10 Oct 2013

Krazy Krugman Kalls

Krugman, Shameless Self-Promotion 25 Comments

This is mostly bookkeeping for myself, if and when the Krugman Debate happens. I’m noting the best botched predictions (that I hadn’t previously known) that Niall Ferguson had found in his 3-part series.

Krugman likes to pride himself on having noted the housing bubble well before most others. Now what’s odd is that Krugman gave (nuanced) support for Greenspan’s creation of the housing bubble, even as late as 2006, but put that aside. What Ferguson made me realize is that Krugman didn’t realize the consequences that would follow from it.

==> On January 1, 2008, Krugman wrote:

So did the U.S. economy dodge a bullet?

Yes, it did — which is why I haven’t been as sure about a looming recession as, say, Larry Summers or Marty Feldstein, let alone Nouriel Roubini. (No, I’m not always a doom and gloom guy — only when the situation warrants, which has been pretty often lately.)

While we dodged a bullet, however, there are between one and three more bullets headed our way.

First, housing has further to fall. There’s been a further plunge in building permits and starts since the credit crunch began in August; these take a while to be reflected in construction spending, so there’s a fresh hit to GDP definitely in the pipeline. Even now, residential investment as a share of GDP is only down to its long-run average; you’d expect it to fall below that average for an extended period.

Second, there are hints of a slump in business investment, especially commercial real estate, which seems to have had a bubble of its own and is feeling the effects of the credit crunch.

Third, there are hints that consumers have finally started to cut back.

On the other hand, exports still seem to be growing fast.

So I’m actually uncertain about where things go this year.

UPDATE: When interpreting the above quotation, remember that the recession officially began in December 2007. So the above is a failed post-diction.

Also, notice that (apparently) Martin Feldstein and Larry Summers predicted the recession sooner than Krugman did. I guess that’s why Krugman and his followers laud these guys so much?

==> Then, in February 2008, Krugman was still saying:

Carmen Reinhart and Ken Rogoff have an alarming paper on parallels between the United States and countries that have experienced financial crises in the past. The bottom line of the paper, which has already gotten a lot of attention, is that we look an awful lot like those other countries — and that if their experience is any guide, things could get really, really bad.

The truth is that I’m not nearly as pessimistic as some. But comparisons like this do worry me.

Update: So does this: the Fed reports that banks are sharply tightening credit. This suggests another downward leg in spending ahead.

So yeah, it’s good that he was starting to get antsy–though “not nearly as pessimistic as some”–seven months before all hell broke loose, and two months after the recession officially began. But I’m not sure it shows how awesome his much-ballyhooed model is. In any event, using Austrian business cycle theory, for a bank client in July 2007 I became far more alarmed than what Krugman is saying above, as of February 2008. A simplified version of that analysis ran at Mises.org in October 2007.

Last point: Notice the difference in analysis. I was explaining why I though there were “real,” structural problems with the economy. In contrast, Krugman is just trying to predict how much various groups will spend. Sometimes it’s breathtaking when you see the huge chasm between Austrian and Keynesian macroeconomics.

25 Responses to “Krazy Krugman Kalls”

  1. Major_Freedom says:

    “Sometimes it’s breathtaking when you see the huge chasm between Austrian and Keynesian macroeconomics.”

    I’m getting closer to the conclusion that the reason for this chasm is the difference in a priori theories of money itself.

    Austrians hold that money is a universal medium of exchange. Hence, the focus on the economy tends to be that which is exchanged for money. That means the “real”, structural side of things. Money “flows”, while important, plays a subsidiary role to real goods. Hence policy prescriptions tend to favor “real stimulus” more often than not. But the state doesn’t “control” the real economy. Private property owners do. So the solution tends to be free market oriented.

    Keynesians hold that money is an end in itself. Hence, the focus on the economy tends to be money exchanges in themselves. That means the “nominal”, spending side of things. Real goods, while important, plays a subsidiary role to money “flows”. Hence policy prescriptions tend to favor “monetary stimulus” more often than not. But private property owners don’t “control” the nominal economy. The states does. So the solution tends to be statist oriented.

    • Major_Freedom says:

      The battle between Keynesianism and Austrians, I believe, will rest on settling the dispute between the a priori theories of money. As long as these differ, so will everything else.

    • Bob Roddis says:

      We think of real human beings freely trading and exchanging real goods and services and hope that money will be as neutral as possible over time and space while people are given as much freedom as is possible to pursue their dreams.

      The statists think that the masses need external prodding, pushing and planning FROM THE STATISTS and that the masses would shrivel up and die without this needed expertise.

