Paul Krugman and the $100 battery

[Jaco Strauss]

Garth

Around a year ago I saw Krugman in a discussion with Charlie Rose on Bloomberg where he used some superficial $100 battery fix analogy to explain QEx.

I raised the points he made in this forum at the time and you and I had quite a few interactions, culminating in the one below to which you never replied. (The full debate could be found under "Robert Wenzel versus Paul Krugman" subject line)

Your reply to this mail would still be appreciated.

Thanks

Jaco

---------- Forwarded message ----------
From: Jaco Strauss <jacos...@gmail.com>
Date: 2012/5/11
Subject: Re: [Libsa] Re: Robert Wenzel versus Paul Krugman
To: li...@googlegroups.com


Garth I get the idea that you worry too much about labels. I ask a few simple questions and you immediately want to portray me as a  Paul/Mises/Rothbard disciple attacking the evil Keynesians

The western world economy is a mess and Krugman, the current toast of the town, claims a very simple solution as all that is needed. And because of his CV, he gets a lot of airtime.

Disregarding his impressive credentials for a moment, on the face of it his solution seems pretty daft to me and I'm trying to work out what I might be missing here. You are a thinking individual who sees him as "technically extremely on the ball" and that "his economics makes a great deal of sense".

Hence my initial mail

Forget about Austrians and Keynesians for a moment. And of business cycles and inflation predictions. I wanted to discuss the simple solution to the simple problem Krugman sees. Is a lack of spending really the biggest problem here? 

You summed it up as follows:

Well he is convinced that THIS recession is almost entirely due to lack of aggregate demand (which he puts down to large private debt) rather than anything structural.  He says that since one person's income is another's spending the only cure is to increase spending and the only source of possible spending right now is the state.  

If "THIS recession" was caused "almost entirely" by a lack of aggregate demand, how did the large private debt develop in the first place? Had it not been caused by excessive spending, i.e. demand for goods and services? And if that unsustainable spending spree eventually ended up causing THIS recession when it inevitably ran out of steam, does it make sense to now create another?

A little like replacing the tech bubble with the housing bubble... also known as kicking the can down the road!

You claim that "the only source of possible spending right now is the state", but as you know full well, the state doesn't have any money to spend. They have taxpayer money to spend, or future generations' money to spend, or the savings of others to 'spend', but none of its own.  

Krugman is essentially saying the following:

• we kept the party going through excessive spending until we had none left to spend. 
• Then we lowered interest rates so that we could extend the party by spending our future earnings now ... until we had none of that left to spend.

Krugman still doesn't see anything inherently wrong with this picture. The only problem he sees is that there is currently nothing left to spend. The problem is therefore not "structural" he claims, merely a lack of spending. 

 

Now he recommends we should keep the party going by

• printing more money, effectively spending the value saved by the savers
• more government debt bequeathed to future generations. 

In short Krugman wants this generation to keep the party alive by spending the money of future generations.

I suppose when we are done with our children's money, we would be encouraged to spend our grand children's and so on..... But at some point the party will still inevitably stop. Somebody, somewhere is eventually going to call the bluff 

Anyway, that is why I believe the drug analogy is so apt. When faced with a "cold turkey" Krugman doesn't see the drugs as the problem, rather the lack of drugs. His solution of "more drugs" would surely cure the cold turkey over the short term, yet over the longer term also lead to host's demise. 

So forget about labels and reputations for a moment. Just sit back and imagine your neighbour's kid coming up with this simple "spending solution" to cure all the world's financial woes.

Would you still have taken it so seriously?

Jaco

2012/5/8 Garth Zietsman <garth.z...@gmail.com>

You (Garth) said of Krugman:

Furthermore if one were to accept his ethical outlook I think his economics makes a great deal of sense.  I found him pretty up front about how his policy suggestions are dependent on his ethical views.  I think he is technically extremely on the ball. 

 
while in the same paragraph you (Garth) said of Paul

On the other hand while I agree with Paul's ideal of smaller government and much more liberty I find his economics pretty much of a one dimensional morality play and so far very unconvincing.

Looking at these two statements of yours, it is clear that - at least economically - your bias is in favour of Krugman; a realisation I found  quite incredible...

I suppose you would - given that you can't conceive of anyone disagreeing with the logic of Paul/Mises/Rothbard or finding Krugman/Keynes plausible. Paul quite often does use polemics as a substitute for argument and so far his predictions of inflation haven't appeared.  I wouldn't say my bias is in favor of Krugman.  I give at least as much weight to libertarian economists like Tyler Cowan who is a Keynesian skeptic and gives a lot of weight to structural factors and public choice theory.

The other night on Bloomberg, Krugman stated quite plainly that the solution to the current financial crisis is a very simple one; we should simply spend our way out of it. And he doesn't even care whether it is spent on useful stuff. Just so long as it is spent. 

Well he is convinced that THIS recession is almost entirely due to lack of aggregate demand (which he puts down to large private debt) rather than anything structural.  He says that since one person's income is another's spending the only cure is to increase spending and the only source of possible spending right now is the state.  He is NOT indifferent to what it is spent on.  It is true he says any spending would create incomes but knows full well that breaking windows and fixing them or going to war are not paths to wealth.  He has clearly said it is best to spend on stuff that will increase wealth and aid the future economy e.g infrastructure repair and expansion, education, etc.

Krugman's solution for an out-of-money addict who is going "cold turkey" is clearly to give them more drugs. (Paid for by someone else, of course). Sure, it would fix the "cold turkey", but would it actually solve the bigger drug problem? Even if you do not have a problem with drugs, or with taking other people's money to pay for it, it is still a daft and unsustainable solution to the bankrupt addict's dependency problem.

Yet, when this man proposes to solve a financial crisis caused by reckless spending, through much more reckless spending, you still think that "he is technically extremely on the ball" and that it somehow "makes a great deal of sense"?!

This drug addict analogy is clearly the view of someone who cannot conceive of anything other than an Austrianish being correct - kind of like a fundamentalist Christian who can't get his mind around the notion that the eye could have evolved without intelligent design.

The fact that an extremely bright, highly informed and respected economist disagrees with you doesn't automatically make him wrong and evil. The more rational conclusion is that there is some non-zero (and most likely significant) probability that your position is mistaken.  In case I'm not being clear that goes for Krugman and me too.

[Garth Zietsman]

Jaco you make a number of what right now I perceive to be some excellent points and paint what looks like a compelling picture.  The issue of whether the buildup of debt can be characterised as overspending is particularly important.  I might think otherwise in a day or two.  I want to digest and think it through before I reply.  Please remind me to reply lest I get distracted.  We must still do the beer I owe you.

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[Jaco Strauss]

Thanks Garth, I am looking forward to your reply. 

I appreciate how you are always willing to consider and evaluate the views of others. Few people (and I don't count myself among them) show the same willingness to critically consider and re-assess positions...

Thanks also for reminding me about the beer, I hope we can manage it before the next summer!

Regards

Jaco

2013/4/15 Garth Zietsman <garth.z...@gmail.com>

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Jaco Strauss
Kaapstad