27 Jan 2009

The Difference Between Milton Friedman and Paul Krugman

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Friedman famously said (though apparently didn’t coin), “There’s no such thing as a free lunch.”

Krugman, on the contrary, believes:

(A) There is such a thing as a free lunch, and

(B) It costs $2.57.

Thanks to von Pepe for pointing out the column and the money quote.

Incidentally, this whole argument involving school lunches had me stumped for a couple of days, but it just clicked while I was giving my son a bath. (I suspect this means Krugman’s logic was dirty.) First, the argument:

As the debate over President Obama’s economic stimulus plan gets under way, one thing is certain: many of the plan’s opponents aren’t arguing in good faith. Conservatives really, really don’t want to see a second New Deal, and they certainly don’t want to see government activism vindicated. So they are reaching for any stick they can find with which to beat proposals for increased government spending.

First, there’s the bogus talking point that the Obama plan will cost $275,000 per job created. Why is it bogus? Because it involves taking the cost of a plan that will extend over several years, creating millions of jobs each year, and dividing it by the jobs created in just one of those years.

It’s as if an opponent of the school lunch program were to take an estimate of the cost of that program over the next five years, then divide it by the number of lunches provided in just one of those years, and assert that the program was hugely wasteful, because it cost $13 per lunch. (The actual cost of a free school lunch, by the way, is $2.57.)

Now this baffled me for days. Did Krugman seriously mean to tell us that the “5 million jobs” figure was a per year statistic, and that really there would be a total of, say, 15 million jobs created by the stimulus package? And that the dumb Democrats weren’t using the bigger number, even though the $825 billion (or whatever) price tag was a cumulative figure?! C’mon, that’s nuts.

But then I realized what Krugman must mean in the quote above. I think he is saying that if Joe the Unemployed Hedge Fund Manager gets a stimulated job making solar panels in 2009, and then he has that same job in 2010, and then in 2011, that this is 3 job-years that have been created by the $825 billion stimulus package. So it’s wrong to just give a total figure for the dollars used to create that slot for Joe for 3 years, since when people hear “$275,000 per job” they are thinking of an annual salary.

Right, does everyone agree that that’s what Krugman has to mean? If so, then he is being incredibly dishonest in his arguments, even for him.

(1) At best, he should be saying, “This is misleading, because a new job lasts for several years.” It is simply NOT TRUE to say that we have created 1 new job three years in a row, for a total of 3 new jobs over the period. When I worked at Hillsdale College, I was there for 3 years. I didn’t hold 3 jobs, I held one job.

(2) More to the point, those new jobs aren’t all going to be created in year one. If Krugman wanted to actually edify, instead of misleading his readers, he would have (fairly) switched away from “cost per job” to “cost per job-year.” But you know why I bet he didn’t do that? Because if he had, he would need to admit to his readers that most of the stimulus money isn’t even going to hit until 2010. And that might make even his die hard fans say, “Huh? I thought this was supposed to be a quick shot in the arm to keep aggregate demand from falling? But if most of the money won’t even hit until 2010…?”

I think another reason Krugman probably didn’t go for the more accurate job-years stat, is that he’d have to consider how long these stimulated jobs would last. And then he’d have to get into the tricky issue that Mario Rizzo has been harping on, namely, that when this pork spigot turns off, won’t you have 5 million people suddenly thrown out of work?

It would be clear that a stimulated job is a simulated job. And that’s why Krugman, I believe, ignored the proper way to do the calculation, and just accused his opponents of arguing in bad faith. The monsters! Imagine saying that somebody who has a job for 3 years just held one job. Crazy stuff coming out of those Republicans.

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