Consulting by RPM || Free Advice Blog

The Difference Between Milton Friedman and Paul Krugman

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.

Ron Paul Educates the Talking Heads

Folks, I only post about 10% of the Ron Paul stuff that comes my way. It is my filtering service, for you. The clip below is about 10 minutes but it’s really good. Paul fields all the questions fired at him, and not only gives sound answers but usually packages them fairly sleekly as well. There is only a hint of the standard politician’s, “Whatever the question, quickly steer it back to your talking points.” And in any event, his talking points are awesome. My only objection was that he basically conceded there would be double-digit unemployment for a long time if his advice were followed, and I don’t think that is true. (But in fairness to Paul, maybe he thought the question was, “If we don’t do stimulus and just ‘do nothing,’ won’t there be high unemployment for years?”) (HT2 LRC)

Response to 60 Minutes Hit Piece on Oil Speculation

We had to wait for the coronation coverage to die down before running this piece, which is a response to the 60 Minutes hit job on oil speculation. If you want to truly appreciate my talents as defense counsel, first watch the 60 Minutes segment below (it’s not that long). Then read the IER piece for the rest of the story.

The Difficulties of Price Fixing

I am getting really sick of hearing all these bank experts explain the difficulties in government “bad bank” programs to buy “toxic” assets from the frozen lending institutions. They sound so serious and aware of the problems when they explain, “If the government pays too little for these troubled assets, then the banks will still be insolvent. But if the government pays too much, then the taxpayers lose.”

And then they move on to the next question, instead of saying, “…so that’s why this scheme is ridiculous. It was a bad idea when Paulson first lied and said he would implement it, and it’s a bad idea now.”

The idea seems to be that there’s a sweet spot, a zone of prices in which the banks would win and the government would make money. But if that’s true, why aren’t private financiers swooping in and reaping the gains from trade? You could make some convoluted argument that “partial equilibrium” analysis doesn’t work here, and that the massive government buying would change the landscape and hence the marginal value of any given mortgage-backed security.

Yes, you could make such an argument, but you would be wrong, methinks. It wasn’t a sudden crisis of confidence that made these MBS assets tank in value, it was the fact that people started defaulting like crazy on their mortgages. And that wasn’t because a bunch of racist Americans were spooked by the prospect of a president who didn’t look like them, it was because house prices crashed and they were getting laid off.

Also, it is wrong to think that the federal government is qualitatively a bigger buyer than the entire private world market. It’s true, Uncle Sam is bigger than any particular hedge fund or speculator, but if these toxic assets were such a steal, a bunch of oil sheiks and software moguls could come up with hundreds of billions to invest in them.

Part of the reason that isn’t happening, is that the insolvent banks are sitting on underwater balance sheets, hoping for a federal bailout. I think that is one of the main reasons for the lingering “credit crunch” and “frozen” credit markets.

Another Strike Against Friedman’s Theory of the Depression

This is too technical for the book, but check out the difference in monetary base growth rates during the 1920-1921 depression versus The Great One. If Friedman is right, then it’s odd that the 1920s weren’t awful. (Incidentally, the Fed hiked rates way up in the beginning of 1920, and kept them there for almost two full years. In contrast, the Fed cut rates down to then-record lows from the stock market crash through late 1931 [.txt]. A slightly different impression from Friedman’s summary?)

Another Austrian Website

Established as a reaction against those of you drawing bushy mustaches on poor Friedrich, or pitting him against Salma.

The Mish-Schiff Tiff

I haven’t had time to read any of this, but I bring to your attention Mike “Mish” Shedlock’s criticism of Peter Schiff. Both EPJ and Tim Swanson rush to Schiff’s defense. But more important than the financial issues is this: Is that Tim Swanson in the last photo of his article?! And did he lose his shirt investing with Mish?

Robert Lucas’ Strange Faith in Bernanke

Details here. The intro:

Lately the Mises Daily may have given the impression that we just bash Paul Krugman. In the interest of balance, today I will cast aspersions on another Nobel laureate, the Chicago School economist Robert Lucas. As is typical among many “promarket” economists, the undeniably sharp Lucas inexplicably sees no problem with government price fixing when it comes to interest rates.