Economics

What Paul Krugman Cannot Imagine

|

Party for your riot to fight!

Paul Krugman today tries to persuade us that deficit fears are chimerical by invoking an econ-policy "consensus" that does not remotely exist:

For the last few months, I and others have watched, with amazement and horror, the emergence of a consensus in policy circles in favor of immediate fiscal austerity. That is, somehow it has become conventional wisdom that now is the time to slash spending, despite the fact that the world's major economies remain deeply depressed.

While there are certainly many economists who think that spending is dangerously out of control–mostly because spending is dangerously out of control–to posit this a "consensus" in a world where the president of the United States is Barack Obama and the country's most influential econ-policy columnist is Paul Krugman strikes me as more than a bit exaggerated.

But the meat of the Krugger's argument is this:

Bond vigilante

This conventional wisdom isn't based on either evidence or careful analysis. Instead, it rests on what we might charitably call sheer speculation, and less charitably call figments of the policy elite's imagination — specifically, on belief in what I've come to think of as the invisible bond vigilante and the confidence fairy.

Bond vigilantes are investors who pull the plug on governments they perceive as unable or unwilling to pay their debts. Now there's no question that countries can suffer crises of confidence (see Greece, debt of). But what the advocates of austerity claim is that (a) the bond vigilantes are about to attack America, and (b) spending anything more on stimulus will set them off.

What reason do we have to believe that any of this is true? Yes, America has long-run budget problems, but what we do on stimulus over the next couple of years has almost no bearing on our ability to deal with these long-run problems. […]

Nonetheless, every few months we're told that the bond vigilantes have arrived, and we must impose austerity now now now to appease them.

Wave aside the casual insult at the beginning, pause briefly to enjoy that to be sure in graf 2, but then drink deeply from the fount of bubble mentality: It can't happen here, because it hasn't happened here, at least not in recent memory. It is this precise mental pathway–the almost tautologial inability to consider catastrophic or even momentous shifts–that is the ultimate, Murder On the Orient Express-style villain of Michael Lewis' The Big Short. And it's one of the reasons why people like Big Short hero Michael Burry are beginning to suspect that Krugman's eternally safe bond market might be the biggest bubble of them all.

Reason on Krugman here. If you can stomach some bad writing, I predicted the end of the dot-com bubble in spring of 2000, the dollar bubble in spring of 2001, and (sorta) the debt bubble in January 2009.

NEXT: Will Chicago Obey McDonald v. Chicago?

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. bubble mentality: It can’t happen here, because it hasn’t happened here

    The trend is your friend. Until it isn’t.

    The music stops, and you haven’t got a pot to piss in.

  2. Excellent Alexander Pope reference.

    1. Pope Alexander?

      1. A little learning is a dangerous thing; Drink deep, or taste not the Pierian spring.

        Wave aside the casual insult at the beginning, pause briefly to enjoy that to be sure in graf 2, but then drink deeply from the fount of bubble mentality

        1. Where you been, Naga?

          1. Oh here and there. Mostly there. I get around. Just like Tony’s mom.

        2. Kirsten Dunst.

  3. What is that story about the guy who jumps off the 20 story building and as he passes the fifth floor is heard to say “so far so good”?

    Austerity if death for everything Krugman has ever believed in. He is like a cornered rat. He has no where else to go.

    1. It was all BUSH!!!!!

    2. Krugman would be more convincing if his “we can’t afford government austerity because the economy’s bad” argument meant that he supported government austerity when the economy was good. But it seems that to all liberals, more government spending is always a good idea, whatever the health of the economy.

      1. So, you love Bush?

  4. Uruguay v Ghana about to kick off.

    Vamos La Celeste!

    1. Uruguay is having the better of it so far. 4 corners already.

    2. Jorge Fucile gets an apparently harsh yellow and will miss the semifinal.

    3. Uruguay getting more chances through Suarez and Forlan. Another corner.

    4. Ghana nearly scores twice very much against the run of play.

      1. Hakuna Matata.

        One would expect one named Timon to pull for the African team, just sayin.

        1. This is an old, old name designed to take the piss out of a very annoying shitbag named Pumbaa on a completely different message board.

          Not a fan of Ghana for multiple reasons and I’d LOVE for Uruguay to suddenly regain their 60 years-dormant glory. It would be a huge story. I mean, their population is about the size of Montreal.

          1. Haha, forgive the joke handle, just wanted to be a pissant pointing out an observed irony and use hakuna matata all in the same post.

            As for my team right now, I am pro-Dutch. As a Liverpool fan, I absolutely love the tenacity of Dirk Kuyt (I also love his first name and his ability to look like everyone’s favorite character from The Goonies). I also have a great appreciation of Nederlands historical contributions as the primary source of Enlightenment Western values that inspired our founding and their current social policies with regards to assisted suicide and their libertarian positions on drugs and prostitution. I can think of no better team to root for.

            1. Not a problem. I’m sure it looked a bit weird. I should probably think of something different, but I’m lazy and shit.

    5. Lugano subbed out due to injury. That’s not good for Uruguay. The flow of the match has definitely turned.

      1. URUGUAY? HA! IT’S ALL PARAGUAY. ALL RED-BLOODED AMERICANS ARE FOR PARAGUAY. IN FACT, ALL HUMAN MALES ARE NOW PARAGUAY FANS.

        1. If it ends up as a Uruguay v Paraguay final, I promise to root for Paraguay. Otherwise, I’m going with the Dutch, but wouldn’t mind Uruguay winning it all for the reasons above.

          Evidently, there was some Dutch bouncy-bouncy on ESPN today. Surely you wouldn’t mind them winning.

          1. FOOL! NO DUTCH WOMAN HAS COMMITTED TO RUNNING NAKED THROUGH THE STREETS IF HER TEAM WINS!

            EMBRACE NAKED WOMEN! ENCOURAGE THEM! LOVE THEM!

            1. Dutch women hang out in store windows naked and for a small nominal fee (a much less costly and rare phenomenon than a World Cup victory) will gladly do any number of unspeakable acts with EL URKOBODLDO.

              1. Proof of Dutch supremacy over landlocked South Americans.

              2. THERE ARE NO UNSPEAKABLE ACTS. ONLY UNSPEAKABLE VISAGES. THE URKOBOLD PREFERS THE PARAGUAYAN SLUT TO DUTCH WHORES.

    6. Holy shit! Sully Muntari scores from a mile away right on the stroke of halftime!

      1. Tommy Smyth just had an orgasm after looking at the replay.

    7. 2nd half on.

    8. Diego Forlan from a free kick!!!! 56th minute and it’s all tied.

      This time, JP had an orgasm.

    9. Is it Ooroogeye or Yooroogay?

      That’s the real question.

      1. Yuraguy.

    10. Looks like this one is going to extra time.

    11. Mensah booked for dissent in the 93rd.

    12. What an awful dive by Abreu.

    13. 1st half of extra time is over.

    14. Fuck. This game very much seems destined for penalties. I hate penalties.

    15. Ghana comes close on a scramble. Lots of fatigue-induced mistakes out there.

    16. Uruguay are on the ropes.

    17. OH. MY. GOD!

      On a free kick at the death, Uruguay cleared the ball off the line TWICE and then a third time with a hand. Suarez gets sent off for handling, and Ghana gets a penalty.

      Gyan would have absolutely won it by converting the spot kick, but he put it off the bar! As soon as that happened, the referee blew for full time. Suarez saved Uruguay!

      So it goes to penalties.

      Amazing.

      1. Wow, just wow. Amazing that that little chip won it in PKs.

    18. Uruguay up first.

      Forlan – goal
      Gyan – goal

      1-1

    19. Victorino – goal
      Appiah – goal

      2-2

    20. Scotti – goal
      Mensah – saved!

      3-2

      The one-step run-up failed him. Awful penalty.

    21. Pereira – miss!
      Adiyah – saved!

      3-2 still

    22. Abreu for the win…goaaaal! And oh, my, was that a confident penalty!

      Chipped it down the middle! Wow. That was ballsy as hell.

      Uruguay with probably the most amazing escape ever. Cruel for Ghana, incredible for Uruguay. The price was Uruguay’s #2 striker is out for the semifinal.

      Wow.

      1. This is a dangerous situation. A Paraguay v Uruguay final could easily start World War III.

        1. It wouldn’t be dangerous. URKOBOLDO’s Paraguay fandom would result in a swift whipping of Uruguay.

        2. A Paraguay / Uruguay final would be an absolute disaster for ratings.

  5. Oooh… Krugman’s coming out against conventional wisdom and the policy elite. What a free-wheeling, dangerous radical.

    Oh, and sure Krugman, short-term stimulus has nothing to do with long-term budget problems. Tossing another trillion on the bonfire won’t have any implications. No biggie… we can keep this up forever.

