One Single Post on the Koch Stuff
I’m mostly posting this because I don’t like it when people have one image of me that turns out to be wrong. So, it’s a good time for me to make sure anybody who reads my stuff realizes: I do consulting for a lot of clients, and it’s all in the genre of “explaining free markets and bad consequences of government policies to the public,” so you do the math.
But, I do want to point out the hilarious bouncing around of Krugman when it comes to demonizing rich people. In the past few years, here are the various positions Krugman has advanced:
==> In July 2012 Krugman said (in a post titled “What You Add Is What You Get”) that according to standard textbook economics, rich people take out of the economy (through their earnings) exactly what they put in, and so that’s why it’s fine to tax the heck out of them. If rich people go Galt and cut their output, it doesn’t matter to anybody else, because it just means rich people take less out of the economy then; the whole thing is a wash. This is why Krugman says we have to stop taking seriously all the standard Republican rhetoric about entrepreneurs being “job creators” and the “engine of the economy”; that is all garbage, according to standard economic theory. (BTW Krugman’s argument is totally wrong, as I pointed out here and cited Karl Smith in support of my response to Krugman.)
==> Now you can see hints of it in the post above, but Krugman doesn’t actually think that ALL rich people truly get paid an income exactly equal to their marginal contribution to the rest of society. No, when it comes to people who earn their income in the financial sector, Krugman actually agrees with Paul Samuelson–as he explains in this June 2013 post–that these people are OVERpaid; they earn much more than they actually contribute. Krugman doesn’t explicitly call for it in the post I linked, but in general Krugman has no problem with various government interventions into the financial sector; he’s certainly not worried about cutting down on all of the “innovation” in the financial sector, since he doesn’t think it’s very socially productive activity anyway.
==> So to sum up, when Krugman wants to justify taxing the crap out of rich people, he tells his readers that standard price theory says rich people take out of the economy in earnings exactly what they contribute; it is a total right-wing myth that entrepreneurs create jobs or introduce new products to benefit the masses, blah blah blah–whatever they give to the masses, they take back with their high incomes. However, when Krugman wants to justify taxing and regulating the crap out of the financial sector, his position becomes more nuanced: Now Krugman tells his readers that standard price theory doesn’t work in this arena; people who get rich in the financial sector actually take out of the economy far MORE than they contribute.
==> Now, in 2014, Krugman wants to justify the Democratic Party’s obvious campaign strategy of going after the Koch brothers. So naturally this is how Krugman spins it:
[T]he Kochs are perfect villains. It’s not just what they are — serious evildoers who use their wealth to push hard-line right-wing, anti-environmental policies that redound very much to their own benefit. It’s also what they aren’t: they’re wealthy heirs, not self-made men, they aren’t identified with innovation (which you can at least argue for Bill Gates), they haven’t made money for other people like Warren Buffett. So focusing on the Kochs is a way to personalize a vision of conservative politics as a defense of people with unearned privilege.
Everyone got that? The super-rich Bill Gates innovates (and so contributed more to society than his immense earnings would indicate he “took back out”?), and at least Warren Buffett got rich by helping others do so as well. I mean, if you’re going to be a rich guy, at least do it in the financial sector and help some people, right?
For the record, this kind of stuff is why I invented the term “Krugman Kontradiction.”
An Example of Krugman Specifically Endorsing Reduction in Capacity to Boost Employment
I’ve still got people in the comments pretty sure I’m mischaracterizing Krugman. So for posterity, here is Krugman explicitly calling for regulations that make firms poorer, arguing that they will boost employment during a liquidity trap:
As some of us keep trying to point out, the United States is in a liquidity trap: private spending is inadequate to achieve full employment, and with short-term interest rates close to zero, conventional monetary policy is exhausted.
This puts us in a world of topsy-turvy, in which many of the usual rules of economics cease to hold. Thrift leads to lower investment; wage cuts reduce employment; even higher productivity can be a bad thing. And the broken windows fallacy ceases to be a fallacy: something that forces firms to replace capital, even if that something seemingly makes them poorer, can stimulate spending and raise employment. Indeed, in the absence of effective policy, that’s how recovery eventually happens: as Keynes put it, a slump goes on until “the shortage of capital through use, decay and obsolescence” gets firms spending again to replace their plant and equipment.
