"Paul Krugman Is Not an Economist"
So says Bill Anderson. I used to think that was an over-the-top cheap shot, but the more I read Krugman, the more I think Bill is right. In a recent article on deficits, Krugman gives us this gem (amidst all kinds of other basic mistakes):
Should the government have a permanent policy of running large budget deficits? Of course not. Although public debt isn’t as bad a thing as many people believe — it’s basically money we owe to ourselves — in the long run the government, like private individuals, has to match its spending to its income.
It is just stunning to me–though I should stop being continually surprised; my expectations are clearly not rational in the mainstream sense–how casually Krugman repeats throw-off remarks that I used to critique as a fun little exercise when teaching undergrads.
I was going to refute this notion from scratch, but in reviewing the proofs of my Study Guide [pdf] to Human Action, I realized that Mises blew it up 60 years ago. Here he is:
The trumpery argument that the public debt is no burden because “we owe it to ourselves” is delusive. The Pauls of 1940 do not owe it to themselves. It is the Peters of 1970 who owe it to the Pauls of 1940. The whole system is the acme of the short-run principle. The statesmen of 1940 solve their problems by shifting them to the statesmen of 1970. On that date the statesmen of 1940 will be either dead or elder statesmen glorying in their wonderful achievement, social security.
When the government runs a deficit today, it takes real resources from the private sector, in exchange for IOUs. So the total damage is done today; e.g. if the government pays for a bunch of chicken dinners, then that food is gone. The politicians don’t have a time machine to literally steal from our grandchildren.
But what happens is that the people who relinquished their purchasing power to the government today expect to be compensated down the road, when the Treasury debt is paid off. So the taxpayers at that time are forced to bear the brunt of the fact that the economy has fewer resources (because government deficits today lead to less capital accumulation).
So there are two separate things going on. On the one hand, there is the simple transfer. Some people get government handouts today, and those lending to the government to finance it have to reduce their consumption. (I.e. these people have less money to spend, because they bought government IOUs.) Then later on, the taxpayers make a net transfer to the holders of government debt.
So yes, “we owe it to ourselves,” but it’s not much consolation for the average taxpayer to know that at least he is getting ripped off so that another American can live on the government teat. But even on its own terms, Krugman’s analysis is wrong because government deficits tend to crowd out private investment. Thus, the overall pie in 30 years is smaller, and then the transfer occurs on top of it.
Highlights from Marginal Revolution
As some of you may have noticed, the frequency of posts here has plummeted in recent weeks. This is because I actually have “real work” to do, not to mention writing a book in (now) 6 weeks.
But, that doesn’t stop me from being a wiseguy over at MR. In commenting on Chapter 4 of Keynes’ General Theory, Tyler Cowen concludes with: “With this one chapter, Austrian capital theory falls off the map.”
To that, I responded, “And depressions were vanquished once and for all!”
Now here I thought I was merely entertaining myself (and providing needed procrastination from activities that actually generate income), but to my surprise the next comment was: “I clicked on the comments just because I wanted to see what Bob Murphy would write.”
If I can turn one frown upside down, it’s all worth it. My work is done here.
Some Pretty Funny Animations From a Leftist
Karen DeCoster links to this funny take on the hypocrisy of “free market” bailout seekers. While browsing the guy’s site, I came across the best critique of “Drill Baby Drill” I’ve yet seen.
Hummel Not So Keen on Bernanke
Readers of this blog know that I disagree with Jeff Hummel’s praise for Alan Greenspan. However, the two of us agree that Bernanke doesn’t know what he’s doing. In this blog post, Hummel discusses the Fed’s decision to start paying interest on reserves. He says:
I predict that future economic historians will look back on this change as a major blunder during the current credit tightening, making traditional monetary policy less effective….[I]rrespective of whether the long run brings deflation, inflation, or neither, paying interest on reserves has certainly applied deflationary pressure in the short run. It may eventually rank with the Fed’s doubling of reserve requirements in the 1930s and bringing on the recession of 1937 within the midst of the Great Depression.
