Krugman Victory Lap?

Smug asshole

shmug shmasshmole

so the guy who is arguing that heroin addicts should be given drugs indefinitely takes a victory lap when the addict breaks out of the rehab center to get a fresh high.

They're rolling back austerity measures because the public is too stupid to realize that they can't pay for their government programs anymore.

Regarding whether he's right or not, it remains to be seen. The problem is that if you assume he's right, well then he's right and the "pro-growth" policies will work. If he's wrong, the theory goes that their austerity measures WILL invoke a recession but that it's necessary, that the recession will be over fairly quickly, and that the spending increases will only prolong it, resulting in kicking the can down the road and an even deeper recession.

The problem with all of this (and the reason none of us can ever fully agree on one correct theory of economics) is that if another recession develops, the Krugman people say "We didn't spend enough!!" whereas the Austrians say "We spent too much and had too much intervention! We should have let things completely fail!" So basically, no matter what result, you can always spin it any way you want to. The only solution would be to either have the government completely manage the economy and spend at gigantic levels or to have the government let everything fail and be completely laissez-faire. The only problem is that it's political suicide and no one wants to gamble with people's lives just to see which theory is correct, so I fear we'll never get the right answer.

krugman is the guy who thinks a war with mars will goose the economy

this man by all rights belongs in an insane asylum

I don't blame Europe, once you give an entitlement it is nearly impossible to take it away. They should jack up tax rates and see how much additional revenue they get lol.

I once saw Krugman speak in person. I wish I could tell you what he said, but I fell asleep.

I'm not a Krugman worshiper, but the guy's obviously right about the need to stimulate growth... less gov't spending = less output = less taxes = more austerity = less output... a pretty difficult cycle to get out of, especially when wages are sticky.

The "kicking the can down the road" analogy only holds true if the current recession is structural in nature (as opposed to cyclical), which may well be true, but I don't think that's the case.

how has no one said "Dr. Smugman" yet?

Krugman is an idiot. Let them shift away towards "pro-growth" which I assume means lets spend and spend hoping to achieve growth. Oddly enough, inflation isn't growth it simply destroys the value of wealth already created. There was a great piece by Ron Paul about this in the Financial Times I saw. The Keynesian model of spend and spend and spend some more, to make up for a lack of aggregate demand. Can someone please tell me I'm wrong and that I don't think demand is the issue in this economy?

Also I understand that it isn't exactly popular to pursue a policy of lower growth in favor of tampering down spending, but I hate to tell you eventually the well runs dry. The infinite growth paradigm doesn't work, sometimes you actually have to realize you over promised and deal with it accordingly. The entitlement mentality is very dangerous.

I met the guy at a conference and he's actually pretty cool, just very focused and I think that gets misinterpreted. "Aggressive fiscal austerity is self-defeating if you can’t grow,” said Andrew Balls. Dude's name is BALLS, and he said this with conviction, I'm sold. Europe needs (1) growth and (2) to actually start collecting taxes. Some cuts, ya: 35 hour work weeks are absurd. But just cutting the system to the bone has never served Europe well, (see: 1890 to 1945) and they'd do well to think proactively JUST FOR ONCE IN THEIR FREAKING STUPID HISTORY.

Realize that a sharp contraction will make life even MORE miserable for us over here, and let go of the notion that being tight assed enough to produce rectal diamonds is always a good thing.

dude the whole fucking economy is built on a lie. for the last 40 years we have replaced real productivity growth (which is only possible when you capitalize the economy with actual savings, ie deferred consumption) with borrowing from economies that produce real goods and services. our whole economy is configured to redistribute the goodies that constitute our $70BB annual trade deficit.

stimulus is an ass retarded idea only a princeton economics professor can come up with. private borrowers are rightly deleveraging but then professor fuckwad decides that doing the right thing is the wrong thing and he wants to reverse that by quadrupling of the public debt to replace private debt (or is it octupling? it's never enough for him).

more stimulus = more dollars in the PRC central bank and petrodollar holder countries and keeping the illusion that we can be a nation of yoga instructors going just a few years more.