    1. I love the money fires.

    2. I would love to ask Krugman how much he thinks the US would have to borrow to in his opinion place their credit worthiness in question. 10 trillion? 20 trillion?

      1. That article a few days ago by Krugman about the coming depression was really about how our stimulus was way too small and about how awesome Krugman is for noticing said upcoming depression and knowing the solution (more spending). How generous he is with other people’s money. This guy’s columns are rather loathesome.

    3. BUUUSSSHHHH!

  6. Krugman is an idiot.

    That’s really all that needs to be said about him.

    1. Wasn’t there an article somewhere comparing Linus Pauling to Paul Krugman? Both exceptional talents in their specific fields, but moronically misguided elsewhere. The equivalent of Linus Pauling’s mega vitamin C dosing for disease is Krugman’s mega stimulus spending, except instead of causing kidney stones, it bankrupts us.

  7. Timmay and Ben will be rounding buyers up at gunpoint, one day.

    1. I was wondering what would happen if nobody bought what the Treasury was sellin’…this seems about right.

  8. Correct me if I’m wrong here, finance nerds, but Bonds are essentially* stocks for governments. The price of a stock (and its requisite movements) are an indicator of investors’ confidence in said company. Therefore, the Bond market would be a reflection of the confidence investors have for said government.

    Everything I know about economics I learned from the Lone Biker of the Apocalypse: Price, it’s not what you say it is, it’s what the market will bear.

    *oversimplification, I’m sure.

    1. That is one way of looking at it. At some point will conclude that there is no way for us to pay all of this back. There is limit to how much taxes or spending cuts people will take. When that happens, people will stop buying bonds. Krugman has truly lost his mind if he thinks the US government is somehow immune from that.

      1. Krugman is not insane to think that the US people can take higher taxes, we’ve paid higher taxes before. What he doesn’t realize is that it’s really INFLATION that drives revolutions.

        King Edward II of Britain was severely punished during a hyperinflationary period in the middle ages – the mobs strung him up and slowly pushed a hot medal poker up his potootus all the way up into his brain.

        1. That makes me recall a half forgotten travel essay where the guy details the history of the places in England he visited and concluded that if there is a violent, gruesome and sexually charged way to kill someone, an Englishman has thought it up and done it long before the notion ever occurred to you.

      2. He doesn’t. When growth returns, we can pay down the deficit. That’s Keynesian too. But you don’t have any data to support the idea that we’re headed toward runaway debts or inflation right now. It’s just a feeling you have, or a talking point you were supplied.

        You’re saying the sky is falling with regard to deficits. The problem is the sky IS falling with respect to unemployment. And you can’t fix both at once.

        1. There’s one problem with your analysis: Obama and the Democrats keep passing laws that hurt growth and they keep spending more and more so they’ll never pay down the deficit. You are right that the sky is falling with respect to unemployment, but again Obama and the Democrats keep making that worse, not better. They have no clue on how to fix the deficit or unemployment.

        2. When growth returns unless higher taxes and energy costs put the kibosh on growth, which they will.

          You’re saying the sky is falling and Tony and his ilk do the same thing with global warming alarmism, among other isms.

        3. The problem is the sky IS falling with respect to unemployment. And you can’t fix both at once.

          Except the data that the smartest economic minds in the Obama administration showed us said the sky wouldn’t be falling with unemployment if the stimulus happened. So someone’s wrong here, and team Obama is coming sharply into focus.

        4. When growth returns, we can pay down the deficit. use the extra tax revenue to fund new programs!

          Counter-cyliwhatsitnow?

  9. And it’s one of the reasons why people like Big Short hero Michael Burry are beginning to suspect that Krugman’s eternally safe bond market might be the biggest bubble of them all.

    It’s almost as if the bond market is Krugman’s personal 1990’s real estate market: What bubble? Real estate never goes down.

  10. Well, I’m not sure Krugman is entirely wrong.

    (1) I think we have a bit more “wiggle room” with our debt for the next several years. He absurdly says $10 trillion; but it seems to me another $1 trillion in stimulus can be handled if spent wisely (stop that giggling in the back);

    (2) We absolutely must get growth going and I’m not sure austerity measures at this time will be as beneficial as a smart stimulus;

    (3) We could use some stability; investors and corporations are standing still because they don’t know what’s going to happen tomorrow. Or the next 5 minutes.

    To be sure, if I had to choose between austerity or stimulus, I’d choose the former. But we have more than those two options, I think.

    On the other hand, he’s nuts.

    1. (3) We could use some stability; investors and corporations are standing still because they don’t know what’s going to happen tomorrow. Or the next 5 minutes.

      Unfortunately, neither does the government, which kind of throws off the first 2 points in your post.

      1. Unfortunately, neither does the government, which kind of throws off the first 2 points in your post.

        Re stability: I’m referring to massive healthcare reform or financial regulations. Not government expenditures.

        I think Krugman’s central argument has merit, i.e., austerity measures at this time may not be wise.

        Merit does not mean full agreement on my part.

        1. Yesterday, someone (Cavanaugh?) linked to a GoldmanSachs analysis done on fiscal crises following financial crises over the past 30 years in 24 OECD countries. The results were convincing that austerity measures (read: spending cuts) were actually a more effective means for addressing fiscal imbalances and spurring growth because they emeliorated concerns in the business community of the uncertainties of future taxes (the reasoning was obviously not empirically proven like the results but rather a qualitative analysis of a clearly recognizable quantitative trend).

          As to whether or not our bond status is in jeaopardy, obviously, the bond markets aren’t acting like it is right now, but thats partly a function of limited alternatives for placing one’s money into and because the demographics situation here is less bad than most other developed nations as far as ballooning safety net spending is concerned. The important thing to consider is that by doubling down on an ineffective policy we only hasten the day of reckoning, whereas if we were to the thing that is a) more effective at spurring sustainable economic improvements (stimulative policies are so short lived) and b) fiscally prudent for short term deficits, we would be in better shape fiscally and financially over the short, medium, and long term.

          Besides, one of the most underappreciated aspects to all this stimulus spending is that the massive gov’t borrowing is crowding out so much of the capital available to businesses and individuals to invest in productive endeavors that it is contracting the parts of the CIGNx equation that feature the highest multipliers.

        2. Merit does not mean full agreement on my part.

          I understand that. The problem is for Krugmans idea, or “plan” if you will, is that in the words of the infamous Jayne Cobb of Firefly, “I’m smellin’ a lotta ‘if’ comin’ off’a this plan”

          Krugman accuses the austerity backers of speculation. There’s absolutely nothing about a stimulus plan (even if you believe in it wholeheartedly) that isn’t speculative. So in my opinion, he’s being intellectually dishonest.

          But from my standpoint, which begs a whole discussion in and of itself, Austerity measures from government merely means they’re going to stop spending other people’s money they don’t yet have in the first place.

          For a stimulus to even occur (let alone work), the stimulators must take money from productive sectors of the economy, and move them to the so-called unproductive sectors of the economy.

          This shrinks and strangles the economic activity from those productive sectors (which Krugman logically has to believe have a “surplus” of economic wherewithall) and tries to jump-start those unproductive sectors (which logically Krugman believes are perfectly viable sectors but for lack of funds).

          Bottom line, to make the case for stimulus to work (or in this case, for abandoning Austerity measures to work) you have to accept all of these premises at face value.

          I don’t. I’m sorry, but I really don’t think it’s more complicated than the finances of a single household. When you’re mired in debt, your economic activity slumps because you’re spending all of your extra cash servicing the debt.

          If you can attack the debt, then meaningful economic activity can resume and everything gets easier.

    2. The key phrase there is “smart stimulus.” That would require somebody smart in leadership positions.

    3. BUSH BUSH BUSH!!!

    4. “2) We absolutely must get growth going and I’m not sure austerity measures at this time will be as beneficial as a smart stimulus;”

      Government spending does not create stimulus. It has nothing to give anyone or spend on anything except that which it has first taken away from someone else.

      It nothing but a forced transfer payment. Any benefit to the transferee is completely cancelled out by an equal detriment to the transferor.

      1. Government spending does not create stimulus. It has nothing to give anyone or spend on anything except that which it has first taken away from someone else.

        Sorry, I don’t think Keynes was entirely wrong.

        Beside, the money is borrowed (or printed), not taken.

        1. “Sorry, I don’t think Keynes was entirely wrong.”

          He was entirely wrong.

          “Beside, the money is borrowed (or printed), not taken.”

          It’s still taken in either of those cases – taken away from what it would have been otherwise spent or invested in.

          The bottom line is that government cannot create something that has any value out of thin air. Everything it does is merely a redistribution of wealth that already existed.

          1. He was entirely wrong.

            Well, it’s here we part.

            1. Money that is borrowed is taken out of economy because it “crowds out” private borrowers (both businesses and consumers) from being able to borrow that money. GDP is caluclated as C (consumption), I (investment), G (gov’t), and Nx (net exports). C and I have the highest multipliers and when G grows at the expense of C and I, GDP shrinks.

