

Paul Krugman: Fighting off depression - ardit33
http://www.iht.com/articles/2009/01/05/opinion/edkrugman.php

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mhartl
I've long had a hobby interest in economics, but it's only in the past couple
months that I've really dug into macroeconomics and monetary theory
(motivated, of course, by current events). It's weird: there's bizarreness at
every turn---it's like studying astronomy for the first time, only to discover
that the astrologers are in charge. The inmates are running the asylum.

 _To wit:_ take a look at "Baby-Sitting the Economy"
(<http://www.slate.com/id/1937/>), an article Paul Krugman wrote in 1998. It
describes a simple example: a co-op with a coupon or "scrip" currency
redeemable for baby-sitting. By Krugman's own admission, this example inspired
his understanding of monetary policy, recessions, and Keynesian economics. In
the story, a "recession" occurs when co-op members start hoarding scrip in
anticipation of future outings; the result is that the whole system freezes
up; and the solution was an injection of liquidity through scrip inflation.

Exercise: discover the flaw in Krugman's analysis. _Hint:_ consider what would
happen in a real economy with hard currency by allowing the price of baby-
sitting to fluctuate and by replacing "scrip" with gold. Contrast this
situation with the long-run effects of the inflationary "solution" on savings
and business investment incentives.

I have two predictions: the economy will continue to tank despite (or because
of) attempts to "stimulate" it, and Krugman will blame the resulting
depression on the stimulus being insufficiently bold---i.e., on not being
Keynesian enough.

~~~
barbie17
"Hint: consider what would happen in a real economy with hard currency by
allowing the price of baby-sitting to fluctuate..."

You are confusing two different types of analysis. If you had taken a (more
rigorous) macroeconomics course you would have learned that there are two
types of analysis: long-run and short-run. In the short-run prices are
inflexible due to unions, preexisting contracts, menu costs, etc. In the long-
run prices can fluctuate and recessions are impossible (we don't worry about
some recession that happened in 120 A.D. for example). Keynesian economics
only deals with the short run, and only in the short run can the economy be
trapped in a temporary disequilibrium. Even though the economy should
eventually recover on its own in the long run it can cause a lot of pain in
the process, which is why Keynesian economics advocates government
intervention.

"I've long had a hobby interest in economics... The inmates are running the
asylum."

Maybe a hobbyist shouldn't be suggesting that Nobel prize winners be put in an
asylum ;).

~~~
mhartl
Thanks for the explanation. It helps me to understand why so many economists
(and politicians) seem to treat our present situation as some sort of short-
term technical glitch that can be straightened out with the right kind of
fiscal kick. I suspect they are wrong, and that we face deeper structural
problems. Indeed, it seems obvious that we do.

I have little confidence in the putative experts because of a long list of
seemingly elementary fallacies promulgated by many mainstream economists.
Notable among these are the idea that spending causes prosperity, the notion
that economic "stimulus" is beneficial, and a persistent conflation of trade
deficits with indebtedness. Perhaps most damning is the simple observation
that, though people have long been spending beyond their means, and saving
more is the obvious antidote, this solution is vehemently opposed by the
conventional wisdom. They seem immune to the argument that, while increased
savings will result in a contraction of consumer product companies, this is
not a bug, but a feature---a painful one, to be sure, but ultimately
unavoidable. Seen from this perspective, the present attempts to limit the
severity of the recession are not only misguided, they are probably
counterproductive.

I do expect to take a course in this at some point, by the way, just for fun
(and it really will be only for fun; I'm a 35-year-old physics Ph.D. with
little to gain from further formal schooling). Unfortunately, my intuition is
that "rigorous macroeconomics" is an oxymoron, and that much of the subject as
presently taught is a hopeless lost cause. I hope I am wrong...

