Consulting by RPM || Free Advice Blog

Krugman Talking About Productive Capacity, and Demand vs. Supply Shocks, After the Crisis Struck

I am mostly making this post for bookkeeping purposes for myself, but for those of you arguing with me in the comments of my recent posts, take a look. I welcome your comments.

The following posts are from Krugman, discussing other economists who were trying to defuse the calls for more stimulus, by saying the economy post-2008 was facing structural problems. I have ranked them in order of helping my cause in the current dispute over potential GDP.

1) In this 2012 post, Krugman can’t believe even professional economists think that the economy’s productive capacity could be lower. They are confusing supply and demand.

2) In this post from 2012 Krugman singles out the Austrians by name, who claim that the economy’s productive capacity is lower because of malinvestments made during the boom. He says no, the data show that can’t be right. Now to be sure, Krugman isn’t now saying that potential output in 2012 was lower because of boom-time malinvestments, but he IS saying it was lower. So he was clearly wrong, back in 2012, when he was saying any moron could tell from looking at CPI and bond yields that the Austrian story made no sense.

3) In this piece from mid-2013 Krugman dismisses people saying the economy had a structural problem. In fairness, you could say there that he was focusing on sectoral mismatches. (Incidentally, note the non sequitur in that post. His data are entirely consistent with my worldview. It’s amazing to see his inability to get into other people’s heads. Of COURSE unemployment would fall the most in states where it initially rose the most. Duh.)

4) In this late 2013 piece Krugman again says he can’t believe some economists are still banging on about the economy facing a structural issue. Clearly the problem is lack of demand.

Actual vs. Potential (Real) GDP

So here is what the CBO/BEA now say, from 2000 through the present:

Now be careful: The series for potential real GDP is quoted in 2009 dollars, whereas the real GDP series is in 2012 dollars. So to make them apples to apples I multiplied the former by 1.0639, because this calculator said that was the conversion rate (at least in terms of CPI, GDP deflator would be different but I don’t think it would be a huge difference).

So anyway this is all relevant to the thoughts here.

Krugman Potentially Owes Me an Apology

First, some background:

==> In August 2013 Brad DeLong wrote a blog post wondering why the Fed wasn’t proceeding full-steam ahead. He wrote:

There are no signs in the pace of technological progress, in the level of investment, in the pace at which the American labor force educates itself, in measures of capacity utilization, in signs of upward wage pressure due to labor quality bottlenecks, or in surging commodity prices due to supply bottlenecks to suggest that the path of growth of U.S. sustainable potential GDP is materially lower today than was believed back in 2007.

Yet real GDP in the U.S. today is and remains at least 5.5% below the path that past history tells us is consistent with stable inflation, and thus with rough balance in the labor market.

==> I found his statement odd, because the recession had obviously led to a fall in investment.

==> As is his wont, DeLong bit my head off. If I had done my homework (his phrase), I would’ve known that even taking into account the drop-off in investment, potential GDP as of August 2013 was only about 1% below its pre-recession trajectory.

==> Paul Krugman piled on, agreeing with everything DeLong had said, but adding that the CBO already took into account investment when it put out its potential GDP series. Krugman used the occasion of my smackdown to give this lesson to the world: “before you denounce a reputable economist for making some completely idiotic mistake, do your homework.”

==>  Daniel Kuehn piled on as well. (It’s OK, Daniel, when I was younger, I too followed around some older boys who I later realized had a bad value system. I forgive you.) In the comments, DeLong elaborated on his position, once again claiming that the level of potential GDP was about 1% lower than it had been originally forecasted. DeLong suggested that I go do something else with my life. (And I’m not exaggerating, he literally wrote that.)

==> I pointed out here at Free Advice that I had been totally correct in everything I’d said during this dispute. Using the CBO’s potential (real) GDP series, we could see that as of August 2013, the rate of growth was 25% below the pre-crisis value. So what the heck were DeLong and Krugman talking about?

==> Daniel Kuehn had a follow-up post, acknowledging that I had given a response, but was puzzled as to why I kept writing on this topic? What the heck was my point? In the comments, DeLong says that if potential GDP had been down, say, 5%, then it would have been “materially lower” and I (Murphy) would have maybe had a point. But since anybody doing his homework knew it was only down 1%, it was clear that I was wasting everyone’s time.

==> I pointed out in the comments that there had been a misunderstanding: In his original post, DeLong had written about “the path of growth of U.S. sustainable potential GDP” and that was in fact 25% lower. But now it was clear that DeLong meant “the path of the level” and so we were much closer. But, I also noted, even on DeLong’s own terms, the actual drop reported by the CBO in potential GDP was 3.6%, not the 1% that he had repeatedly insisted was the right value. (Not sure if that’s because the CBO didn’t do their homework either.)