      Mike Normal blogger Tom Hickey:

      [Re: a “Cold turkey balanced budget”] It would also say that if this scenario comes to pass it is likely the end of capitalism as we know it. Then it will be obvious that without government kicking in for accumulated saving of net financial assets, capitalism breaks down.Endogenous credit is not sustainable given profit share relative to labor share typical of managerial capitalism. The alternative is to ban accumulated saving and rentierism and force productive investment, as Keynes realized in calling for the euthanasia of rentierism.

      http://mikenormaneconomics.blogspot.com/2013/10/warren-mosler-paints-dismal-picture.html

      They do not even know the subject of our analysis. It’s bizarre and it’s getting creepier by the week.

  2. Teqzilla says:

    The failed prediction that I find most illustrative of the way Krugman works is his repeated warning of imminent deflation. His obvious indifference at its failure to occur and token attempt to confront it shows just how half hearted and opportunistic his supposed empiricism is.

    If he as a proponent of a model can glibly explain away its apparent failures then why can’t an opponent of that model just as glibly explain away its apparent successes?

    It has to work both ways if it’s going to work any way. Either the data tells you meaningful things about the validity of the model or it doesn’t but Krugman wants to pick and choose when the data should be taken seriously and how seriously to take it. Essentially, when the facts change, he changes his mind about the facts

  3. Lord Keynes says:

    “Krugman likes to pride himself on having noted the housing bubble well before most others. Now what’s odd is that Krugman gave (nuanced) support for Greenspan’s creation of the housing bubble, even as late as 2006, but put that aside. What Ferguson made me realize is that Krugman didn’t realize the consequences that would follow from it.”

    Your serious problem is that time and again you act as if Krugman could never — NEVER — have changed his mind on certain economic theories or ideas.

    Yet that is actually what has marked Krugman’s view of economics over the past decade:

    I really am gravitating toward a Keynes-Fisher-Minsky view of macro, although of the three I’d much rather read Keynes.

    Paul Krugman, “Actually existing Minsky,” May 19, 2009
    http://krugman.blogs.nytimes.com/2009/05/19/actually-existing-minsky/

    • Bob Roddis says:

      Krugman would naturally be attracted to Minksy because Minsky is nothing but Austrian theory stripped of the self evident price distortions induced by funny money emissions. The theory then replaces the obvious and empirical price distortions with a baseless non-empirical theory based upon nothing more than the bold assertions that “investors are nuts – just cuz” and “we ‘progressives’ are smart enough to regulate them” meme. A narcissistic authoritarian theory is naturally attractive to narcissistic authoritarians. It is an a priori theory because it is based upon the unstated assumption that the regulators will be from the anointed Keynesian elite. The advocates would be appalled if the regulators were southern racists and the regulated were the hipster anointed Keynesians themselves.

      So who’s empirical and who’s the day dreaming a priori authoritarians now?

      • Lord Keynes says:

        ” The theory then replaces the obvious and empirical price distortions .”

        Oh, yes, those largely imaginary price “distortions” in a world where most prices are fixed and administered prices. We’ve heard this rubbish before.

        And even where prices are flexprices, price rises after new money is created and demand rises are precisely what needs to happen in markets, so talking of “distortions” just begs the question. What would you expect to happen in a flexprice market? Price freezes?

        Quite apart from which you also just beg the question by assuming new money creation is all inherently immoral — which would logically require “authoritarian” impositions on the private sector, to stop all private agents from creating things as simple as negotiable cheques, etc.

        It’s amusing you speak of ” authoritarianism,” as Rothbardianism is exactly a “narcissistic authoritarian theory” with respect to money, imposing its ignorant ban on FR banking on an unwilling private sector.

        • Richie says:

          Here we go – another 100 comments re-hashing the same topic over and over and over and over and over and over and over and over and over and over and over and over and over and over again.

        • Bob Roddis says:

          I’m going to restate my main point and then I’m going boating today.

          Austrian theory holds that the terms of voluntary exchanges will be determined by the subjective values of the parties to the exchanges. That means not just the prices, but ALL of the contractual terms of the agreement. To the extent one party prefers to cut production and not prices in making its sales offers is in line with that analysis because we assume that such a party is acting so as to maximize the result of his plans. Predicting in advance that people will always tend to slash prices and not production is not the Austrian theory.

          Plus, I thought we proved that “fixprice” markets are crony capitalist markets.

          http://consultingbyrpm.com/blog/2013/10/outrage-over-outrage-over-government-shutdown-im-starting-with-the-man-in-the-mirror.html#comment-75073

          • Lord Keynes says:

            “Austrian theory holds that the terms of voluntary exchanges will be determined by the subjective values of the parties to the exchanges.”