 _Maybe a hobbyist shouldn't be suggesting that Nobel prize winners be put in
an asylum ;)._

Oh, I've read too many of Krugman's essays to heed that warning. :-)

~~~
barbie17
You should check out Macroeconomics by Mankiw. It's very short and sweet. You
really shouldn't judge economics by a few articles aimed at lay audiences just
as you wouldn't try to learn about quantum mechanics from the NYTimes.
Economics is filled with clever little insights that makes you go "Ahh!".

I'll take the time to explain some of your complaints:

"spending causes prosperity": well, obviously if you don't spend any of your
money obviously you don't have prosperity. If you borrow money to spend
economics assume that you are rational and that it is because you prefer
having a good time now to later. This seems more like a value judgment though,
which most economics tend to avoid.

"conflation of trade deficits with indebtedness": well, if country A wants to
consume something produced by country B, it can only do so in three ways: 1)
give B something A produced, 2) give B a chunk of A (e.g., real estate) or 3)
borrow from B. Since most countries don't like 2), trade deficits are settled
using 3)

Most economics will say that a higher savings rate will be beneficial in the
long run but if people suddenly saved more because of government policy there
will a aggregate demand shock and the economy will go into a recession since
the price level cannot easily adjust in the short run. (When people save more
they have less money to spend and thus all prices become "too high" for them.)

Check out the book for more information. You will find that while economics
may have flaws, it is internally self-consistent. It just doesn't take into
account that most people are not rational :(.

~~~
mhartl
N.B. Regarding trade deficits: if Alice from A wants to buy something from Bob
in B, she typically pays for it with money. The source of that money is either
production (your option #1) or debt (option #3). (Option #2 is just past
production, since people usually buy real estate with money.) In either case
Alice's purchase increases the A's trade deficit with B. But it's totally
beside the point that Bob lives in B. Indeed, the analysis is identical if A =
Atlanta and B = Boston.

There's a rough correlation between trade deficits and debt, just as there's a
correlation between the number of movies people see and debt: there's a
correlation between _spending_ and debt. Focusing on foreign trade---and using
the loaded and misleading word _deficit_ \---simply feeds people's xenophobia
and distracts from the underlying issues.

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scudco
Krugman shilling for Keynesian get-rich-quick schemes and insisting that what
Obama(read The Executive Branch) needs is simply more power to spend our way
out of The Greater Depression? Say it ain't so!

All kidding aside Krugman accurately points out that the Republicans are
simply posturing themselves as "champions of careful Congressional
deliberation." The big problem I find with his line of thinking, however, is
that he assumes Obama is not posturing himself as the "champion of quick and
decisive action." Krugman further magnifies his blind-spot in the following
excerpt:

"The biggest problem facing the Obama plan, however, is likely to be the
demand of many politicians for proof that the benefits of the proposed public
spending justify its costs — a burden of proof never imposed on proposals for
tax cuts."

That is, we are likely going to be unable to spend our way out of this mess
because people are unsure about this whole magical plan that spending and
printing money will actually be a viable plan toward recovery. Secondly he
firmly plants his flag in statist territory by insisting that tax cuts are
never held to this same standard. By this he seems to be suggesting that when
government spends money what rulers need is nearly carte-blanche ability to
spend as they see fit; but when we want to steal less from citizens then we
had better have some careful deliberation that this tax cut is going to
positively effect them!

------
gleb
Anna Schwartz - Bernanke Is Fighting the Last War
[http://online.wsj.com/article/SB122428279231046053.html?mod=...](http://online.wsj.com/article/SB122428279231046053.html?mod=special_page_campaign2008_mostpop)

"The Fed," she argues, "has gone about as if the problem is a shortage of
liquidity. That is not the basic problem. The basic problem for the markets is
that [uncertainty] that the balance sheets of financial firms are credible."

Reading NY Times for their business/economics opinion is like reading Playboy
for the articles -- curiously unsatisfying.

------
sarvesh
"Friedman's claim that monetary policy could have prevented the Great
Depression was an attempt to refute the analysis of John Maynard Keynes, who
argued that monetary policy is ineffective under depression conditions and
that fiscal policy - large-scale deficit spending by the government - is
needed to fight mass unemployment. The failure of monetary policy in the
current crisis shows that Keynes had it right the first time. And Keynesian
thinking lies behind Obama's plans to rescue the economy." -- From the article

Just because Keynes wasn't proven wrong doesn't mean he is right. I don't
think he has put enough thought into this. The fact of the matter is our
financial system pretended there was whole lot more wealth than there really
was and not mention the fact they continued to trade based on that.

Niether trickling down money top down nor spending can solve this core issue
in my opinion.

