07 Nov 2015

Contra Krugman Episode 8

Contra Krugman 20 Comments

We have special guest Gene Epstein on this one, to help evaluate Krugman’s arguments about Democratic economic growth.

20 Responses to “Contra Krugman Episode 8”

  1. Tel says:

    Good work guys, already listened to it 🙂

    That partisan stuff Krugman comes out with is so laughable and lame, he deserves to get lambasted for it, but I must admit I’m a bit disappointed on the intellectual side you could have been taking on this article:

    In particular, quite a few economists seemed utterly unaware that Say’s Law – the proposition that supply creates its own demand, that shortfalls in aggregate demand were impossible – had been refuted three generations ago.

    In fact, not only doesn’t supply create its own demand; experience since 2008 suggests, if anything, that the reverse is largely true – specifically, that inadequate demand destroys supply.


    Not only is that an incorrect statement of Say’s Law (it is the mangling of Say’s Law by Keynes) but the whole business about “inadequate demand” is backed up by some amazingly skew logic.

    A new paper by Fatas and Summers looks at the impact of fiscal austerity, not on actual output, but on estimates of potential output; it finds large negative effects.

    Oh gosh, why look at any actual output (who cares about that?!?) when you can look at potential output?

    I did glumly plod over and read the article and I was kind of thinking they probably won’t even bother with a definition for “austerity” but I was surprised. Not only did they provide a definition, but a highly collectible one at that. This is unique and adventurous.

    We collect data from the April 2010 issue and measure the planned fiscal consolidation over the next two years (2010 and 2011) as the change in the forecast of the change in the structural balance as a percentage of potential GDP. This is identical to the specification in Blanchard and Leigh (2013) and this magnitude can be thought of as the size of the planned fiscal consolidation.

    That’s right… not only have they substituted “potential” GDP (a meaningless estimate and nothing more) for actual output, but they have substituted planned fiscal consolidation for “austerity”. That’s the diet you are intending to go on, right after this bucket of ice cream… the smoking habit you are just about to kick, right after this cigarette, and perhaps just a few more.

    The conclusion? Well there’s a strong correlation between people who kid themselves about how quickly their economy will recover and people who kid themselves about the ability of future governments to pay back debts. Astounding result there, I would never have guessed it. To Krugman, this is a clear sign that “austerity” is a terrible idea (and by “austerity” presumably he means every government should fire unrealistic economic planners).

    • guest says:

      “… if anything, that the reverse is largely true – specifically, that inadequate demand destroys supply. ”

      It’s not “inadequate demand” that’s destroying supply. It’s producers wasting resources on production processes that haven’t been justified by consumer demand.

      Keynesians have a problem understanding the order of value. Value is *imputed* up through increasingly higher order production processes, beginning with the consumer who has valued a final good for its ability to satisfy his preferences.

      Perhaps they think that since final goods have to be produced by someone that production is where value is created (the Labor Theory of Value).

      But just because a Swiss Army Knife must be produced doesn’t change the fact that consumers had to have valued the knife, the tweezers, the toothpick, etc., for the use-value they each had to someone.

      Putting them together in a multi-tool is just a convenient way of making these tools that consumers already valued more readily available – they don’t have to keep track of each tool.

      So, consumers had to value the tool before it became profitable for producers to produce them in any combination.

      Demand can never be inadequate because production is *for* consumers. Consumers drive the economy, not producers.

      Now, consumers have to pay with something, so there needs to be a supply of something that producers want. Consumer “demand” entails supply.

      Consumers, if they don’t have final goods to trade, can supply labor or raw materials. And then once producers produce final goods, they can labor for final goods.

      That’s the order of value: Consumer preferences, consumers using means to satisfy those preferences, producers supplying the means for consumers to satisfy their preferences, and workers (and investors) lowering the costs of production for producers so that they can make even more profit supplying the means for consumers to satisfy their ends.

      That’s why consumer demand cannot logically be inadequate.

  2. guest says:

    That episode was like a dogpile on Krugman.

    Looks like you’re show could become a venue for more people to join the dogpile more visibly.

    Maybe David Stockman could be a guest some time. Heck, since you were talking about Reagen, he would have also been good for this episide.

  3. E. Harding says:

    Actually, the proportion working full-time went way up after the ACA:

  4. E. Harding says:

    The war thing only works for WW II, Korea, and the Vietnam War.

  5. E. Harding says:

    I’m not astonished at all by the inclusion of FDR. It shows nothing screwey. A huge economic recovery occurred under FDR, even when not counting the war. Hoover presided over virtually all of the Great Contraction.

    • Bob Roddis says:

      You, of course, have conducted a replicable scientific experiment to finely distinguish the “market failure” from the “central bank failure” and “violent intervention failure” between 1925 and 1947, right?

    • guest says:

      “Hoover presided over virtually all of the Great Contraction.”