Also, Hummel’s article made the Hollies song pop into my head. If you care to listen to it, just pretend that Bernanke is singing the lyrics. It’s surprisingly apt. Last thing: I have no idea who the woman featured in this YouTube is. Was she on Hollies’ covers or something?
A Man Like Murphy Comes Along Once Every 60 Years
So says Jeff Tucker (sort of) in this post, where he introduces the all-new Study Guide [pdf] to Human Action. In all seriousness, I think this guide accomplishes its function. As I explain in the preface, I discovered a very orderly organization of the book’s chapters and Parts that I had never noticed before. That wily Mises seems to have “planned” his magnum opus.
The Spinning Girl: You Won’t Believe Your Eyes
This is pretty incredible. In the comments to the FedEx post, Silas linked to this silhouette of a spinning girl. When I first looked at it, I would have bet $100 that it was “clearly” spinning in one direction. I sat and stared for a several seconds, and thought, “There is no way I could possibly ‘see’ this girl spinning the other direction.”
And yet, I followed the instructions and focused on a small part (in my case, I watched where her foot bounced up and down on her shadow). And then all of a sudden she was “clearly” spinning the opposite way, and I would have bet $100 that that was the only way to make sense of it.
The effect is so strong–in contrast to the Necker cube–that I am still suspicious that the website randomly changes her direction every few minutes. I.e. I still can’t believe that the same sequence of two-dimensional images gives the illusion of spinning in one direction or the other.
DeLong’s Hilarious Admission
Longtime reader Von Pepe urges me to referee the dispute on Cato Unbound between Larry White and Brad DeLong. I just spent several hours this morning writing up an analysis for Mises.org, which presumably will run in the next couple of weeks. In the meantime, let me say that I think Larry White is spot-on, while I think DeLong is spot-off.
DeLong’s approach is to list several possible causes of the financial crisis, rule out all but one, and then conclude that it “must be” the last remaining thing on his list. As Casey Mulligan notes, this approach is dangerous because DeLong might have left something important out of his list (which he did).
Anyway, check out this excerpt from DeLong’s original essay:
Things are even worse as far as the risk discount is concerned. Our models predict that in normal times, with the ability to diversify portfolios that exists today, the risk discount on assets like corporate equities should be around 1% per year. It is more like 5% per year in normal times — and more like 10% per year today. And our models for why the risk discount has taken such a huge upward leap in the past year and a half are little better than simple handwaving and just-so stories. Our current financial crisis remains largely a mystery: a $2 trillion impulse in lost value of securitized mortgages has set in motion a financial accelerator that we do not understand at any deep level but that has led to ten times the total losses in financial wealth of the impulse.
Got that? “Our” models of risk discount on stocks are off by 400% in normal times, and 900% right now. So while I appreciate DeLong’s candor, you would think he might be a bit more humble. It’s one thing for him to shoot holes in everybody else’s explanation, and say after it all, “I’m sorry fellas, but I don’t think any of us knows what is going on here.” But he seems pretty sure he knows the way to fix the economy.**
* People like Nassim Taleb and Benoit Mandelbrot think the problem is in the normal distributions used in standard financial markets models. If you instead model stock prices that are subject to error terms with “fat tails,” then the “equity premium puzzle” disappears. Thomas Bundt and I have a forthcoming paper on this in the Review of Austrian Economics. Let me also admit I am dumbing down the analysis in this little footnote; we cross our Ts in the academic paper.
** I checked his blog to give a good example, but it’s just full of Keynes loving at the moment. But that in itself should give you a hint that DeLong is confident on how to fix things, and it doesn’t involve more freedom for individuals to structure their own “recoveries.”
Casey Mulligan: Don’t Impose New Tax on Homeowners!
I am going to quibble with him in a forthcoming mises.org piece (concerning the Cato Unbound series on the financial crisis), but Chicago economist Casey Mulligan is on fire with his analysis of the horrible incentives in mortgage forgiveness plans that are tied to income. Here is his piece in the Chicago Tribune, but scroll through his awesome blog for more.
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