==> In response to these observations, which I kinda sorta thought weren’t half bad, DeLong called me a “clown” and said I should “step up my game.”

==> Stepping back from the particular (and personal) dispute, in general, DeLong and Krugman spent many blog posts and op eds in the post-crisis years, smacking down people who said that maybe the recession was “structural.” (Here’s but one of many, many examples.) As the block quotation from DeLong above indicates, their go-to argument was: If this were “structural” or had to do with “capacity constraints,” we would see wage/price pressure. Since we don’t see that, we know the problem is a general drop in Aggregate Demand. The economy’s capacity is just fine, thankyouverymuch, the reason actual GDP is down, is because the Fed’s hit the ZLB and Ron Paul won’t let the Treasury borrow more.

*   *   *

Nooooow, with that extensive background/refresher course, I invite you to read Krugman’s latest blog post. Someone make a compelling case for why I’m NOT taking crazy pills right now. Because it sure feels like it. In case you want some hints: Krugman shows that CBO now says 2013 potential GDP was about 8% (just eyeballing the chart) lower than what it had projected in 2008, and Krugman furthermore admits that using price inflation/deflation as a way to gauge capacity during the Great Recession was wrong, because that model of price dynamics was wrong. (Remember, unlike unemployment forecasts from Christina Romer, inflation forecasts really matter, according to Krugman/DeLong.)

Now I hope you’re all sitting down for this one: In light of the fact that it turns out maybe potential GDP had been dropping pretty fast from 2008 onward, Krugman now recommends: The exact same policies he recommended back in August 2013, when he was high-fiving DeLong for saying at best it was down 1%. In fact, now Krugman says this new information is all the more reason to implement his policy solutions.

I’m being serious. Daniel? Harold? Transformer? Help me out here. Am I just sulking because the older boys teased me on the playground? The above seems rather contradictory and hypocritical to my eyes.

Jesus, the Perfect Sacrifice

Someone (who gave me permission to post) wrote to me: “How could Jesus’ sacrifice be sufficient? Here’s what I mean: No matter how terrible his sacrifice was, it was only for a finite period of time, but he paid the price that for me would only be payable by torment for an infinite amount [of] time. How could it have been enough? Thanks.”

Here’s what I wrote in response:

I think I see what you’re saying, but I think it’s crude to conceive of it God wanting a certain amount of suffering/punishment. I acknowledge that some Bible passages, and particularly a lot of sermons based on them, lend themselves to that interpretation.

Epstein’s Devastating Critique of Stiglitz

I had seen people passing this around, but it wasn’t until a couple of days ago that I carefully read Gene Epstein’s critique of Stiglitz. Yikes! There is some serious stuff in here. An excerpt:

Even more damning to Stiglitz’s “crisologist” credentials was another paper he failed to mention in Freefall: a March 2002 study, coauthored with Jonathan and Peter Orszag, on the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, and commissioned by Fannie Mae. Six years later, of course, the government bailed out these GSEs because of massive defaults on the mortgages that they held. Yet according to Stiglitz and his coauthors, the “probability of default by the GSEs” was “extremely small,” and “the risk to the government from a potential default on GSE debt” was “effectively zero.” Washington’s GSE bailout has been estimated at about $200 billion.

This research certainly bears on Stiglitz’s argument in Freefall that regulators should be trusted to prevent financial meltdowns. Yet the paper isn’t even cited on Stiglitz’s website, among hundreds of others listed. The staff at Fannie Mae must have agreed that the study was worth burying, since they removed it from their website, too.

Potpourri

==> After a long hiatus, I’ve resumed blogging at Lara-Murphy.com.

==> JP Koning joins the ranks of the nutjobs (including me) who think 100% reserve banking is a perfectly defensible thing. An excerpt:

“But times have changed. Zero-maturity reserves, which originally comprised precious-metal coins, evolved to a far-less-cumbersome medium: paper. And now they are digitized, existing as mere bits on a central bank’s ledger. In digital form, reserves do not incur any storage costs. And unlike gold coins or cash held in a vault, they do not need to be insured. So one major impediment to full-reserve banking — the cost of holding physical zero-maturity instruments — has been dramatically reduced.”

==> Check out how much a NYT article on Kavanaugh was edited (I’m linking to one intermediate batch of changes) even though the actual article at the link doesn’t give any whiff that it had been changed since original publication. Does anybody know, is this standard? I learned of this website (which tracks story edits) on Twitter, by someone claiming that this was pretty extreme.

==> Joseph Newhard has published another article on private military defense. I haven’t read it yet, but it looks like it’s at least partially a critique of my stuff.