And now you can see why tighter ozone regulation would actually have created jobs: it would have forced firms to spend on upgrading or replacing equipment, helping to boost demand. Yes, it would have cost money — but that’s the point! And with corporations sitting on lots of idle cash, the money spent would not, to any significant extent, come at the expense of other investment.
More broadly, if you’re going to do environmental investments — things that are worth doing even in flush times — it’s hard to think of a better time to do them than when the resources needed to make those investments would otherwise have been idle. [Bold added.]
So this is exactly what I said Krugman had been doing: He isn’t calling for arbitrary reductions in Aggregate Supply (or potential GDP or just “capacity” if you want to remain grounded in the real world and not mainstream models). He’s not pining for earthquakes, or secretly planting rumors of an alien invasion.
However, he really believes his 2011 model with Eggertsson, which says that in a depressed economy with a debt overhang blah blah blah, measures that reduce productivity will actually boost employment and output. So that what would normally be a strike against, say, an environmental regulation–which must be counterbalanced by its ostensible benefits in mitigating climate change damages–now turns into yet another reason to support it.
Last thing: The reason these ozone regulations would reduce capacity going forward is that they are a restriction on the production technology firms are legally allowed to use. So don’t just get hung up on them having to replace existing machinery; that mandate per se doesn’t reduce (potential) GDP, it just means that some of actual GDP is sopped up replacing a machine only because of the regulation. [UPDATE: Actually in a normal economy the replacement of the machinery would directly reduce potential GDP relative to the baseline counterfactual, to the extent that it displaced some private investment. In other words firms have to devote some of their investment just to comply with the regulation, which doesn’t boost their capacity, rather than investing in other things that would have increased productivity next year.]
However, it’s still true that going forward, even with the new machinery etc., firms have fewer options available to them in how they can combine resources to create goods and services. So the regulations permanently reduce Aggregate Supply (or potential GDP, or “capacity”) relative to the non-regulation baseline.
Immediate Reaction to the Latest IPCC Report
I will be writing tons on this topic in the coming weeks, but my immediate reaction to the IPCC AR5 Working Group II report that came out Monday is now up at IER. An excerpt:
Now the reader should understand the hole into which the climate alarmists have dug themselves. They can’t have the IPCC running around telling people that the best projection of climate change damage will be “0.2% to 2.0%” of global income, either by mid-century (at worst) or possibly not until 2090, when they’ve spent a few years reassuring Americans that their preferred anti-carbon policies will cost 2% of income by 2050. Even using their own numbers, these policies clearly fail a standard cost/benefit test. (It obviously doesn’t make sense to spend $2,000 in the year 2050 to prevent a bad outcome that will probably cost you $1,000 in the year 2090, and the same logic applies to percentages of income.) The cost/benefit comparisons get much worse when you consider that even in their own computer simulations, the various carbon tax and cap-and-trade proposals will only reduce (not eliminate) the total damages from climate change; thus the economic costs of these policies must be compared to the potential benefits of avoiding only some fraction of the projected damages of climate change.
As I said, there are all sorts of other issues to discuss, such as the framing of anti-carbon policies as insurance. But I thought it important to underscore, on this first pass, what the big-picture middle-of-the-road numbers say. This is not at ALL what you would think, if you just listened to the conventional discussion.
Krugman Elaborates on His Alien Invasion Thought Experiment
I have never said, “Paul Krugman thinks it would be good for the authorities to fake an alien invasion, ha ha what an idiot.” I knew from Day One that he was trying to be cheeky and provocative, and was merely saying that such a policy would be better than the status quo. Hence, if you can “see” the truth of his thought experiment, then you should all the more so embrace government deficit spending on things that are actually useful, like bridges and shelters for kittens.
