about Krugman, I don’t think he has ever categorized 2009-2010 as a “world without stimulus.”

* If you haven’t already seen it, check out the Taleb video on QE2 that Wenzel showcases.

* Here is the 34-minute talk I gave today at the Mises Institute’s High School Seminar. It was on the division of labor. It was pretty funny, if I do say so myself. Many more yuks than in Adam Smith.

A Question for the Money Printers

I am being serious with this one, so if you actually know what you are talking about–always a plus–please help me out. We’ve got lots and lots of economists (like Paul Krugman but also Scott Sumner and even Tyler Cowen) who think QE2 might help a little bit, but that it’s not enough to get the job done and restore full employment.

OK, Bernanke is going to create an additional $600 billion “out of thin air” as they say. Help me out here:

* According to that bastion of truth, the Bureau of Labor Statistics, the number of unemployed Americans is 14.8 million.

* With $600 billion, Bernanke could have hired each unemployed person to pick up litter, read Aesop’s Fables to orphans, change bed pans, etc. for an average salary of more than $40,000 per year (no health benefits).

* So if Bernanke were to do the above, the unemployment rate would immediately drop to 0%, especially if Congress discontinued federal unemployment benefits in light of the Fed subsidy.

* I anticipate that Sumner could argue, “Ah, but if people perceived this as a one-time Fed burst of inflation, then most of that new income would be saved. So Aggregate Demand wouldn’t actually rise enough to sustainably create full employment.”

* OK, but note that on Keynesian grounds, my hypothetical make-work Fed program–call it Laziness Easing–couldn’t possibly hurt anything. Especially if we assume that Bernanke promises he won’t repeat the experiment–since we don’t want current workers quitting their jobs in the hopes of getting on the gravy train next year.

* So what would Krugman et al. predict would happen in my scenario? That the official unemployment rate would drop to 0%, and then it would shoot back up to 9% or whatever in one year’s time? And that everybody would be perfectly rational Chicago-School type agents, and those unemployed workers would not think, “Maybe things will pick up in a year from now, so I feel safe spending some of this $40,000 paycheck this year”?

* To the extent that an actual Keynesian agrees with me that this prediction is ridiculous–that surely we couldn’t literally put every single person back to work for a full year, without that nudging the economy out of its pure Aggregate-Demand-slump–then can we all agree that the Fed’s current QE2 is a ridiculous failure?

(Incidentally, Tyler Cowen in his limited praise for QE2 acknowledges that there are “real” problems with the economy, so he could get out of this dilemma easier than Krugman or Sumner.)

Krugman Still Rattled

We have further, smoking gun evidence that Krugman has been following my every move. The hints just keep leaking out. Submitted for your approval:

Me on November 10: “A few people today have sent me this Slate article that links to one of my old Mises Daily articles. Just when I’m about to give up economics and go full-time into male modeling, they pull me back in…”

Krugman on November 13: “Sorry about radio silence. Some traveling, together with some modeling — fruits of which should be posted in a week or two.”

Oh, I’m supposed to think that’s just a coincidence? Hardly.

Quite clearly Krugman is like Jack Nicholson’s character in A Few Good Men. He thinks he can crush me in a debate, and he’s dying to eviscerate my phlogistonic theory. But his handlers tell him it’s a reckless move that can only hurt his career.

You just watch. The next time Krugman misses his connecting flight in Europe, he’ll blog about “Murphy’s Law.”

Liberty: Accident or Divine Gift?

I’ve just gotten back to Nashville, and have about 12 hours before I need to get on the road for my upcoming talk at MTSU. (Not sure if there is a link for it, but the event is Monday at 6:30pm and is in the State Farm Room, in the BAS [Business and Aerospace] building. I’m talking about the difference between free-market capitalism and corporatism.)

Let me give a quick post that may very well start a war in the comments. I recently was in a discussion with a small group of liberty activists, and we were wondering whether there were any hope for freedom if the US continued on its present course. One of the people was very knowledgeable in this arena, both in terms of history and personal travels in foreign countries.

This guy’s viewpoint was that yes, America really was the only hope, and further that this shouldn’t surprise us. He viewed it as almost a fluke of history (my term, not his words) that our notion of liberty ever developed. He said that it was quite implausible, if you think about it. The Romans, for example, developed a notion of law that everyone was subject to–even Roman officials–but this was purely out of necessity for ruling over a diverse empire. (In other words, the only way to keep the subject nations from constantly revolting was to make them think that even the Romans were following the same basic rules that were imposed on them.)

This guy then focused on the interaction of the Roman tradition with the Judeo-Christian heritage. (As far as I know, this guy himself isn’t religious; he was speaking purely in terms of secular, historical impact.) The Hebrews of course bequeathed the idea that there was an orderly universe, with a just Lawgiver and that mere mortals had no business trying to overturn the divine law. If the king overstepped his authority, then a lowly prophet could dress him down to his face.

The culmination of the unique Western European heritage of course was Christianity. In the doctrines of Jesus, everyone was a child of God, and so possessed immense worth as an individual. More important, people were given freedom of conscience–they could choose whether to accept Jesus’ offer of salvation. And if they did so, then they were no longer threatened with legalistic punishments, and they could “backslide” and still be forgiven. Furthermore–according to this guy–for the first time in history there was an intellectual basis for repudiating the institution of slavery, something that had plagued humanity in all earlier times.

I am not doing this guy’s narrative justice; it really was beautiful. In fact, if you had read it in a novel, you would have thought, “Oh c’mon, nobody in a small group of people would have such a long statement; somebody would have gone to the bathroom and interrupted him.” But really, we were mesmerized by his crash course in Western civ.

It occurred to me, though, that if one is a believing Christian, then this “lucky break” is nothing of the kind. It is no surprise that the very concept of liberty could not fully develop–even in the works of agnostic geniuses–before God Himself walked among us, teaching.

Michael Moore Makes an Unbelievably Bad Analogy Choice

I just got back from dinner with Richard Ebeling and the hosts of tomorrow’s Freedom Seminar, along with some of their donors.

I flipped on the TV so I could fully appreciate my advantage over Stephan Kinsella. I couldn’t resist watching Michael Moore pontificate to Larry King about the significance of the elections. (His conclusion was that voters demonstrated that they wanted Obama to pursue the progressive agenda for which they elected him in 2008.)

Then, as a special treat, Moore said that most of the mortgage fraud had been conducted by the Wall Street banks. King asked him to elaborate, and Moore fumbled for an embarrassing amount of time–I actually thought he was going to punt and move on.

But then Moore recovered, and said something like this (paraphrase): “These banks gave mortgages to people who they knew wouldn’t likely pay them back. And then these same banks went out and bet against these investments. If a casino did that, they’d be prosecuted.”

Really? So a casino doesn’t lend someone money, and then bet against the investment that the person makes with it?