            It says much more than that:

            The characteristic feature of the market price is that it equalizes supply and demand. The size of the demand coincides with the size of supply not only in the imaginary construction of the evenly rotating economy. The notion of the plain state of rest as developed by the elementary theory of prices is a faithful description of what comes to pass in the market at every instant. Any deviation of a market price from the height at which supply and demand are equal is – in the unhampered market – self-liquidating.” (Mises 2008: 756–757).

            “Mises conceives the market process as coordinative, ‘the essence of coordination of all elements of supply and demand.’ This means that the structure of realized (disequilibrium) prices, which continually emerges in the course of the market process and whose elements are employed for monetary calculation, performs the indispensable function of clearing all markets and, in the process, coordinating the productive employments and combinations of all resources with one another and with the anticipated preferences of consumers. (Salerno 1993: 124).

            Still, I expect neither Mises nor Salerno understood Austrian theory.

            • Bala says:

              LK,

              You highlighted one portion from Mises. I am just highlighting another for your understanding and to show how silly you are.

              The size of the demand coincides with the size of supply not only in the imaginary construction of the evenly rotating economy.

              To make my point clearer, I am now pasting the same sentence with only the most relevant portion highlighted.

              The size of the demand coincides with the size of supply not only in the imaginary construction of the evenly rotating economy.

              Now, think. It sure can’t hurt.

            • Bala says:

              As for the Salerno quote, I just showed you up on that in the previous thread. So I won’t waste my time repeating it.

            • Bob Roddis says:

              LK:

              I fail to see how either the Mises quote or the Salerno quote refute what I said and I fail to see how either quote announces how someone MUST set their prices.

        • Razer says:

          Oh, yes, those largely imaginary price “distortions” in a world where most prices are fixed and administered prices. We’ve heard this rubbish before..”

          This is demonstrably, empirically false. You, sir, are a fraud and liar.

        • Major_Freedom says:

          “Oh, yes, those largely imaginary price “distortions” in a world where most prices are fixed and administered prices. ”

          That doesn’t refute the fact that inflation from central banks affects relative prices in ways other than what would occur with unhampered market activity.

        • Major_Freedom says:

          In other words, “fixed prices” doesn’t actually mean prices that don’t change.

  4. Ken P says:

    The structural point is so important. If businesses are only profitable because of stimulus of some sort, then what is to make them hang around when the stimulus is gone? That is without even taking into the “fake resources” aspect. I think structural modifications even extends into the level of job skills. How many people now have job skills that were encouraged by low interest rates (mortgage broker, homebuilder,…) but are of much lower value today? A lot of economists believe that it takes a year or two for labor to retool their skills. That may have been true 50 years ago, but these days people often build job skills that result in higher pay for a decade or more.

    I think there is some truth to the Keynsian animal spirits, but I don’t think it’s anywhere near as cut and dry as “economy good”, “economy bad”. It’s more like “crap, I’m never going to get myself in this situation again!”, which could be a debtor or a company being overstaffed, etc. I really don’t see increasing AD as being very effective. Plus, I believe such animal spirits are more rational than we give them credit for.

    • Bob Roddis says:

      In line with your point, I would say that artificially “increasing AD” is ALWAYS a temporary, unsustainable Cantillon Effect purchasing power transfer/subsidy that lasts only as long as the subsidy lasts.

  5. Mike T says:

    Not to distract from Krugman’s poor “post-dictions”, but did you see his latest post? Appears Krugman is dipping into the race baiting pool: http://krugman.blogs.nytimes.com/2013/10/11/the-war-on-the-poor-is-a-war-on-you-know-who/?smid=tw-NytimesKrugman&seid=auto&_r=0

    I particularly adore this passage:
    “One irony here is that at this point it’s the liberals who believe in America, while the conservatives don’t. I believe in our ability to change while retaining our essential nature; I believe that today’s immigrants will be incorporated into the fabric of our society, just as Italian and Jewish immigrants — once regarded as fundamentally incompatible with American ways — became “white” by the middle of the 20th century.”

    You hear that, Murphy?? You may constantly expose Krugman on his botched predictions and contradictions, but you don’t believe in America and Krugman does,…. so there.

  6. Ken P says:

    One interesting observation from October 2007 post is that these counter-cyclical moves by the Fed were often pro-cyclical. Of course those interest rate trends weren’t necessarily all Fed induced.

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