Yet even though I have been trying to be fair to Krugman on this point, in the last post some commenters led me to believe that they really didn’t understand just how far some Keynesians have pushed this idea that completely useless spending is better than nothing. So let’s let Krugman explain it himself:
[UPDATE: I originally threw in Krugman’s clip on Bill Maher, but realized afterwards that he was being slippery. In the original version above, Krugman is clearly saying that totally useless government military expenditures will be good for the economy, relative to doing nothing. Yet in the Bill Maher account, Krugman makes it sound as if he has been calling for high speed rail and genuinely useful things. Now maybe the difference is that he’s “kidding” in the CNN appearance, but by Bill Maher it has morphed into his “serious” proposal. Who knows. In any event, in the original CNN appearance, he is clearly saying totally useless spending will boost the economy; the interviewer is right when he asks isn’t this what Keynes himself thought.]
So Wieland isn’t putting words in the Keynesians’ mouths. Their position really does entail that supply disruptions–like an oil shock or even an earthquake–should boost output, if they occur during a liquidity trap. (That doesn’t mean it will increase wealth on net.)
Look, one of the papers Wieland cites–to motivate his empirical exploration–is Eggertsson and Krugman (2011). From that paper, I quickly found the following paragraph:
[T]he “paradox of toil,” first identified by Eggertsson (2010b)…appearing here in a starker, simpler form than in the original exposition, where it depended on expectational effects. Suppose that aggregate supply shifts out, for whatever reason – a rise in willingness to work, a change in tax rates inducing more work effort, a rise in productivity, whatever. As shown in Figure 2, this shifts the aggregate supply curve AS to the right, which would ordinarily translate into higher actual output. But the rise in aggregate supply leads to a fall in prices – and in the face of a backward-sloping AD curve, this price decline is contractionary via the Fisher effect. So more willingness and/or ability to work ends up reducing the amount of work being done.
I have other things to do with my life than to continually explain, “Krugman really did say that,” so I will leave it to readers to see if they can find Krugman saying the inverse to the above–that less willingness and/or ability to work ends up increasing the amount of work being done. But I hope I’ve given enough so that the fair reader can see this isn’t a strawman; Krugman has been advancing this stuff for years.
Data Confirm: Earthquakes Not Good for Boosting Output
Tyler Cowen links to a paper by Johannes Wieland. The following excerpt from the paper should give you some insight into the state of formal economics:
Standard sticky-price models predict that temporary, negative supply shocks are expansionary at the zero lower bound (ZLB) because they raise inflation expectations and lower expected real interest rates, which stimulates consumption. This paper tests that prediction with oil supply shocks, an earthquake, and inflation risk premia, demonstrating that negative supply shocks are contractionary at the ZLB despite also lowering expected real interest rates. These findings are rationalized in a model with financial frictions, where negative supply shocks reduce asset prices and net worth, translating into larger borrowing spreads so that consumption contracts. In this data-consistent model fiscal stimulus at the ZLB is substantially less effective than in standard sticky-price models.
Let me translate: The author is saying something like, “Some economists since 2008 have been touting the efficacy of government deficit spending when interest rates are near 0%. The standard models used to rationalize these policy recommendations work through a particular channel. This mechanism has the counterintuitive property that in this type of scenario, a sudden disruption in oil deliveries, or even an earthquake, could actually lead to higher economic output. However, I have tested this empirically, and find that even when interest rates are low, earthquakes reduce economic activity. This leads me to
question whether government deficit-spending is actually a really good idea when interest rates are near zero.”
In case the reader doubts my summary, go read John Cochrane’s discussion of the paper back in 2013 (I guess when he read a working version of it).
Potpourri
==> David Gordon walks through some of the issues with praxeology, which I’ve found is the chief stumbling block people have to Misesian economics.
==> On April 11 the Mises Institute will host a seminar on “Inflation” for high school and college students. Details here. (You can apply for in-person attendance at the Institute itself in Auburn, or you can watch it online.)
==> I had someone ask me about the “stock-rigging” allegations flying around. I haven’t looked into the specific allegations, and it wouldn’t surprise me if there were skullduggery afoot with the cozy Wall Street/Fed/Treasury nexus. However, it’s still useful to think through the logic of stock market speculation–and how it’s socially beneficial–in a genuinely free market.
==> I’m sorry, but John Cochrane did NOT do a good job responding to Krugman in this post, even though lots of people on Facebook and Twitter are doing victory dances. Unless DeLong misquoted Cochrane, or somehow reversed the context, DeLong did indeed show that Cochrane sure seemed to be contrasting two different explanations for what happens with conventional monetary policy near the zero lower bound. I thought DeLong and Krugman made a good point, and I’m not exactly unbiased in this regard. So for Cochrane to come back and (a) ask Krugman to produce a citation for an obviously generic insult that he wasn’t literally attributing to Cochrane and then (b) to point to his general body of work on New Keynesianism, is goofy. If someone found a quote of me saying, “Unlike Mises, I think business cycles can be explained by artificially low interest rates,” I couldn’t get out of that pickle by pointing to my dissertation. No, I would have to explain exactly what I was talking about in that specific quotation, and why the critic was wrong.
Colbert Responds to Demands for Cancellation
Not as good as Jon Stewart responding to Krugman, but still pretty funny.
Krugman Wonders Why He’s the Only One Parroting Administration Talking Points on ObamaCare
Remember back on the day the Healthcare.gov website launched, that Krugman reported to his readers:
So, very early reports are that Obamacare exchanges are, as expected, having some technical glitches on the first day — maybe even a bit worse than expected, because it appears that volume has been much bigger than predicted.
Here’s what you need to know: this is good, not bad, news for the program….
The big fear has been that a combination of ignorance and misinformation would keep people away, that they wouldn’t sign up either because they didn’t know that insurance was now available, or because Republicans had convinced them that the program was the spawn of the devil, or something. Lots of people logging on and signing up on the very first day — a day when the Kamikaze Kongress is dominating the headlines — is an early indication that it’s going to be fine, that plenty of people will sign up for the first year of health reform. [Bold added.]
So obviously what happened here is that Krugman naively trusted some White House outlet, and foolishly repeated “facts” that were lies. I was watching Krugman’s blog pretty closely back then, and I never saw him apologize for this mistake, or even bother to change it in the original post. This, despite Krugman’s frequent compliments to himself and the NYT for the wonderful fact-checking process they use (in contrast to the shills who write for pro-Republican newspapers).
In that context, it’s pretty funny to now read Krugman complaining:
It’s not in itself that big a deal, but I’m somewhat amazed by what amounts to a de facto blackout by major news media on a developing story that’s really obvious if you read the invaluable Charles Gaba, or even the White House blog: a huge surge in Obamacare enrollments in the final days of the signup period.
Imagine that! People aren’t mindlessly repeating the ACA talking points put out by the Obama Administration. You know, the same group that told Americans they could keep their insurance, knowing full well this was a lie.
And in case you don’t know who the “invaluable Charles Gaba” is, here’s one of his recent posts, which should give you an idea of his objective hunt for the truth regarding enrollments under the Affordable Care Act:
“Outstanding Numbers” has two meanings: The first, of course, is that in spite of everything–the terrible website launch of HC.gov and some of the state sites; the still-terrible status of some of the state sites even now; the actively-hostile opposition and obstructive actions in certain states, the negative spin on every development by some in the news media–in spite of all of this, over 7 million people nationwide enrolled in private, ACA-compliant healthcare plans between 12:01am on 10/1/13 and 11:59pm on 3/31/14…slightly surpassing the original CBO projection for that period.
There’s the usual discussions about “But how many have PAID???”, “But how many were ALREADY INSURED???”, “How many were YOUNG???” and “What METAL LEVEL did they get???” etc etc etc. All of these are reasonable questions for actuaries, accountants and so forth to ask, and the answers will indeed help shape our understanding of what the overall economic and health impact of the law will be.
For the moment, however, none of that matters. This is an outstanding number any way you slice it.
Man, this guy holds his cards close to his chest, doesn’t he? I think he might have voted for Romney, but I’m not really sure. I can see why Krugman is upset that this guy hasn’t become a go-to source for objective reporting on ACA enrollments.
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