It didn't exactly take a genius to see that cutting on a massive scale was going to lead to recession. Dude is smug, dude is smug.

There are a couple of somewhat viable options at this point IMO: 1. tie fiscal and monetary stimulus to mandatory labor market, tax, and entitlement reform. 2. deep-six the euro.

Option 2 is awful and I think it's hard for many Americans to grasp how bad it would be for the world economy. The problem with Option 1 is that getting the political will to move forward with these reforms will be exceedingly difficult and monetary/fiscal stimulus without reforms will lead to Option 2 being the only option.

You cannot have a fiscal union without a political union. I think Europe will grow closer to having a unified political body because breaking up the Euro would be too much to bear. I guess this buys the USD more time as the worlds reserve currency. I have no doubt we will squander this precious breathing room.

tax collection rates in these struggling countries in Euro is terrible. Socialism works for some, not others. Think I read somewhere that Greek tax collection around 35% of GDP while spending around 56%? and the fact that they should not even be in the euro in the first place.

A few facts most of you do not seem to know:

Markov you make some great points, and I actually do agree with you. I also happen to think that Krugman is a massive prick.

Good post Markov, but there's a problem. The sovereign financial crisis has by and large been driven by markets. A return to spending without reforms will blow out spreads all the same. And there is no way the world's financial system could handle a Greek-style credit event on Spain or Italy's debt.

I agree that Spain and Italy have a huge problem. And that problem is probably not fixable with either austerity or stimulus spending. Stimulus spending works largely because low interest rates make it cheap to do, but Italy and Spain have to pay disastrous interest rates. And austerity, on the other hand, is quite capable of worsening their fiscal situations by creating recessions. Neither option looks good at all.

As I see it, the only way save Italy and Spain now (at least, if they are to remain attached to the Euro), is for some entity to guarantee their debt, or pledge to keep their rates low, allowing them to stabilize their fiscal situation and gradually make labor and tax reforms. Unfortunately, the ECB is unwilling to do this, and so is Chancellor Merkel. I really don't know what can be done now.

I get annoyed when people say "Ha! Europe is getting worse! Austerity doesn't work!". The entire point of austerity is to go down to sustainable spending levels! Of course people are losing jobs - the economy is going down to the levels it should have always been. The problem is that people are not responsible. They never want to pay the price for foolish actions. So in their mind if the solution isn't painless it probably isn't the solution.

Take it as an investment.

Would you put your money in the company that is still taking on debt well past its annual revenue in hopes that it can spur enough future growth to avoid bankruptcy?

Or would you put your money in a company that rarely takes on debt and relies on its savings to invest in future growth? Or at the very least takes on small amounts of debt and has a record of paying it off promptly?

Then I guess there's the third option, would you put your money in the company that realized it over leveraged in the good times and has taken on too much debt and is now taking actions to restructure its capital and loans in order to avoid bankruptcy in the future?

Maybe someone smarter can refine these examples much more than I ever could.

(I'm typing from a phone so please excuse typos)

1., 2.I confess I'm not sure of how Spain's health system factors into their fiscal situation. However, my broader point still holds: the size of government has little to do with the nature of this crisis. This crisis is born of a poorly constructed monetary union. Sweden has a massive public sector, and is doing very well. Countries like Italy and Portugal would be solvent if they could get decent borrowing costs.

1. Even if you deny that deficit spending, in spite of some very solid econometric analysis suggesting that it does, consumption smoothing still makes deficit a good way to ameliorate recessions.

2. No, you don't know the Japan example very well. Japans ultraconservativr central bank effectively cancelled out any stimulative effort as soon as there was a hint of inflation. Stimulus was never given a chance. All the Japan example shows is that a country with its own currency can support very high levels of debt without seeing Eurozone style interest rates.

3. So you say we should protect the interests of creditors at the expense of everyone else?

4. What is this "natural" rate of interest you speak of? I remember correctly, it's an artifact of Austrian ideology.

And yes, I am in school. Where I spend my time carefully studying economics

Even with austerity repealed, how is Europe going to grow out of this? The US is growing at ~2-3% and we are more competitive and in a far better situation than Europe. Austerity is needed to pare down government spending and programs. It is politically easy to not do this, but without fundamentally fixing the situation Europe will just face their maker later on down the road.

The PIGS are the big issue and unless they are backstopped by the few strong nations they are at risk of failing. This will have a ripple effect on the rest of Europe. Either way Europe is in a tough situation.

@ drexel

and the peter/paul fallacy is just the heart of keynesianism: i.e., not fully accounting for the full costs of your policy actions. this touches on every point that markov made and every policy dogma that every keynesian believes in. is it clearer to you now?

@markov

a few of your points that weren't addressed in my response to drexel:

1. a huge part of spain's national debt is their health care costs and future obligations. your point is just factually wrong

2. i believe you are the one who doesn't understand japan. but since you need the touch of keynesian professor authority on this point, refer to some of bernanke's own dutch uncle lectures to the japanese on what they were doing wrong back in the early part of the last decade.

3. what is the natural rate of interest? what is the natural price of a car? what is the natural price of a cell phone plan? what is the natural price of a hamburger?

for you to lecture grown-ups on economics is like a kid "carefully studying" astrology telling astrophysicists they they don't understand the stars.

Godwin's Law really requires a corollary about age. If you want to argue, argue. But don't tell a college student that he's wrong simply because he's a college student. Getting involved in this sort of pettiness is demeaning to both of us, but for the record, I don't see many undergraduates in the courses I've been taking for the past few years. And if you're basing your argument for superior knowledge of economics on being a "grown-up," as you appear to be, well, I really don't know how to respond to that. But more power to you.

1. I don't bother to discuss the mechanism because the arguments for/against austerity are pretty widely known. The question now is what the evidence says. And the evidence shows that countries engaged in austerity are not doing well. Take Ireland as an example. They've engaged in brutal austerity measures and their GDP just took another hit after a slight uptick. These countries are being killed with no end in sight, and no relief for millions of unemployed people.

2. As Drexel said before, Japan suffers from a liquidity trap, and the BoJ have never made the sorts of moves that might help them get out of it. In addition, Japan's attempts at Keynsian stimulus are drastically overstated. They only really tried in 1995, and briefly saw solid growth. In 1996 and 1997 Japan actually engaged in fiscal contraction. Japan's problem isn't stimulus, its schizophrenia. They've constantly reversed position and never really pushed Keynsian policies.

3. This ignores the actual economic state of the lower and middle classes, most of whom rely primarily on social security (which is adjusted for cost of living) and have little to no savings in the first place. As for those (very) few middle class people who have saved, if they put a huge portion of their savings in bonds (that aren't inflation indexed), rather than instruments that protect against inflation (stocks, inflation-indexed bonds, etc.), then yes, this comparatively small group of individuals will do slightly worse than they would have otherwise, if inflation increases by a few points. But everyone else's well-being shouldn't be held hostage to the interests of this small group of people and, of course, the real benefactors of disinflation, the very wealthy. And these are the people who should have planned! We all know inflation can occur. This is the very sort of thing people should take responsibility for! It is reasonable to assume that citizens should prepare for varying rates of inflation.

4. This is just more Austrian crap being marketed as gospel truth. You seem to assume that everyone will always behave irrationally in the presence of "artificially" low interest rates. If markets are worth anything at all, investors will be looking for successful enterprises, not ones domed to fail. You're assuming that investors can be consistently tricked across history, and it's ridiculous.

5. Nice straw man. You're dodging the main point here, which is that Europe's troubles are not born of socialism, but the euro mechanism. As I said before, Sweden is doing quite well, for instance. Many of them are or were paying down their debts. There are plenty of graphs out there showing that there is no connection between size of government and size of crisis, whatever the case may be with Spain.

6. Covered above. Yes, I know Bernanke's views quite well.

7. So how exactly is the Fed to leave this holy rate untouched? Should it adopt a gold standard (hollow laugh)? That action is going to affect the money supply, and thus interest rates. And the Fed can still control the supply of money even on a gold standard. If the Fed adopts any target at all, it will influence interest rates. Do you want to get rid of the Fed?

You make a big point of calling yourself a "grown-up," but your economic arguments are factually wrong and morally childish. At the heart of it all, you, like most Austrian-esque types, have trouble with the idea that money might not be a solid and immutable store of value. This is really primitive. Even gold, the typical panacea of people with your worries, is hardly a solid store of value. The populist movement for the silver standard in the 19th century lost their battles but won the war when increased gold-mining got them the inflation that they wanted. It tends to become over-valued in relation to other goods just as that is the worst thing for the economy (recessions, depressions).

yeah, you guys are right. economies can consume more than they can produce indefinitely and central planners are smarter than the market. all we have to do is hand over our tax dollars for government geniuses to spend and have a centrally planned currency and we'll never have to suffer the business cycle. checkmate, i concede it all to you.

I fail to see how more stimulus is going to do anything other than provide short term relief. Spain has +25% unemployment and 105% debt to GDP. More debt isn't going to measurable fix the economy or bring unemployment down to 10% or lower.

http://www.economist.com/node/21529082

"Health spending makes up 30-40% of regional governments’ budgets. Long-lived Spaniards are rightly proud that they enjoy free health care from cradle to grave. But soaring drug bills, an ageing population, slack cost controls and reduced tax revenues are testing the system to breaking point. One estimate is that health costs will double in the decade to 2018."

Could someone tell me how this is a fixable solution without a fundamental reduction in entitlements?

(Note: Nixon takes dollar off gold standard in 1971)

Fiat currency and reckless central banking enables profligacy in government, that is the root of our problem.

This chart is very flawed. First, median income is a very bad measurement of the nation's wealth in relation to its debt, because of increasing income inequality. The vast majority of the increases in income are going to the top few percentiles, and thus won't show up on this median household income measure.

What exactly is this chart supposed to show, anyway?

Secondly, correlation does not equal causation. We have high government spending because of entitlements and military spending. The real crisis in our future is Medicare, which is terrifyingly expensive and needs serious reform. It's a genuine problem, and requires careful thought about the best way to cut spending and also to make health spending more efficient. Many European countries with far more socialized health systems than we have are vastly more cost efficient than we are; we could learn from them.

You have to be kidding. Spain is spending 40% of their budget on healthcare with little to no defense spending. Once you eliminate a cost of something consumers use it without thought.

The last thing we need to do is "learn" anything from Europe except what not to do.

@ markov

in all seriousness, your age is not the problem, it's the intellectual milieu you are in. the fundamental flaw of keynesian macro is that, like a lot of other social "science," it sounds very plausible within the confines of an academic lecture hall with heavily massaged econometrics and statistics. but it is completely at odds with reality.

one day, if you bother to study the subject on your own after you leave school, you will look back on this and realize just how wrong you were.

Not trying to be a dick, but Obama dropped nearly $1T in stimulus and the effects are debatable. My issue is with how much do we have to spend to get the desired results?

Supposing Greenspan cooled things off before the massive bubble that sent us down this hole we might not be in this situation, but artificially low rates "stimulated" the economy too much. At what point do we say it is time to take our medicine.

I am all for stimulus and I agree more might help, but the problem is it isn't as if we repay the stimulus in good times. In bad we over spend to accommodate the people and in good times we spend because, hey, we have the money.

I think the gold standard is so alluring to me because it forces people to behave appropriately. Politicians and central bankers have so much incentive to rack up debt, keep rates low, etc. Until we can elect people with firm morals and standards who will not bow to this pressure we will continue to have these issues.

No president wants to be the guy who slowed down the economy, no matter how fiscally and economically responsible it is - so I definitely agree with you on that point. Promises to do otherwise are just not credible. Not sure about a Gold standard, though - if implemented on an international scale, it would have the same effect as the Euro, except this Gold currency would include North American countries (and perhaps others) as well. Not exactly an attractive proposition (tempting, I agree).

I think the real threat comes from the possibility of inflation, which would force the Fed to enact a contractionary monetary policy, hurling us back into recession. Inflation might come from China, with their wages and demand for energy (arguably, this has already started and is speeding up). It could come from expanding credit from banks as the liquidity glut breaks free (and the Fed hasn't provided a plan on how to mop up excess liquidity quickly). Or it could come from the debasing of the dollar as foreign creditors lose faith. So I disagree with Krugman about targeting 4% inflation. 4% could easily become 5%, which becomes 6%, etc... it's not like typing a number into a program. Economists overestimate fundamentally how much individual entities (including gov'ts) can control the economy.

Greenspan said something wise once, that the goal of a fiat currency should be to mimic the gold standard without being on it. Unfortunately, as you and I have mentioned, it is too tempting to use the fed and debt to avoid a slow down. In essence we are push over parents.

I would contend that we are already at 4% or more inflation.

http://www.bls.gov/cpi/cpid1201.pdf

2.9% for 12 months, but look at the break down.

4.4% for food.

6.1% for energy

4.7% clothes

3.2 % Medical Care Commodities (not sure if that is healthcare or something specific).

The core things people need and the things lower income people disproportionately spend on. These are also government numbers and invariably sandbagged.

The USA is lucky. Oil is priced in dollars. We have the reserve currency of the world. We have a military that learns on anyone who dares piss us off. China needs the US to keep its economy going and thereby continue placating their population. We have a long rope, but unfortunately I think we will use it to hang ourselves with it.

We will be back on an international gold standard within 10 years after the dollar fails, and then after the SDR fails.

I think we should have a debate on why people think the gold standard failed or would fail. All I know is that central bankers seem to be doing a real shit job considering that they were sold as the better alternative.

Maybe gold isn't the answer, but what we currently have isn't giving us the results we desire.

I mean the housing crisis was caused 1/3rd by artificially low rates (Fed) and 1/3rd government intervention (CRA). Seems to me that our saviors are not as great as they come off.

Deficit spending in bad times is only a good thing if there is fiscal responsibility in good times. The borrowing when the economy lulls is offset with savings and repayment in good times. Unfortunately politicians are not motivated or benefited by responsible behavior. So we either remove the ability to borrow in bad times or we reorganize the political system so that politicians have an incentive to do what is right.

Frankly, I think it is a lot easier to handcuff politicians than it is to elect people who have any morals or standards.

There are a quite few reasons not to stick with the gold standard. The most important is probably what happens when a country with a gold standard enters an economic recession/depression. In times of economic weakness, the value of gold increases in relation to other goods and services, because it is considered a safe asset. This causes deflation at the very worst time. Just as people are facing financial uncertainty, their debts increase in value! It's a really nasty one-two punch.

If money is tied to gold and the value of gold increases wouldn't the value of whatever is tied to gold increase along with it?

Yes, money increases in value when gold increases in value in country with a gold standard. This is the problem. Gold gains value compared to other goods, making those goods cheaper in the gold-pegged currency, thus creating deflation.

Ok, so one negative is currency gains strength in bad times. What about what we have now where in times of a bad economy the fed tries to stimulate the economy, thereby creating inflation.

Not saying one is better than the other, but now that we have figured out that both might be fucked, what is the optimal solution.

when you start thinking of money as any other economic good, which has a market and a price, then all the anti-gold standard arguments fall apart.

Seems to me that we dont have some magical consensus. But maybe we do and all the dissenting opinions in this thread have been a figment of my imagination.

This is an awesome paper on monetary policy reform from the Bank of England that could be of interest to a lot of you guys: www.bankofengland.co.uk/publications/fsr/fs_paper13.pdf It doesn't really come up with any definitive solutions but it's a nice framework to consider monetary policy though.

Cool, I am sure others will.

TNA, have you ever read about Modern Monetary Theory (MMT)? I don't believe everything they claim, but they have a lot to say about national debt and fiat currency.

They have a bunch of interesting ideas about how money works in a fiat currency system, none of which I agree with entirely, but all of which merit some thought. I'll try to summarize some of what they say (I may not be exactly on the mark, because I haven't been reading their formal papers.).

1. Money comes from the government, which creates and spends it. Thus for the private sector to have money, the government must spend that money into circulation first.

2. The government does not really have a balance sheet in the way that households and corporations do. When it wants the money it spends to be worth more, it taxes to take money out of circulation, so that when it creates and spends out money, that money is worth more.

3. If the government runs a surplus, it can only do so by pulling money out of the private sector. Thus, in a debt-ridden country, the government should spent, because this is the only way to reduce private debt.

4. You won't see runaway inflation until you approach full employment.

5. Because countries with a fiat currency (that they control) can always just create more money to spend, they cannot ever default, and thus their interest costs will always remain low (as Japan has).

That's a really, really rough summary of some of what MMT is about. In my own opinion, there is a measure of truth behind MMT ideas, but they tend to go too far with their conclusions. It might be worth reading more about MMT if you want a different perspective on monetary policy.

http://economistsview.typepad.com/

Mark Thoma's blog is a great resource. Every day he goes around the web and scours for a bunch of interesting articles on econ-related stuff. His daily links are very informative, as are many of the articles he posts.

http://gregmankiw.blogspot.com/

Mankiw's blog is also a great source for econ material. Mankiw is an interesting figure, because he has a very Keynsian worldview, but is also pretty staunchly conservative. He generally favors lower taxes, less regulation, etc., though he is strongly in favor of a carbon tax to limit global warming.

http://worthwhile.typepad.com/worthwhile_canadian_initi/

Several economists post on this blog, but the posts on this blog by Nick Rowe are especially appealing. He's a careful economist who tries very hard to make himself understood. Well worth a read.

http://www.pkarchive.org/

The Paul Krugman archive contains a lot of his older academic work. Whatever one thinks of his career as a pundit, his earlier economics work was really top-notch. Check out the "New Economy" and "International Trade" sections.

Thanks dude. I'll check them all out. My issue with Freddy kurgan is the face that he is an expert in a narrow aspect of economics and has branched out into something else, at the same time dumbing it down and politicizing it.

Glad I could help!

And yeah, Krugman has branched out pretty widely, and definitely made some missteps along the way. But he has also made some pretty impressive calls in his career as a pundit. He picked up on Enron's fraudulent trading practices in California well before the rest of the press realized the energy shortages they were creating were artificial. He pointed out that the Bush tax cuts were budget busters well before the rest of the press would acknowledge it (when thinking about countries not in a very severe recession, Krugman is quite fiscally conservative). He also was arguing that the WMD argument for Iraq was based on faulty premises well before almost anyone else was. And though he didn't understand the significance of the housing bubble, he did point out as far back as 2005 that there was a rapidly growing bubble that could burst with severe consequences. Since the crisis began, he successfully predicted that interest rates would stay low, even after QE ended, that the recovery would be slow, that the stimulus package might halt the recession but couldn't bring back much growth, and that core inflation would generally remain low in spite of QE (he went too far, though, and predicted deflation). A (not very scientific) study once found that he was the single best forecaster among US pundits.

In other words, a bold investor could have made a lot of money if he had based his calls on Krugman's analysis.

@Jeff: He never "endorsed" a housing bubble. No one ever says, "gee, whiz, a bubble! This is fantastic!" It's ridiculous. The horribly out-of-context quotation that appears to suggest that he was in favor of a bubble is, in context, merely a description of the conundrum facing the Fed. He didn't see any way to recover from the recession in 2002, and suggested that the Fed would create a housing bubble just to get out of the (then) current recession. This was in no way an endorsement of creating a bubble, but simply a glum joke about the grim state of the economy at that time.

To say that he endorsed a bubble is both childish and dishonest.

you keynesian dumbasses don't realize that the object of your idolatry, the fed, was an institutionalized bailout mechanism that the international financial mafia wanted so that they wouldn't have to go begging to JP morgan the next time their bets went sour. even andrew jackson called these thieves out on it 85 years before that in its incarnation as the second central bank, and he was a backwoods frontiersman who didn't have the benefit of your education.

if any part of the foregoing is news to you in any way you haven't earned the right to debate the topic because you don't know the ABCs of it. now power down your computers and hit the library and come back when you have removed your heads from your asses.