              1. Money that is borrowed is taken out of economy because it “crowds out” private borrowers (both businesses and consumers) from being able to borrow that money

                The problem right now is not that government spending is crowding out private capital. Interest rates are near zero.

                Yes, the long-term problem is our debt. The short-term problem is growth.

                So, what’s the best way to get growth?

                Reducing debt helps growth when interest rates and inflation are high. But we’re not in that situation.

                I think the argument that a short-term stimulus will be more beneficial than austerity measures, right now, has merit.

                Not sold on it; but I’m not convinced it’s the wrong answer.

                1. Above I cited the Goldman Sachs study that was linked to here on H & R yesterday that stated austerity measures were the most effective means of sparking sustainable economic growth because the seriousness in cutting spending alleviates the concerns of businesses and investors about future tax liabilities to fund the deficit/debt problems.

                2. “The problem right now is not that government spending is crowding out private capital. Interest rates are near zero.”

                  Where do you think the bond investor gets the cash he uses to buy Treasury bonds?

                  Unless it was buried in a box in his back yard, he previously had it invested in something other than Treasury bonds. He had to sell that investment, whatever it was, to raise the cash to buy the bonds. Which means the the person on the other end of THAT trade had to come up with the cash to pay that investor.

                  So all that has occured is that cash has switched from one form of investment to another and nothing of any net value has been created.

                  1. Gilbert is incorrect in his absolute assertions, as per usual.

                    For instance, there is no reason to believe that costs and benefits in redistribution are symmetrical.

                    1. “Gilbert is incorrect in his absolute assertions, as per usual.”

                      You have never been capable of proving me to be incorrect about anything.
                      This time is no exception.

                      “For instance, there is no reason to believe that costs and benefits in redistribution are symmetrical.”

                      You can believe what ever you want. It doesn’t change the fact that it is physically impossible for a forced transfer payment to ever add anything of value.

                    2. A (credible) promise to pay back the debt is something of value in the present day. If you don’t believe this, then you must think anyone who lends money is giving up something for nothing.

                      So government offering bonds does create value in the present time. It does require that value be taken from the economy in taxes in the future. Also there’s the concern that that future value will not be sufficient, which goes to the credibility of the promise.

                    3. It doesn’t change the fact that it is physically impossible for a forced transfer payment to ever add anything of value.

                      The fact? As per usual, you are confusing your strongly held beliefs with facts. For your assertion to be true, you would have to posit that all uses of resources are equally productive, meaning that taking resource A from person X who was going to use it for purpose Q and giving it to person Y for use Z instead provides the same value. But is Z is more valuable than Q? Is Q more valuable than Z? Are A-Z all equally valuable, or is it possible to make a more valuable rather than a less valuable choice? The end use determines the value, not how the resource was acquired.

                      You can make a MORAL case against ever redistributing by force, but the idea that no transfer of resources will ever result in the more valuable use of that resource is simplistic to the point of parody.

        2. So, you’ve never heard of taxes?

          Or realized that government counterfeiting of fiat money is a form of taxation?

  11. Nice work with the Jaws photo. Somebody deserves an extra scoop of ice cream.

  12. Nice work with the Jaws photo. Somebody deserves an extra scoop of ice cream.

  13. Want growth?

    (1) cut taxes

    (2) cut regulation

    (3) ruduce te size of the federal government by 50%

    (4) repeat as needed

    1. YOU LIE!!!

      1. I have to apologize, I think that this guy and “prog” are a guy that I unfortunately linked to the reason blog during a heated discussion about inflation. He’s a krugman-worshipper, thinks the man shits gold (if only!)

    2. If a deficit is the government not having enough income to balance expenses, and taxes are the government’s income, how does cutting taxes reduce the deficit?

      1. “If a deficit is the government not having enough income to balance expenses, and taxes are the government’s income, how does cutting taxes reduce the deficit?”

        See numbers 3 & 4.

    3. (1) isn’t even necessary. It might be nice. But there’s little evidence that the existing tax burden is unusually cumbersome.

      1. See: Laffer Curve.

        1. Video on YouTube from 2006? “Everything is great!”

        2. See: Laffer Curve.

          Which would point out that cutting taxes will only reduce the deficit for a limited range of the possible taxes. Only those on the extreme high-side end up being counter-productive in terms of government revenue. We aren’t even close at the moment.

  14. Get more piping hot NYT economic illiteracy here. Incompetent former babysitter wants to price poor, immigrant nannies out of a job.

    Hey, NYT, this piece of shit domestic workers’ rights bill is one instance where a “women, minorites hardest hit” headline would actually be true.

    1. The whole domestic service industry puts lie to all government labor standards. Here we have an entire industry that exists in the shadows without any government regulation. OSHA never visits anyone’s home to ensure that it is a safe work environment for the nanny. No one looks to ensure you are paying minimum wage. Yet, the millions of people still want to work in the industry. And in fact people come from all over the world to do so.

      You rightly point out the ridiculousness of telling everyone to pay their nanny or baby sitter on the books. But your point goes even farther than you think. If it is okay not to pay your babysitter on the books, what possible benefit are any of us getting for working on the books?

      1. That’s a great point. This kind of stuff drives me crazy, because in this one little corner, there’s a functioning market with people engaging in mutually beneficial transactions, and these idiots act like the gov’t wanting to squash it is somehow noble.

        I can’t find the link, but a few years ago, I read an article (in the NYT, even) about how people are turning to what they called “the gray market” for in-home care for the elderly. Cost was a big factor, but also the fact that on-the-books agency help is often not allowed to do stuff like help the elderly up if they’ve fallen. But no, letting people make their own dependent-care choices is bad.

      2. Do you even try to understand the Commerce clause? The federal government cannot regulate everything–just interstate things. Such is presumed when an employer is fairly large, but not within your home. OSHA does not apply to your maid.

        1. The federal government cannot regulate everything–just interstate things.

          HAHAHAHAHAHAHAHA! You’re funny. Stick around.

          1. The fuck we can’t regulate everything.

        2. Yes I understand the commerce clause. But sadly have no idea what my point was.

        3. Ha ha. I mean, this post was meant as satire…right?

      3. I prefer when the state is my nanny.

      4. If it is okay not to pay your babysitter on the books, what possible benefit are any of us getting for working on the books?

        John, there are some days where you rise to the level of genius. The reason why I never hector you on the days you don’t.

  15. Journalism (along with Government) is one field where you can do well for a long time, without having a clue. Many other fields this shows up a lot faster and gets you out the door.

  16. “in a world where the president of the United States is Barack Obama and the country’s most influential econ-policy columnist is Paul Krugman

    That line made me throw up in my mouth a little.

    1. Bush bush bush bush. Bush bush bush bush?

      Bush bush bush.

      1. Obama inherrited Paul Krugman from Bush.

  17. How about dispensing with NEPA permitting for 2 years on all transportation and industrial projects. Cost $0. You could create tens of thousands of a jobs by greenlighting projects that would be mired in dilatory study.

  18. Um, we’re ignoring the fact that any deficit problems will only become worse if we retract. Austerity in a time of recession is counter-productive.

    But I suppose we’ll find out if you guys are right. Once the whole world starts paying down deficits rather than spend money buying American products, we’ll see if our economy magically turns around. Maybe we should stock up on fairy dust?

    1. There was a huge book after ww2 when government drastically cut spending. (they also cut back labor laws and price controls)

      It worked then it will work now.

      Keynesian Spending one the other hand has never been shown to work.

      1. huge book = Huge boom

      2. I tried writing a response to this, but if we can’t agree on a basic set of facts then what’s the point.

        Apparently the massive amount of new deal and war spending, the vastest deficits the country has ever known, had nothing to do with the boom, it was the penny pinching that followed. And I suppose the 90% tax rates on the rich that lasted for decades after?

        1. Tony. We can’t agree on fact when you don’t know them and refuse to learn. When the war ended all of that spending ended with it. The Keynesians all predicted that the economy would slip back into recession. Indeed many of them advocated keeping war time rationing and planning systems in place. That is how the Republicans took control of Congress in 1946. People revolted over the Democratic insistence of not lifting war time controls and taxes. That is one of the things which spurred Hayek to write the Road to Surfdom. That is the whole premise of the book; how planners had sold planning as a war time necessity and now wanted to keep the central planning system.

          But all of that ended and despite the Keynesian predictions of doom, the economy boomed. That was Josua’s point. You have never refuted it because you don’t understand it.

          1. Regarding the Great Depression and the “New Deal”, here is a telling fact I learned from a Thomas Sowell column where he was reviewing a book written by somebody.

            In the book there was a page that listed the unemployment rate month by month starting right after the stock market crash of 1929 and going right on through the 1930’s.

            After the crash, the unemployment rate peaked at 9% and was declining back toward 6% BEFORE the government started intervening in the market. Then the Smoot-Hawley tarffis were passed under Hoover and FDR continued and accelarated government intervention after he was eleceted. After that started, the unemployment rate shot up to 20% or more and never declined below it for all of the 1930’s.

            FDR’s “New Deal” didn’t “save” the country from the Depression – it helped create and prolong it.

            1. “FDR’s “New Deal” didn’t “save” the country from the Depression – it helped create and prolong it.”

              Yup. It wasn’t the “Great Depression” in Europe. Only in America.

              1. Domestic spending in the New Deal didn’t save the country from the GD… FDR was trying to balance the budget the whole time and never spent quite enough, until the war, which did the job.

                1. You’re both just cherry picking libertarian-friendly fluctuations and minor events while totally ignoring the main elements of the causal chain.

                2. It also helped that the war demolished any foreign competition for our exports, and opened markets that were incapable of producing their own goods after the war.

                  I like how you parrot the line that the New Deal got us out of the depression 15 years after the New Deal began. I suppose we shouldn’t judge Bush’s economic policies until 2017 then, should we?

          2. Road to Surfdom

            Wasn’t that his book about abandoning the midwest and cruising out Route 66 to fulfill his lifelong dream of longboarding with some hot chicks?

        2. Actually, deficit spending during the GD wasn’t that high. The Great Depression is far far far far more of a story of monetary policy than fiscal policy. The only true periods of explosive government borrowing have occurred during times of war, mainly WW2. It’s hard to tell whether or not that borrowing was terribly effective, as a lot of noise makes it impossible to ascertain the economic benefits and economic problems associated with that borrowing as post war demand was an entirely new element in the picture. Also, price controls during WW2 make it impossible to develop a truly accurate picture of GDP and per capita income that existed during the war. Even with the price controls, the borrowing levels during WW2 created less of an increase in GDP than they cost in terms of money borrowed. That could be just because the money was spent on military goods rather than “beneficial infrastructure,”but it is impossible to know for sure.

    2. Austerity in a time of recession is counter-productive.

      Yes, getting government workers out of make-work jobs that are few people would pay for without being coerced via taxation, and into the private sector producing goods and services people actually want at a price they are willing to pay voluntarily, is SO counter-productive.

      /sarcasm

      1. The private sector was hemorrhaging jobs. The market alone was not sustaining itself. It does occur to you that it’s possible for there to be way more people looking for jobs than there are jobs available, doesn’t it? The whole fucking point was that demand was depressed. There wasn’t a lack of goods and services because of government spending. You could still go buy whatever you wanted, it’s just that people weren’t doing it.

        1. Look around your home, your town, your state, your country, the world. There’s plenty of work that is going undone from sweeping streets and painting things that are more intangibly lacking like inventions that aren’t getting invented and films that aren’t being filmed.

          So, why aren’t all those unemployed people doing those things? There wouldn’t be much reason for them to not be finding a job doing something useful in a truly free market economy. Must be something interfering with people finding useful ways to spend their time and be compensated for it.

          1. Hmm, sweeping streets and painting things. I couldn’t agree more. What private company is going to beautify a city or build infrastructure just for the sake of employing people, though? Sounds like a good job for government, which is the only thing that cares about things like overall employment rather than its own short-term profit.

            1. A private company wouldn’t spend any money on beautifying or building things? They do it all the time.

              Bureaucrats don’t care about their income, power and influence, popularity?

              And on what do you base your belief that people who work in government are somehow different or more caring than other people?

            2. I can list 5 separate NFPs (in my area) that specifically employ people and use volunteers to plant flowers at intersections medians and park corners and government buildings. Nothing like motivated old ladies that hate concrete.

            3. Sounds like a good job for government, which is the only thing that cares about things like overall employment rather than its own short-term profit.

              Government cares about overall employment? Let me introduce you to this thing called a public sector union contract. Many of them forbid the government from paying non-union-members to do the work you describe.

        2. I’d argue that the main reason that the economy is slow to create new jobs is that the government does everything to prop up the wage rate and regulates most entrepreneurship out of existence.

          1. Not to mention that freezing wages during the initial economic contractions (which is always slightly deflationary) is the worst goddamned thing you can do because you essentially raise the cost of labor relative to g&s and therefore cause unemployment.

    3. “Um, we’re ignoring the fact that any deficit problems will only become worse if we retract. Austerity in a time of recession is counter-productive.”

      Tony’s right. Whenever I’m going through hard financial times I stock up on new credit cards.

      1. The fact that you think governments should act just like an individual in response to economic downturns proves you don’t know what you’re talking about.

        The ENTIRE POINT of government acting is because everyone is acting like you and conserving. Somebody has to step in and create the demand otherwise things continue to spiral downward.

        1. You’re right. Governments shouldn’t act like individuals. When an individual goes into debt, that’s a personal choice. When government goes into debt, it’s saddling the repayment obligation on generations of individuals who could have never voted on that spending, no matter how vehemently they opposed it.

          Unless, you don’t believe in the principle of “no taxation without representation”.

          1. Minorities can go fuck themselves, Yonemoto. Numerical superiority makes every stupid idea A-OK.

            1. Well that explains executive order 9066.

              1. Yonemoto, Kurimatsu…. same difference.

          2. So don’t bitch at me, bitch at the Republicans who got us into this mess. I don’t like deficits any more than you do. I just know that worrying about deficits when there is a depression looming is just not getting priorities straight.

            1. I dunno, not prolonging the pain seems to be like a good priority, if you ask me. Unless the plan is to spend a shit ton of money and then say fuck you to all our lenders by defaulting. As much as that’s a horrible thing to do, at this point, I’d say it’s the only way out for the US.

            2. Right, it was the Republicans who were pushing mortgage companies to make loans to any live body who applies, and then accusing same companies of “predatory lending” when it all went wrong.

            3. Never mind that our current economic mess has nothing whatsoever to do with Democrats… because we are never to blame.

              1. Can’t tell if that was a serious comment.

                1. That was almost certainly someone mocking Tony.

        2. Oh god an aggregate argument. You might want to review your first statement. It applies to you.

        3. The ENTIRE POINT of government acting is because everyone is acting like you and conserving. Somebody has to step in and create the demand otherwise things continue to spiral downward.

          But…but what about the environment?

          Would not everyone conserving actually reduce the strain on the environment, since they would be using fewer natural resources?

    4. So, how much more government spending is needed? I never hear concrete figures, just “we’ll know it when we see it” type answers. That does not inspire confidence.

      1. I have the same question for austerity promoters. How much debt as a percentage of gdp can we tolerate before it’s necessary to trigger austerity measures?

        Because it seems to me like it’s just whenever it’s politically convenient for Republicans to have the economy stagnate.

        We need to spend until the economy is growing robustly on its own–and we have a long way to go, as it’s a pretty deep unemployment deficit the Bush recession has left us with.

        1. In other words, you don’t know either. And when the economy does start growing on its own, how do you establish that the “stimulus” was the cause? As opposed to committing a post hoc ergo propter hoc fallacy?

          1. he’s a phd. Part and parcel of modern science. Hypothesis-driven went out the window.

            1. Krugman cannot be falsified. If we recover, it was the stimulus that did it. If we sink, it was because we didn’t do enough stimulus.

              Just because he’s got a phd, don’t compare him to the lab serfs who spend their productive years growing cell lines. We should all avoid using his name and “science” in the same post.

        2. I have the same question for austerity promoters. How much debt as a percentage of gdp can we tolerate before it’s necessary to trigger austerity measures?

          About the same moment any sane person realizes he has too much personal debt– when a significant portion of his income is going to debt service.

        3. I’ve heard studies quoted that say, historically, nations that reach a 90% of GDP debt level inevitably collapse economically.

          1. And if you count publicly held debt (i.e. monmey we borrowed from ourselves from the SS revenues back before the predictable demographic flip), we are in excess of that at present.

          2. It was pushing 120% during WWII.

            1. And I’ll bet you think World War II was a time of economic prosperity instead of a time of horrible, massive life and economy destroying events.

              1. Of course it was, which is why that money is better spent on improving the domestic sphere.

            2. If you include the state debts, and the intergovernmental debt, we already close to 130% of GDP I assume. Also, we won’t have a post war boom to assist us in the near future. I wouldn’t say that there is an ideal debt to GDP ratio, as things can go from perfectly fine to bad at any debt to GDP ratio depending on changes in the cost of borrowing, projected future GDP growth (a quick growing country can get away with more debt than a country with a sluggish economy), and changes in the external economic factors that have little to do with domestic policy. Basically, the debt can seem a ok one day and then the next day that same debt can be deadly.

              1. Okay, we still have a little bit to go before we reach debt levels of 130% of GDP, but it is a given that we’ll be there by 2012.

                1. We should presumably be out of recession by then and can focus on paying for the things we buy unlike the last administration that never once cared about such things.

                  1. The Bush administration had almost reduced the deficit as a percentage of GDP to nothing before this major recession. Bush did everything by the keynesian playbook. He increased deficit spending in the middle of a recession and then slowly tapered it off. I don’t agree with what he did either, but your team spirit is showing.

                  2. As I said above, we could have our debt paid down to 100% of GDP again by the time the next recession comes around, but if it is a real doozy, and economic growth stalls for a few years, and the cost of financing debt increases, we could be screwed. We won’t really be safe until debt as a percentage of GDP gets below 80% again. Even then, things can be dangerous, I’m just calling the 80% level to be “safe enough.”

        4. I think we are at that point now. We are lucky the US bond market has been robust. But how much of that robustness has to do with investors fleeing from the European bond markets?

          That the US bonds are slightly better shit than all the other bonds isn’t a positive sign. It means that we REALLY need to be on watch, because the emergence of a better investment will cause massive flight from US bonds. And look now, Germany and the rest of Europe are talking austerity and reform…

    5. Right off, you show misunderstanding. It’s not a matter of spending or not spending money. It’s a matter of the world’s governments spending money vs. private parties spending money.

    6. “Hey, honey, we’re in shitloads of debt, and I’m STILL unemployed. So… what say we take out three or four mortgages on the house, and buy a bunch of shit we really don’t need?”

      THAT is the single-family equivalent of Obama’s lock-stepping with Keynesian economics.

  19. I posted this earlier today on a dead thread – It goes well here

    While the United States and Europe fret over huge deficits and threats to a fragile recovery, this region has a surprise in store. Latin America, beset in the past by debt defaults, currency devaluations and the need for bailouts from rich countries, is experiencing robust economic growth that is the envy of its northern counterparts.

    Strong demand in Asia for commodities like iron ore, tin and gold, combined with policies in several Latin American economies that help control deficits and keep inflation low, are encouraging investment and fueling much of the growth. The World Bank forecasts that the region’s economy will grow 4.5 percent this year. [italics added]

    Whole NYT article here.

    1. Right. And that speaks to my # 2 item — Reduce regulation. I believe we have the largest natural gas deposits on earth, but regulation prevents us from tapping into them. Same with oil shale. There are trillions of dollars worth of natural resources in this country that just sit there because regulations prevent it.

  20. It’s not impossible that stimulus spending could help now. But since that outcome is incredibly unlikely (esp. given how the government spends) I’d oppose it.

  21. And it’s one of the reasons why people like Big Short hero Michael Burry are beginning to suspect that Krugman’s eternally safe bond market might be the biggest bubble of them all.

    No fucking way I invest even a penny in bonds. The rates simply don’t reflect the strong possibility of inflation in the near- to mid- term due to all the fiat money created recently.

  22. Is there any evidence that stimulus has any positive permanent effect? Okay, you borrow money, you fund something, that something produces economic activity. Then that something ends, and you drop back to where that something was going to be anyway. For examples, cash for clunkers and the first-time homebuyer credit. So, you end up where you were anyway, but with more debt, for no permanent benefit.

    Now, it may be true that the US can spend more on stimulus without the immediate wrath of the bond market. Fair enough. But if it doesn’t do any long-term good, why do it at all? Why add debt when it doesn’t fix anything?

    1. Because without it there would be a vicious spiral effect–falling demand leads to fewer jobs which leads to more falling demand. The point is to get the economy out of recession mode and to jump-start it so that it can grow on its own.

      You only think our stimulus spending did no good because things are still fairly crappy. If we could visit the alternate universe where there was no stimulus spending we might see 25% unemployment instead of 10%.

      What really annoys me though is when people argue against further stimulus, get their wish, and then bitch about how bad the economy is.

      1. If we could visit the alternate universe where there was no stimulus spending we might see 25% unemployment instead of 10%.

        Bwahaha! Just a year or two ago, you Keynes bots were arguing that unemployment could reach as high as 10% without the stimulus.

        1. I am not impressed with your deployment of the right wing talking point du jour. You don’t even have the details right in your lie. Consult free republic or whatever and get back to me.

          1. Waaah! See page 5 of Obama’s own report (pdf). Actually, I was wrong. You Keynes bots were predicting 9% unemployment without the stimulus. Oops!

            http://otrans.3cdn.net/45593e8ecbd339d074_l3m6bt1te.pdf

            1. Your side is busted, Tony. Obama made the error of making a hypothesis (9% unempl without stimulus, presumably lower with stimulus) that events have shown to be wrong. By Obama’s own metric, the stimulus failed. So you think a second stimulus will not fail? Based on what data?

              1. You must be kidding? Obama was vindicated. I agree with him that without the stimulus the most unemployement ever wouldve reached was 9%.

                1. “Obama was vindicated.”
                  Unemployment was 10.6% in January. That was with the stimulus.
                  This is significantly greater than Obama’s prediction of employment without stimulus (9%).
                  The stimulus failed to curb unemployment below expected rates. Obama was not vindicated.

                  “I agree with him that without the stimulus the most unemployement ever wouldve reached was 9%.”
                  How does this relate to Obama being “vindicated”? You are agreeing with a falsehood: unemployment rose above 9%.

                  1. You fail at reading comprehension on several levels.

                  2. Unemployment was 10.6% in January.

                    Nope, it’s well above 20%. The government has been cooking those books since the Clinton administration.

                    -jcr

      2. That’s right, without the government taking money form people & buying stuff with it, we’d all end up on subsistence farms scratching out a living from the dust…

      3. Because without it there would be a vicious spiral effect–falling demand leads to fewer jobs which leads to more falling demand.

        Except that, if there’s no long-term benefit to the stimulus, there’s no avoiding the spiral unless you borrow the currency broke.

        You only think our stimulus spending did no good because things are still fairly crappy. If we could visit the alternate universe where there was no stimulus spending we might see 25% unemployment instead of 10%.

        Actually, when you take Depression-era unemployment measures, then add in the massive prison population, you get about 25%. But that’s a different thread.

        I’m not saying there’s no short-term benefit to stimulus. There obviously is. But there’s no long-term benefit that I can see, and you end up with more debt and back where you started in the first place. Put another way, if the economy is so screwed up that we’re going to 25% unemployment, stimulus isn’t going to change it, only delay it, and we’ll end up with more debt and pain when we get there. It’s credit card rich.

        1. But there’s no long-term benefit that I can see, and you end up with more debt and back where you started in the first place. Put another way, if the economy is so screwed up that we’re going to 25% unemployment, stimulus isn’t going to change it, only delay it, and we’ll end up with more debt and pain when we get there. It’s credit card rich.

          Yep. Japan is a perfect case-study. Two decades of zero economic growth and stratospheric debt.

          1. That’s because Japan suffers from the same political malady we do:

            An absolute unwillingness to confront liquidation if that means existing firms, unions and entrenched class elites will lose their positions and fortunes and benefits.

            1. Bingo. Today’s investment opportunities have to wait in line until yesterday’s malinvestments are out of the system. Stimulus and Tarp activities have only held that up by inflating the value of near worthless assets. The explosion in government growth at both the local and federal levels in the ought-nots being the worst malinvestment of monies in human history.

              Every data point I’ve seen confirms Grig’s contention that even in the most optimal conditions where private savings is high, and government debt being historically low, the multiplier effect’s best performance is around an 0.8. Take a look at the cost per employee from the stimulus is a conservative estimate of $120,000, more than twice the median income, and, by crappy, the multiplier effect can’t but be something on the negative side of 0.8.

            2. …entrenched class elites will lose their positions and fortunes…

              Exactly. They’ll do anything they can get away with to keep their positions.

          2. Add to that the Great Depression 1929-1933, and Bush-Obama 2008-present.

            What you don’t generally hear about is how austerity (or at least laizze-faire) cut short the recession/depression of 1921.
            http://www.firstprinciplesjour…..&loc=b
            It seems a reasonable argument that no stimulus would have caused a painful-but-short-lived recession in 2008, without necessarily causing a deflationary death spiral.

            1. Tom Woods gave a fascinating talk on that subject:

              http://www.youtube.com/watch?v=czcUmnsprQI

              -jcr

      4. Simplistic pseudo-Keynesian economics used by politicians misses a very important point. It matters what you’re spending the money on and what is being demanded. Just pouring money into Demand so that you get a big aggregate number isn’t going to do shit for the economy if its being spent on wasteful things.

        1. If only there was some way to prioritize effort and allocate resources according to people’s actual desires, instead of the whims of our political class…

          -jcr

      5. Yes, the government could create thousands of jobs. Like in California. Where the state now intends to pay the minimum to all its workers. Why can’t they just keep stimulating?

      6. Because, you know, we liberals can predict teh future.

      7. Because without it there would be a vicious spiral effect–falling demand leads to fewer jobs which leads to more falling demand. The point is to get the economy out of recession mode and to jump-start it so that it can grow on its own.

        Demand will eventually stop falling.

        People still need to eat and drink, you know.

  23. Maybe we should stock up on fairy dust?

    I wouldn’t exactly call it fairy dust, but maybe we should try policies which will result in job growth in the private sector. (HINT- “crowding out” should appear somewhere in your answer.)

  24. Okay, you borrow money, you fund something, that something produces economic activity.

    Wait- are you trying to tell me I can’t get rich by eating large meals at expensive restaurants and charging it to my credit card?

    1. A hard lesson to learn, I know.

    2. Well, of course the “something” has to be substantial, like the National Railroad Passenger Corporation.

  25. Paul Krugman vs. Matt Welch. Sort of like Einstein vs. Sarah Palin.

  26. I’m not sure austerity measures at this time will be as beneficial as a smart stimulus

    (rising intonation) What about *smart* austerity measures?

    Seriously, what is “a smart stimulus”? Not pouring money down a rathole? Not throwing good money after bad?

    1. (rising intonation) What about *smart* austerity measures?

      (exasperation growing) Toward what end?

      Our short-term problems – getting growth up – aren’t going to be solved by reducing the debt. How much lower can interest rates go?

      Granted, a debt reduction package may send a signal to the public that they won’t have to worry about massive tax increases tomorrow to pay for the debt and they can spend a bit more today.

      But the benefits historically of austerity measures, to my understanding, were only successful when interest rates and inflation were high. E.g., government spending crowding things out.

      We don’t have that today.

      So, we reduce the deficit by, let’s say, $300 billion. How does that help growth?

      1. Granted, a debt reduction package may send a signal to the public that they won’t have to worry about massive tax increases tomorrow to pay for the debt and they can spend a bit more today.

        Bingo. More to the point, a debt reduction package *may* send a signal to employers that they’re not going to keep getting “surprised”/”screwed”. I say “*may*” because more (e.g. regulatory stability) is probably also required.

        Please don’t be exasperated. I really am trying to understand your POV.

      2. Public investment crowds out private investment.

        I see where you are coming from, and I agree that deficit spending can be a good thing. However, we shot our wad on the stimulus package that was really just a bailout of state governments and not a true infrastructure bill. Think of how much argument was involved with passing a healthcare bill. The bill had to be “deficit neutral,” because after the TARP, Omnibus, and the stimulus package, there was no more political capital available to borrow more money. Had we passed a comprehensive healthcare package that cost 1.4 trillion dollars plus another 200 billion each year after, and avoided any “stimulus” or bailouts, the economy would have gotten a shot in the arm and we would be in the same financial position that we are in today. That’s the problem with spending, after the money is spent, you’ll be sitting around worrying about what could have been. Like I said above, had Bush and Obama not wasted so much money before hand, we could have passed a robust healthcare bill without near the level of political wrangling. Each dollar borrowed is an opportunity given up, and each penny saved is a penny earned.

        1. I’m also a person who floats in the middle when it comes to deficit spending. I do think that deficit spending can be not so bad of an idea when debt levels are fairly low. However, debt levels are so high now across the board that it may be harder to find people willing to finance debt in the future. Even a not so high debt level can be dangerous when the cost of borrowing goes up, and our current debt levels will be deadly if the cost of financing our debt were to double in the near future. We’d be in a greece like situation.

  27. If you can stomach some bad writing, I predicted the end of the dot-com bubble in spring of 200

    Matt, you’re far too modest. You didn’t predict the dot.com implosion, you predicted The Great Recession(tm).

  28. For a complementary (and somewhat complimentary) piece to Krugman’s, Bartlett has some good points here: Austerity and Growth.

    He argues that a short term stimulus right now is still probably better than any budgetary consolidation since the record of austerity leading to growth has occurred historically when interest rates were high. But if we do embrace austerity it has to be all on the spending side and not on the revenues side.

    &c.

    1. Can either of you make the case that the last stimulus was less worse than doing nothing? What would the next stimulus be? Much worse than doing nothing?

  29. It gripes the shit out of me that the Big Brains in Washington, having realized that the economy is clanking along and in need of liquidity and a shot in the arm, can only conceive of MOAR SPENDING! to accomplish that.

    Not tax cuts. Certainly not a reduction in the regulatory state.

    Nice straw man on the “bond vigilantes” who will refuse to buy US bonds. Nonsense. Of course we will be able to sell bonds. Just not at interest rates we will want to pay. As the bond market looks down the road, and sees (1) a very small, but non-zero, likelihood of default that is increasing and (more importantly) (2) a rapidly increasing risk of inflation, it will require that we pay it, in the form of higher interest, to take those risks.

    1. Individuals buying stuff doesn’t help the economy. Career bureaucrats investing your money for you, on the other hand…

  30. Because without it there would might, or might not be a vicious spiral effect–falling demand leads to fewer jobs which leads to more falling demand.

    So, if the diagnosis is that the private sector needs more money and needs it now, why not a tax cut?

    The point is to get the economy out of recession mode and to jump-start it so that it can grow on its own.

    Ah, the conceit of the central planner. These hundreds of millions of people cannot stay out of dire poverty without my personal intervention in their affairs.

  31. It occurred to me just now what is going on!

    The Government has created “A GOVERNMENT BUBBLE”

    I only ask that you guys quote me, Van, when you use this pop phrase.
    As in, Van, an anonymus poster on Reason Mag first recognized the Government Bubble and coined the term “Government Bubble”.

    Thanks!

    1. I’ll quote you, dude. Good turn of phrase.

      1. Thanks.

        A GOVERNMENT BUBBLE == An irrational over investment in the Government.

        1. That’s a very valid concept. The Government Bubble seems to be bursting in much of Europe. How long before we join them?

    2. Glen Renyolds has used that term before. And it is a pretty good one for these times.

      1. Newton and Leibniz dangit.

        I believe you but can you provide some links. I want to pursue this.

  32. These hundreds of millions of people cannot stay out of dire poverty without my personal intervention, and the interventions of my minions, in their affairs.

    My minions need to eat, too, you know.

  33. The heresy! It burns!

  34. Paul Krugman is 100% right.

    Krugman though doesn’t go far enough. What’s needed is not just fiscal stimulus but also monetary stimulus followed by fiscal stimulus.

    1. You and Krugman are gonna lose your asses when this Government Bubble bursts.

      Unfortunately almost everybody else will too.

      Cover your asses now! This is gonna be a big one!

  35. Serious questions:

    1) Does an extension of unemployment benefits stimulate the economy?

    My sense is yes, but I could be convinced otherwise.

    2) Does a continuation of Bush’s wars stimulate the economy.

    My sense is no.

    3) Does a near-term investment in infrastructure projects benefit long-term growth.

    My sense is yes, but I could be convinced otherwise.

    1. Interesting the way you set that up, but under the logic of Keynesian demand stimulation, for 1) to be correct 2) would be correct, but they are incorrect for the same reason. Opportunity cost still exist even when an economy is at ‘maximum output’.

      For #3, it never hurts to fill in pot holes but the work of Grigs and Romer suggest the benefits, long term, are exaggerated. In the fat years, these things tend to be trivial expenditures.

      1. Opportunity cost still exist even when an economy is at ‘maximum output’

        More relevant to stimulus arguments though is that they exist even when the economy is not at ‘maximum capacity.’

        I need a good nap.

        1. Not sure I follow. There is no reason that 1 & 2 can’t have different effects under Keynesian ideas. 1 stimulates because unemployed people are likely to go spend most of the money on things that the need like food, shelter etc…but a war diverts spending away from productive uses.

          Or am I missing something?

          1. To our sensible minds, it seems illogical, but Keynesian theory depends on inputs being homogeneous. Any spending will do for making a multiplier, be it, putting money into building tanks or building highways. So long as some one is being paid to build something, demand is being met. Hazlitt demonstrated quite well in The Failure of the New Economics that Keynes was not being facetious when he suggested burying money and then having people treasure hunt for it as a means of economic stimulus. It was a nice little rib on Keynes’ part on himself, but if his theory were correct than there was nothing inaccurate about the suggestion. It. Really. Is. That. Insane.

          2. Found the relevant text from The Failure of the New Economics:

            In Section VI o? Chapter 10 on the multiplier, Keynes lets himself go in one of the irresponsible little essays in
            satire and sarcasm that run through the General Theory as they run through all his work. As these essays rest on obviously false assumptions, and as Keynes writes them with his tongue more or less in his cheek, it might seem to be as lacking in humor to “refute” them seriously as to
            “refute” a paradox of G. K. Chesterton or a epigram of
            Oscar Wilde. But these little essays are the most readable and the most easily understood part of Keynes’s work. They are quoted by many laymen with chuckles of approval and delight. So we had better give them a certain amount of
            serious attention.
            Keynes begins Section VI by assuming “involuntary unemployment” without explaining how it comes about. At the same time he assumes that the only way to cure it is by
            “loan expenditure”?no matter how wasteful. “Pyramid building,
            earthquakes, even wars may serve to increase
            wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better” (p. 129). (If our statesmen were really educated in
            the principles o? classical economics, they would understand
            that unemployment is usually the result of union insistence on excessive wage-rates, or some similar price cost maladjustment.)
            One of the most revealing paragraphs in this section is the
            footnote on page 128, which I have already quoted (p. 148) and which I quote again with different italics: “It is often
            convenient to use the term loan-expenditure’ to include both public investment financed by borrowing from individuals and also any other current public expenditure which is so financed. . . . Thus loan-expenditure’ is a convenient expression for the net borrowings of public authorities on all accounts, whether on capital account or to meet a budgetary deficit/’ This explains what Keynes really means by
            “investment” in his multiplier equations. It is not investment
            in the traditional or the dictionary sense. It means any government spending, provided the money is borrowed, i.e., provided the spending is financed by inflation. Keynes then goes on to write what he evidently considers
            a perfectly devastating satire on gold and gold-mining.
            “Gold-mining,” he tells us, “which not only adds nothing
            whatever to the real wealth of the world but involves the
            disutility of labor, is the most acceptable” to the orthodox of all methods of creating employment. “If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private
            enterprise on well-tried principles of laissez-faire to dig the notes up again . . . there need be no more unemployment”
            (p. 129).

            This sentence tells us a great deal more about the prejudices
            and confusions of Keynes than it does either about gold, gold-mining, the principles of private enterprise, or the purposes of employment. There would of course be no
            need for private enterprise to dig up the “banknotes.” The
            Treasury could simply run off more on its printing presses for no more than it cost for the ink and paper. But there is a slight difference between digging up gold and digging up paper money which Keynes neglects to mention. This is
            that gold has kept its high value over the centuries, not only
            when it was the international monetary standard but even
            since it was ”dethroned/’ whereas paper currencies, by an
            almost inexorable law, have sunk into worthlessness. (A compilation by Franz Pick in 1957 of the depreciation
            of fifty-six different paper currencies showed that in the
            nine-year period from January 1948 to December 1956, for
            example, the American dollar, to which so many other currencies were ostensibly tied, itself lost 15 per cent of its purchasing power, while the British pound sterling lost 34
            per cent, the French franc 52 per cent, and the paper currencies
            of Chile, Paraguay, Bolivia, and Korea, from 93 to 99 per cent.) The reason for this difference is that the quantity of gold that could profitably (i.e., with a surplus of proceeds over costs) be dug up and refined depends on natural factors largely beyond human control, whereas the amount of paper dollars that are printed, or that would be buried and then dug up under Keynes’s scheme, would depend solely on the caprice of the politicians or “monetary authorities”
            in power.

            I recall reading Keynes passage as a bit of witty self parody, as he was a master of that, but actually goldbugs were the only subject of his riposte in that famous quote unless he was even more subtle than even I give him credit (to me, General Theory is the Finnegan’s Wake of economics).

            You’ll note that Keynes answered the questions you posed, and his answer is quite as I described. For him to do otherwise would be to admit to the loss of opportunity cost where it was his mission to refute their existence in the instances where an economy isn’t at ‘full capacity’ (the highest point of measure on a graph of a few accounted for factors, I know, when you you think about it, that doesn’t make any sense either, but there it is).

          3. Keynesian ideas. 1 stimulates because unemployed people are likely to go spend most of the money on things that the need like food, shelter etc…but a war diverts spending away from productive uses.

            When money is spent on armaments, does not some of it go to the manufacturers, their employees, and vendors?

            Do not the employees spend the money they are paid by the arms manufacturers.

            Do not the vendors use the money they get from the arms manufacturers to pat their employees and vendors.

            And then there is the hazardous duty pay soldiers get…

    2. 1) Does an extension of unemployment benefits stimulate the economy?

      My sense is yes, but I could be convinced otherwise.

      Taking money away from productive people to pay people to continue not working does not lead to economic growth, or production of things people want. So, no.

      2) Does a continuation of Bush’s wars stimulate the economy.

      My sense is no.

      They’re Obama’s wars now, but, again, taking money away from productive people to pay people blow shit up in foreign countries does not lead to economic growth, or production of things people other than neocons want. So, no.

      3) Does a near-term investment in infrastructure projects benefit long-term growth.

      My sense is yes, but I could be convinced otherwise.

      If you’re trying to twist the stimulus package’s “bailing out local governments with money to keep on employing unionized public workers” as being somehow “infrastructure”, then no.

      If you mean having government take money away from private investment to build government-run infrastructure, including money-pit trains and bridges to nowhere, again, no.

      If you mean government taking money from private investment to build stuff like government-run roads and bridges that will be heavily utilized, well, then the question becomes, why not more efficient private-sector infrastructure projects? And will the “long-term growth” be less than if the money was invested in the alternate uses that private investors would use it for.

      So, there, a qualified, well, it may not be a total waste of money, and it may go for stuff people actually value, but will the growth be less than if all the decisions about what people actually want most were left in private hands? A probable yes to the latter.

    3. 1) Does an extension of unemployment benefits stimulate the economy?

      My sense is yes, but I could be convinced otherwise.

      Only indirectly. A thousand dollars a month does not replace income for middle class Americans. What they do if they are smart is roll their 401ks into Rollover IRAs and slowly withdraw the money as needed to pay their expenses. In the meantime they look for another crappy job or pursue self employment, or the fortunate retire, either a mini retirement or a permanent one.

      If they are single they can take this $1k to a Show Bar and give it to the Dancers and stimulate the economies of single Mothers, or they can get into a Poker game with it and maybe make a little cash on the side, or they can give bigger tips to Bartenders, Waitresses, and Cabbies.

      If they are married they have to give this money to their Wives.

      The economic benefit needs to be compared to the loss of Tax Revenue that results when unemployment is high. The main problem with unemployment checks is they encourage irrational thinking in the public that contributes to a Government Bubble in the economy.

      1. The economic benefit needs to be compared to the loss of Tax Revenue that results when unemployment is high.

        Tax Revenue being good for the economy? Not sure I follow you here.

        Prolefeed – sorry…need more than boilerplate. For one, the money, in theory, comes from a payroll tax that the unemployed worker paid into, so in a sense it is similar to insurance…for two, the money may do more for the economy in the short run than being spent by the unemployed worker than it does in the savings account of that productive worker. And it is even conceivable that it will have longer run benefits. So, for 1, I don’t buy your arguments.

        For 3, I was talking about useful infrastructure (physical stuff, being built by workers). I think you exaggerate the differences in efficiency for these types of project vis a vis private versus public.

        1. They’re Obama’s wars now

          Nah, he’s just the guy we hired to try and clean up Bush’s messes. Bush still owns the legacy.

          1. IOW, nothing will ever be Obama’s fault.

            1. IOW, nothing will ever be Obama’s fault.

              Not at all what I am saying. But calling these Obama’s wars is like blaming the paramedic for someone’s injuries on the roadside instead of the drunk driver that ran into them. If the paramedic does something blatantly incompetent, the “own” the mistake and its resulting consequences, but the accident is still “owned” by the drunk driver.

        2. Spending on unemployment insurance are at historical records. If they are a net positive in productivity terms should not the last two years reflected that where no accounting in the GDP in terms of consumer spending even remotely shows that?

          1. alan,

            If I am following your point, I would have to say “no.” The boost has to be compared to the economy in the context of those that would be getting the unemployment insurance instead being out of work, not having any income, and using up their savings. For those with savings that can get them through the period of unemployment, it will be a wash. For those without sufficient savings, the inputs will be larger with unemployment insurance. So, you would have to compare spending adjusted for several million unemployed with no insurance, not to the economy with those people fully employed.

            Or am I missing something in your post?

            1. For those with savings that can get them through the period of unemployment, it will be a wash.

              If it worked as you described, I would agree, but it doesn’t. Unemployment insurance comes out of the paychecks of the employer and the
              assets of the employee
              who pay in a percentage when the employee is employed and, are on the hook until the benefits expire. You may be thinking that this is pretty much close to a constant that is factored in year to year, but that is not correct. In lean years like this one, the rates on employers typically go up; in the state I’m most familiar, North Carolina, for instance, employers will be charged an additional 20%:

              http://www.ncesc1.com/business/ui/uiTax.asp

              Why is a twenty percent (20 %) State Reserve Tax (SR Tax) being imposed?

              A 20% SR Tax is imposed upon contributions in any calendar year when the amount in the Unemployment Insurance Reserve Fund does not equal or exceed one hundred sixty-three million three hundred forty-nine thousand dollars ($163,349,000) in accordance with North Carolina General Statutes 96-9(b)(3)j.

              That would make it a double wash, but it would be easier to call it a negative in the aggregate. Note, I’m not arguing against unemployment compensation, you may want to do it in spite of the net loss (not even getting in to additional borrowing), just the Pelosian notion that it is economically productive is not even close to being a legitimate claim.

              1. Your thoughts on this…
                http://wdr.doleta.gov/owsdrr/99-8/99-8.pdf

                The claim is, roughly, a 17% relative reduction in the GDP loss results from the existence of unemployment insurance based on recessions over the last three major recessions last century.

                1. Wont be able to wade through that tonight. I’ve skimmed through the executive summary, and I already have problems with some assumptions it makes concerning business cycles, and the metric of UI versus nothing (private unemployment insurance was a viable and growing industry before the current government based system.)

                  It should be an interesting read given they are essentially making the claim that for the price of little more than 100 billion going to people doing non productive activities we can save several trillion dollars of collapse in the over all economy, even when the total value of those same people during their most productive output isn’t worth even an integer fraction of that. That is one Hell of a multiplier. It is far more than what Keynesians claim when the same amount of money is put to building tanks, bridges, and bombs.

                  1. BTW, we would likely be a more unionized private work force if private insurance still existed as that was one of the more attractive features that unions provided.

                    1. Not really impressed with what I have read so far. The assumptions they make are bizarre.

                      Just to illustrate the absurdity, if you were to instead kill those who are being paid out unemployment insurance instead of paying it out, you would still be far below any number representing a 17 percent collapse in the GDP.

                      Doing a rough calculation based on SDP, you would have to kill off the populations of Mississippi, Nebraska, New Mexico (sorry), Hawaii, Delaware, West Virginia, New Hampshire, Idaho, Maine, Alaska, Rhodes Island, South Dakota, Montana, Wyoming, North Dakota, and Vermont, and smash their resources into dust, before you approximate that much of a collapse, and you still would probably come up short.

                    2. I think you are misreading their claim. A 17% collapse in GDP is not predicted or mentioned. Instead, they claim that GDP will shrink by 17% less with UI than it would without. So, for instance, if the recession were going to result in a 1% reduction in GDP without UI, then with UI it would only shrink by 0.83% (if I got my pre-coffee math right there).

                    3. At first I thought it was merely sloppy wording in the executive summary (many tend be that way)

                      The simulations
                      showed that the UI program mitigated the loss in real GDP by about 15 percent over all the
                      quarters in each recession. When multipliers were calculated (the expansionary effect of each
                      UI dollar added to the economy) for each recession, the impact of UI in the 1990=s recession
                      was found to be more robust than in the 1980’s recession, although less so than in the 1970’s
                      recession.
                      , where it should be placed in the context of the decline as a .17 percentile and not an accumulative and additional measure to the over all GDP.

                      However, I then read through charts and interpretations of the charts, and they use an additional and accumulative in relation to the overall GDP reading too often for me to be generous and ignore it.

                      Here for one:

                      Chapter V ? Table 4
                      GDP and Real UI Benefit Impact
                      WEFA Recession vs. No UI Program Scenario
                      UI Benefit Payments Ratio, GDP to UI
                      Quarter GDP Difference Difference Benefits
                      1999 Q1 0.0 (0.1) 0.1
                      1999 Q2 (0.1) (0.4) 0.2
                      1999 Q3 (0.3) (1.2) 0.2
                      1999 Q4 (0.7) (3.0) 0.2
                      2000 Q1 (1.5) (5.9) 0.3
                      2000 Q2 (2.8) (10.2) 0.3
                      2000 Q3 (4.5) (15.3) 0.3
                      2000 Q4 (6.4) (20.3) 0.3
                      2001 Q1 (8.1) (23.9) 0.3
                      2001 Q2 (9.3) (25.1) 0.4
                      2001 Q3 (9.9) (23.8) 0.4

                      Note they speak of accumulative and not annualized in their break down.

                      This error is repeated in some charts else where in the report and the appendix; other areas of the report dovetail nicely with your explanation, here for instance:

                      The conceptual analysis and empirical evidence presented in this chapter suggest that the UI
                      program has exhibited an increase in effectiveness during the 1990s. The recent improvement in
                      effectiveness was measured in absolute terms. The analysis suggested that UI’s effectiveness declined in
                      the 1980s, relative to the 1970s, and has since rebounded. The evidence of the WEFA model simulations
                      shows that between 13 percent and 16 percent of the decline in real GDP is offset by the UI program.
                      These results were obtained using five counter-factual recession simulations — where the UI program was
                      allowed to perform according to the UI equation — compared to the same simulation with the levels of real
                      benefits of the UI program left unchanged from their observed baselines.

                      It appears to me that members of the team were likely at cross purposes, I imagine between those analyzing the econometric work and those interpreting the counter factual modeling.

                    4. And for a real kick, look at the claims they make for the multiplier effect in relation to UI and you will see why I chose where my lampooning originated.

                    5. strike ‘I chose’, the wording of the original sentence was awkward, and now even more so.

        3. The loss of Revenue from middle class people being out of work causes the government to borrow more money than they are paying out as unemployment insurance, which by the way is a joke as far as income replacement is concerned.

          1. Van,
            Thanks for the clarification.
            So, in essence, you are saying the resulting deficit spending is a drag on the economy.

    4. 3) sometimes.

      Bridge to nowhere.

      1. RE: Bridge to nowhere.

        Of course, not all infrastructure projects are equal. We can speculate about the economic development that might occur as a result of that bridge opening up access to a previously inaccessible resource, but, sure, a poorly chosen infrastructure project is going to be a waste of money.

  36. The Tony comments, in chronological order, are wonderful. They begin with an assertion, then some supporting evidence. The supporting evidence is exposed as lame or untrue. It ends with this being an evil Republican plot, as if anyone on the board besides John was a Team Red kiss-ass. Majestic in its lameness.

  37. Yes, America has long-run budget problems, but what we do on stimulus over the next couple of years has almost no bearing on our ability to deal with these long-run problems.

    Yes I am 300 pounds overweight, but this one triple-decker fudge wedding cake has almost no bearing …

  38. People screwed up. They borrowed and spent more then they could pay back for stuff that wasn’t worth what they paid for it. The government grew way faster then the economy and is still growing while the economy isn’t. At some point you have to pay the piper. Nobody wants to take the pain and consequences for all of this and until we do, this shit’s never gonna end. I wouldn’t let Krugman manage a a bingo game much less the US economy. I’m really sick of listening to his stupid bullshit.

  39. Has the U.S. embarked on a fiscal “austerity” program when I wasn’t watching? What the hell is Krugman talking about?

  40. “on belief in what I’ve come to think of as the invisible bond vigilante and the confidence fairy.

    Isn’t the whole idea of spending gobs of government money one of boosting confidence?

    That was the rationale for each of the “stimulus” bills we have indulged ourselves in – “boost confidence”.

    If the game plan were truly Keynesian then the “demand” side goosing of the economy is on infrastructure intended to yield industrial productivity benefits. And therein lies the joke – how does that happen in a service based economy hooked on trade deficits? Trade deficits that don’t result in the dollar softening because the amounts off shore are simply lent back to our government.

    Should we build bigger container terminals? Faster off loading capability? Invest in red ink factories?

    The Bush/Pelosi/Obama “send out a stimulus check” efforts were aimed at constructing the confidence fairy that Krugman condemns.

    Predictably, the Krugmanites tell us that the pork in the $700B+ Stimulus Bill is for infrastructure which, aside from being untrue, will do nothing to help the US in recovery since we abandoned manufacturing to the strong dollar/ cheap credit policy.

    Hey Paul – Cheap credit isn’t restoring confidence in the form of demand. Stimulus isn’t restoring confidence in the form of demand. And the bizarre and cryptic policy making regarding regulation has completely screwed up business confidence. Looking for a confidence fairy, Dr. Krugman? Try the mirror.

    And if you want a place where the last massively scaled Keynesian experiment failed an industrial/surplus economy, look at Japan.

  41. Where “immediate fiscal austerity” = only going into debt another couple of hundred billion, instead of several hundred billion….

  42. The 2 biggest problems with Keynesianism:

    Total spending is not a good way to measure the health of an economy.

    Government spending should be subtracted from the total, not added.

    1. I’d say that the biggest problem with Keynesianism is that robbing people is fundamentally immoral, whether you do it by putting a gun to their heads or by flooding the economy with fiat currency.

      -jcr

  43. Who won the soccer match?

  44. ‘It can’t happen because it never has’ — Black Swan anyone?

  45. Now we have moved beyond bond vigilantes. The dollar vigilantes are now about to right the ship and vanquish the world of these money printing central bankers! Check out the free newsletter at http://dollarvigilante.com to find out how to protect yourself from the coming dollar crash!

Please to post comments

Comments are closed.