      Is Budget Austerity Modern-Day Hooverism?
      by Robert P. Murphy

      “Who Could Possibly Claim That Hoover Was a “Big-Government” Man? …

      “… But to his discredit, Krugman fails to notify us that on the very next page of Hoover’s memoirs, after he explains the liquidationist advice he got from his treasury secretary, Hoover wrote,

      “”But other members of the Administration, also having economic responsibilities — Under Secretary of the Treasury Mills, Governor Young of the Reserve Board, Secretary of Commerce Lamont and Secretary of Agriculture Hyde — believed with me that we should use the powers of government to cushion the situation.[2]”

      “If you read Hoover’s memoirs in context, you see that his whole point in bringing up the Mellon doctrine was to tell his readers that he rejected the advice. Hoover was trying to show people (and of course I’m paraphrasing here), “Hey, I did everything I could to get us out of that awful downturn! You should have seen the crazy laissez-faire stuff my treasury secretary was recommending.””

      • Tel says:

        Be that as it may, Hoover was undoubtedly Republican, and still presided over a large contraction, so the statistics look bad for Republicans as a party. Whether this is a deep and meaningful truth is something else again.

        As for the “economic recovery” under FDR, that involved a shift from private industry to government dictated industry so the GDP might have gone up, but the structure of that GDP was no longer the same, therefore no longer comparable. This is even more obvious during the war years where official GDP went up, but the people were subject to “wartime austerity”… they weren’t having a good time our anything.

        GDP is at best a rough and ready measure of economic activity. It’s better than nothing. So called “real” GDP has the additional problem that price inflation is impossible to accurately measure, so you have a rough and ready number being adjusted by a highly subjective metric.

    • guest says:

      Herbert Hoover Address at the Coliseum in Des Moines, Iowa

      We determined that we would not follow the advice of the bitter-end liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction.

      We determined we would stand up like men and render the credit of the United States Government impregnable through the drastic reduction of Government expenditures and increased revenues until we balanced that budget. We determined that if necessary we should lend the full credit of the Government thus made impregnable to aid private institutions to protect the debtor and the savings of our people.

      We decided, if necessary, upon changes in the Federal Reserve System which would make our gold active in commercial use, and that we would keep the American dollar ringing true in every city in America and every country in the world. We determined that we would expand credit to offset the contraction brought about by hoarding and foreign withdrawals; that we would strengthen the Federal land banks and all other mortgage institutions; that we would lend to the farmers for Production; that we would protect the insurance companies, the building and loan associations, the savings banks, the country banks, and every other point of weakness in this Nation.”

      • guest says:

        And just because it’s funny (from the same speech; October 4, 1932, by the way) …:

        “We had also to meet an attack upon our own flank from some of our own people who, becoming infected with world fear and panic, withdrew vast sums from our own banks and hoarded it from the use of our own people, to the amount of nearly $1,500 million. This brought its own train of failures and bankruptcies. Even worse, many of our less patriotic citizens started to export their money to foreign countries for fear we should be forced onto a paper money basis.

        Those worry warts. Tsk, tsk.


      • E. Harding says:

        Classic example of politicians focusing on the wrong things.

        • Major.Freedom says:

          Spending instead of coordinated investment which requires market activity?


  6. Jim says:

    Yow! This coming week’s episode ought to be great!

    Honorary mention on Zerohedge comment section: http://www.zerohedge.com/news/2015-11-09/krugman-doesnt-understand-why-darkness-spreading-over-part-our-society#comment-6767104

  7. Bitter Clinger says:

    Didn’t someone at the “Angry Bear Blog” write a book a few years ago about the differences in economic growth between Republican and Democratic presidents? Presidmetrics or something like that? At the time, I said it was a bunch of nonsense, pure garbage, because it is not just the R or D behind their names but it has to be how they run their administrations. I personally believe that Clinton’s administration was much more Republican than George W. Bush’s. That JFK was much more like a modern Republican that LBJ or Carter or Obama. Also instead of comparing over the life of the administration you should look at it year to year, there are lots of lags in administration policy and what they call black swans. Actually, we might learn something if this study was done correctly. Be that as it may.

    Jim, I too am interested in what Murphy is going to say about Krugman this week. I worked on a project in Russia in 2009 and saw the people, worked with them, and interacted with them. (At least the workers, not so much the politicians) Krugman pointed out their taste for alcohol and short lives and then went on to say that what we are seeing in the United States is unprecedented. Huh??? I don’t think it is. I wanted to find a nice 50-year-old to bring back to the US (the mother of my children had passed away two years previously), but ended up with two 25’s. It is what it is. Since then I have found a nice Trophy Wife and while she goes to work every day to pay off her student loans, I stay home and take care of the house, do the laundry, and cook the meals. (I’m retired and financially secure) Wandering around the neighborhood, I find that it is full of househusbands who have wives that are successful in their occupations and are in the age group noted. I wonder if that isn’t the reason for the high suicide rate?

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