==> This is old news at this point, but the relevant tabs were on my laptop computer and I kept forgetting to blog this… Anyway, back when Alex Jones got booted off of big social media platforms, Jonah Goldberg wrote a piece titled, “When the Tide Comes In.” He celebrated National Review’s history of excommunicating (his word) irresponsible people from the Right, and remembers fondly “Buckley’s decision to defenestrate the John Birch Society.”

In this piece, Goldberg goes so far as to say that Candace Owens should be banned from Fox News, not for anything she has said or any position she has held, but because she had previously appeared on Alex Jones’ show.

Now this is annoying for two reasons. First is the utter hypocrisy. It’s true, Goldberg alludes to the fact that NR’s past isn’t perfect, but he doesn’t give any specifics. Fortunately, Paul Krugman is under no compulsion to whitewash NR’s past. When I was reading his book Conscience of a Liberal (for a podcast interview I linked a month or so ago), I was surprised to read this quotation Krugman provided from a 1957 NR editorial: “The central question that emerges…is whether the White community in the South is entitled to take such measures as are necessary to prevail, politically and culturally, in areas in which it does not predominate numerically? The sobering answer is Yes–the White community is so entitled because, for the time being, it is the advanced race…” (I found another person quoting it here, if you want reassurance that Krugman isn’t making it up.)

Also in 1957, William Buckley apparently wrote in his “Letter from Spain” that “General Franco is an authentic national hero.”

But what’s even more annoying than the historical hypocrisy, is the present-day hypocrisy in real-time. I should have taken a screenshot at the time (and now the moment is lost), but when I first read Goldberg’s article, in the right column, showcasing other NR pieces, was another Jonah Goldberg article titled, “Kevin Williamson, Thought Criminal.”

I’m sorry folks, but I have to call a foul on that one. You don’t get to wag your finger at Candace Owens for appearing on Alex Jones’ show and then turn around and condemn the left for policing thoughts. Here is Goldberg’s argument about what happened to Kevin Williamson (who, you may recall, tweeted “sardonically” [Goldberg’s term] that women who got abortions should be hanged):

I could go on for another 2,000 words about all of the double standards I have in mind. But let’s stick with the subject at hand: Kevin Williamson’s views on abortion put him outside the mainstream. And he was fired from The Atlantic merely for refusing to recant them.

Meanwhile, extreme views on the left are simply hot takes or even signs of genius. Take the philosopher Peter Singer. He has at least as extreme views on a host of issues, and he is feted and celebrated for them. He is the author of the Encyclopedia Britannica’s entry on “Ethics.” He holds an endowed chair at Princeton. He writes regularly for leading publications. And he argues that sometimes it’s okay to kill babies, as in his essay “Killing Babies Isn’t Always Wrong.” “Newborn human babies,” he writes, “have no sense of their own existence over time. So killing a newborn baby is never equivalent to killing a person, that is, a being who wants to go on living.” He cutely asks whether people should cease to exist. (He ultimately and grudgingly answers “No.”) Oh, he also argues in favor of bestiality.

And he’s been profiled favorably in the pages of The Atlantic.

And that’s okay. I can’t stand his utilitarian logic-chopping and nihilistic view of humanity, but at least going by Nock’s Ark of the Covenant rules, he should be free to make his arguments anywhere willing editors want to publish them. We have a right to be wrong.

But that’s not the point: Singer’s work does not render him anathema in elite circles, it earns awards, praise, and celebration for its ruthless consistency and edgy provocation. He is not fired for what he writes never mind what he thinks. I have no doubt some people don’t think this is a perfect example of a double standard, and I could come up with some objections to it myself. But if you can’t see why some people — fellow American citizens — see it as a glaring double standard, you are part of the problem.

To be clear, in the block quotation above, I put in the bold, but the italics are Goldberg’s.

So, in light of the two pieces: On Jonah Goldberg’s moral scale, it is a qualitatively worse sin to appear on Alex Jones’ show, than to argue in print that “Killing Babies Isn’t Always Wrong,” and to endorse bestiality.

I too can perceive some double standards and people who are part of the problem…

Bob Murphy on Stefan Molyneux’s Podcast

Mostly talking about the prospects for the Trump economy. (Of course it’s not that Trump himself controls the economy–but the show is geared toward the politics of it.)

I Will Never Trust Again

So if I’m in the office late and want to feel the pangs of melancholic yet enchanting song, I put on this badboy:

Now that’s the go-to version of the song that always pops up on YouTube; it has 2.8 million views!

For some reason, yesterday I was scrolling through the comments. I’ve noticed that when it comes to old “classics,” the comments are usually very positive and uplifting. (This is unusual, since YouTube comments are notoriously awful.)

That pattern holds true for the above Christopher Cross video, but I noticed one guy said that the video footage was from his other song, “Ride Like the Wind.”

So I looked it up, and he’s right:

I went back to the first one to see if the guy edited it. And he did: