Archive for ‘Paul Krugman’

June 22, 2009

Liberals try to spin the market

Since December, I’ve been warning that the massive deficit spending of the Democrats’ neo-Keynesian “stimulus” agenda would lead to ’70s-style stagflation. Three words: It Won’t Work.

Financial markets are now proving it won’t work. The lead item in today’s “A.M. Market Update” at is about how massive government deficits are pushing up mortage rates, and thus destroying the hope for recovery.

As I’ve also told you, however, liberals think that economics is a popularity contest, so now they’re attempting to “spin” the market, as if the market were a political campaign. Liberal economist Alan Blinder takes to the op-ed pages of the New York Times to declare that fears of inflation are irrational. The “experts” at Treasury and the Fed have it all figured out, Blinder assures us. Trust the experts!

Speaking of experts, liberal economist Paul Krugman gets a needed spanking from Cato’s Alan Reynolds:

In his June 15 column, “Stay the Course,” Paul Krugman suggests it is simply foolish to worry that the government could possibly borrow too much, or that the Federal Reserve might buy (“monetize”) too much of that debt.
In a closely related blog, claiming Art Laffer is “way off base” about future inflation, Krugman insisted “for the 1.6 trillionth time, we are in a liquidity trap.” That makes 1.6 trillion times he’s been wrong about that. . . .

You should read the whole thing. It’s a classic: A major reason Krugman can’t predict the future is because he gets his economic history all wrong.

What Krugman, Blinder and other liberals are trying to do is to deceive the financial markets. Investors are clearly worried about deficit-fueled inflation — an utterly rational concern, given current policies. So Krugman and Blinder are using the world’s most influential newspaper in a propaganda campaign to convince these investors that their common-sense concerns are unwarranted.

If this propaganda campaign succeeds — which it won’t, because it can’t — would have the politically benefit to Democrats of preventing the federal government from having to pay higher interest on those massive deficits.

There’s an old saying that “money talks,” and you know what the other half of that saying is. The economic bovine excrement peddled by Blinder and Krugman won’t walk too far.

Ultimately, the market is immune to “spin.” Over relatively short periods of time, the market may be irrational, but in the end, you get what you pay for. And what the Democrats have been buying — with massive amounts of borrowed money — is a perfect formula for stagflation.

The recession will get worse, not better, as a result of their policies. After a three-month “sucker rally,” the markets are sobering up to the fact that the fundamentals suck. Hello, Weimar America.

June 14, 2009

It’s not every day I quote Krugman

And more or less favorably at that!

In an interview with the British Observer, liberal economist Paul Krugman confronts the possibility that our current economic problems do not lend themselves to a quick fix:

The risk for long stagnation is really high . . .
The size of the shock to our systems is going to be much bigger than what happened to Japan in the 1990s. . . .

Most people seem to believe that the mess we’re in is just an ordinary recession — a few quarters of bad news, and then we’ll be right back on our feet again. The problem with that belief is that the disastrous meltdown of housing values over the past three years is unprecedented in recent American history.

Not since the crash of 1929 has the U.S. economy sustained such a drastic loss of asset value. Recovering from that kind of catastrophe will not be easy or quick, and fully recovery will only be delayed by the kinds of neo-Keynesian approach being pursued by Pelosi, Reid and Obama.

The Fundamentals Still Suck, and The Worse Is Yet To Come.

UPDATE: How bad is it? Joe Biden admits they “guessed wrong” about the stimulus. Heh.

May 1, 2009

Of Hope and Hubris

Less than six months after the 2008 election, and just past the 100-day mark of Barack Obama’s presidency, liberals have begun congratulating themselves on the triumph of their ideas. Paul Krugman on global warming:

The 2008 election ended the reign of junk science in our nation’s capital, and the chances of meaningful action on climate change, probably through a cap-and-trade system on emissions, have risen sharply.
But the opponents of action claim that limiting emissions would have devastating effects on the U.S. economy. So it’s important to understand that just as denials that climate change is happening are junk science, predictions of economic disaster if we try to do anything about climate change are junk economics. . .

And here’s Josh Marshall on same-sex marriage:

I think most of us can see that despite some painful setbacks, and likely more to come, time is definitely on the side of marriage equality in the United States. But are we hitting some sort of tipping point under a new administration and with a rush of recent successes in several states around the country?

Think back to the 2008 campaign and ask yourself: Did Obama and the Democrats win because of gay marriage and global warming? Obviously not. It was the economy, stupid. And yet in the wake of that election, liberals now believe they have a mandate to enact their entire agenda.

Ah, but what about the economy? Megan McArdle has a 1,070-word article at the Atlantic Monthly examining the basic math of Obamanomics. It’s so good, it feels unfair to attempt to characterize it by excerpts, but here is the key part:

It’s probably no exaggeration to say that Obama’s presidency will ultimately stand or fall on its handling of the financial crisis. And at this point, with respect to all the frantic activity, the polls seem to be saying, so far, so good. . . .
Of course, Jimmy Carter’s early approval ratings hit 70% before beginning their long downward slide. And Bush’s ranged as high as 95% after 9/11. As the Wall Street prospectuses all say, past performance is no guarantee of future results.
Still, Obama’s performance thus far ought to offer some clue: has he set the stage for economic victory, or defeat? In some sense, for all its exertions, the Obama administration hasn’t actually done all that much.

Megan then proceeds to dismantle the fiscal assumptions of Hope, and you should read the whole thing. It is not unfair to summarize her analysis in three words: It Won’t Work. The stimulus-and-bailout policies have not addressed the fundamental problems of the economy — namely, an excess of debt and a shortage of capital to spur job creation — while the entitlement trainwreck of Social Security and Medicare loom immediately ahead. By piling on new trillion-dollar deficits, at a time when the recession will result in significant tax revenue shortfalls, the Democrats are steering the economy into a stagflation trap.

If the economic situation actually worsens between now and fall 2010 — and there are many reasons to believe it will — the public-opinion polls of April 2009 will have proven a false omen, which served only to swell the pride that went before the fall.

UPDATE: Welcome Red State readers and other disciples of blog-fu sensei Moe Lane, who says:

Not to be a broken record about this, but I didn’t need Megan to tell me that we enjoy, ah, suboptimal economic oversight. . . . Or that the current administration seems to default to style over substance.

So how come we can see this and yet (if polls are to be believed) Obama’s approval rating is at something like 110 percent? Might I suggest that we are paying the price of an educational system that renders a majority of Americans ignorant of, or misinformed about, basic economics?

UPDATE II: At The American Spectator, commenter “Indiana Alex” summarizes a fundamental problem with Obamanomics:

The shortage of capital is going to be even more severe given the extent of government borrowing.

This is why stagflation is the inescapable result of the current policy. Begin with the fact that the collapse of the “housing bubble” has left millions of Americans saddled with a huge debt load for illiquid assets (i.e., their homes) that cannot be sold for a profit or leveraged to acquire additional liquidity. Now, consider that the stock-market collapse (i.e., from a 14,000 Dow to an 8,000 DOW in less than three years) has severely depleted the 401Ks and IRAs of tens of millions more Americans.

Between the declining market value of their homes and the declining market value of their retirement accounts, these individual Americans who had positive net worths in 2005 are now in no position to make new investments that would create jobs. The total supply of American capital has thus been diminished by a sum of however many trillions.

The Obamanomics answer to this is for the government to borrow many trillions more, in order to fund an expansion of public-sector programs. And government must borrow this money from the same global credit pool already depleted by the loss of capital caused by the collapse of the bubble.

Guess what? Foreign investors balked at the last offering of Treasury notes. As a result, the Federal Reserve bought the unsold balance of this new debt, which means . . .?

Very good, class! The Fed will just turn on the printing presses to produce “new” money to account for the additional federal debt. This is inflation, which further erodes whatever asset value individuals had after the collapse and therefore leaves them less able to make new job-creating investments than they were before the enactment of these stimulus-bailout policies.

The erosion of currency value makes U.S. debt even less attractive, since inflation will cheat investors out of what interest would be paid on new bond issues. Thus, Geithnerism/Obamanomics results in a federal fiscal/economic policy that is chasing its own tail, a descending spiral of recession and inflation.

This is not merely The Road to Serfdom, but the road to Weimar America. Even if Obama, Geithner, Pelosi and Reid wised up tomorrow and suddenly reversed course by enacting sound policy, it might take 18 to 36 months of serious economic pain before we’d see anything like a real recovery. And since there isn’t the slightest hope that they’ll do the right thing, this crisis is going to get much worse over the next several years.

Things are about to get very, very bleak, and I’ve heard some informed investors talk about the Dow not reaching a bottom above 4,000.

UPDATE III: Professor Thomas Woods:

In a nutshell, the point is that when the government’s central bank intervenes in the economy to push interest rates lower than the free market would have set them, the result of its tampering is a massive cluster of errors . . . on the part of investors and consumers alike.

Of course, the professor’s new bestseller, MELTDOWN, has been a must-read recommendation here for weeks. He makes clear that it is a fundamental error to describe the Bush administration’s fiscal/monetary policies as “conservative.”

April 13, 2009

Instapundit on dead tree?


That might be the headline in the New York Post for his column on the Tea Party movement:

Instead of the “astroturf” that has marked the ACORN-organized AIG protests, this movement is real grassroots. So if you’ve had enough, consider visiting a Tea Party protest in your area — there’s bound to be one.
It’s your chance to be part of an authentic popular protest movement, one that just might save America from the greed and ineptitude of the folks who have been running it into the ground.

Like he’s not worried about being replaced by Twitter.

UPDATE: Of all the dead-tree columnists who should be replaced by Twitter, perhaps not even Frank Rich can rival Paul Krugman:

[The Tea Party protests are] AstroTurf (fake grass roots) events, manufactured by the usual suspects. In particular, a key role is being played by FreedomWorks, an organization run by Richard Armey, the former House majority leader, and supported by the usual group of right-wing billionaires. And the parties are, of course, being promoted heavily by Fox News.

JournoList-approved Meme of the Week! But it’s just a coincidence that Krugman’s reading from the same script as Jane Hamsher, Steve Benen and Oliver Willis. Their smear campaign against the Tea Party movement isn’t “orchestrated” or anything.

Right-wing billionaires, please hit the tip jar! My bank balance is looking shaky, Dick Armey isn’t returning my calls, I’ve got to drive to Alabama tomorrow in order to be an AstroTurf stooge at the big event Wednesday in Hoover, ande my wife’s worried because the fat check from Rupert Murdoch hasn’t shown up yet.

January 27, 2009

A mighty big ‘if,’ sir

Doing battle with economists Eugene Fama and John Cochrane, who argue that deficit spending by government ultimately discourages private investment, Paul Krugman engages in one of those magic hypotheticals beloved by Keynesians:

Similarly, after a change in desired savings or investment something happens to make the accounting identity hold. And if interest rates are fixed, what happens is that GDP changes to make S and I equal.

If interest rates are fixed! Does Krugman mean to propose fixed interest rates? It’s like the joke about the chemist, the engineer and the economist stranded on a desert island, where they discover a castaway cache of canned food. After the chemist and the engineer each suggest their own distinctive proposals for a way to open the cans, the economist says, “Step One: Assume a can opener.”

Government borrowing represents demand for credit, and if government responds to a recession by massive borrowing, this increased demand means that the price of credit (i.e., interest) can be expected to rise. The rise in interest rates thereby reduces the credit supply for private investment, and the economy cannot grow without private investment.

Generally, however, a heavily indebted government (as ours is) will attempt to defraud its creditors via inflation, paying back today’s dollar with devalued dollars, which in turn will cause creditors to charge the government higher interest to offset the anticipate loss. It was the U.S. government’s attempts to play this game — devaluing the dollar while simultaneously borrowing heavily and also inflicting job-killing taxes — that led to the “stagflation” spiral of the 1970s.

“Stagflation” was the ultimate disproof of the Keynesian theory of “equilibrium,” which saw government manipulation of the economy as a trick of balancing unemployment vs. inflation. The possibility of both unemployment and inflation rising simultaneously was something never contemplated by the Keynesians, nor did they ever envision the result of Reagan’s supply-side revolution, which nearly eliminated inflation while simultaneously resulting in full employment.

Neo-Keynesians like Krugman are trying to pretend that we did not learn what we learned, and that we do not know what we know. A Nobel Prize-winning ignoramus!

UPDATE: By God, the more I think about it, the angrier I get. You don’t have to have a Ph.D. to understand economic basics: Supply. Demand. Talk amongst yourselves.

For me, this all goes back to the feud between David Stockman and the supply-siders in the Reagan years. Stockman had a very good point, namely that for political reasons, the Reaganites refused to force a showdown with Democrats in Congress over the continued growth of federal spending. But the supply-siders argued that, (a) with tax cuts unleashing economic growth, and (b) the attendant growth in federal revenue, then (c) additional federal spending was affordable, and (d) what really counted, in macroeconomic terms, was the size of federal spending in relation to GDP. So, even though government was growing, in real terms, it was actually shrinking in comparison to the overall economy.

Thus spake the supply-siders, at any rate, but Stockman was still right about the lack of political courage among Republicans. If the federal government in 1980 was too big, too powerful, too expensive, and doing too many things it had no constitutional authorization to do — which was the fundamental premise of the Reagan campaign, vis-a-vis domestic policy — then this argument about the relative size of the government vs. overall GDP was just an excuse for not doing what Reagan had pledged to do.

And now, in 2009, we find that the clients of Uncle Sam refuse to give up a nickel of their slice of the taxpayer pie, so that Obama can propose a vast and expensive stimulus, and most so-called “conservatives” don’t have any coherent argument to offer in reply. The abandonment of sturdy principle thus results in ever-weakening opposition to the liberal Leviathan.

December 1, 2008

Krugman’s thesaurus

“Fiscal expansion” = deficit spending

Now he’s working on the Nobel Prize for euphemisms.

November 29, 2008

Amity Shlaes vs. Paul Krugman

Amity Shlaes’ excellent history of the Great Depression, The Forgotten Man, has already been featured in our Holiday Book Sale, and today she takes on Paul Krugman:

Paul Krugman of the New York Times has been on the attack lately in regard to the New Deal. His new book “The Return of Depression Economics,” emphasizes the importance of New Deal-style spending. He has said the trouble with the New Deal was that it didn’t spend enough. . . .
New Dealers raised taxes again and again to fund spending. The New Dealers also insisted on higher wages when businesses could ill afford them. Roosevelt, for example, signed into law first his National Recovery Administration, whose codes forced businesses to pay an above-market minimum wage, and then the Wagner Act, which gave union workers more power. . . .
High wages hurt corporate profits and therefore hiring. The unemployed stayed unemployed.

As I said Monday, many of Obama’s supporters “will be disheartened to discover that there is no magic in Obama’s economic plan, a patchwork of warmed-over Keynesian ‘pump-priming’ claptrap as stale as the memory of Hubert Humphrey.”

It is evident that many liberals (even Nobel prize-winning liberals) simply can’t shake their mental addiction to the Keynesian fallacy. Back in the ’60s, liberals prescribed Keynesian “solutions” to an economy that was already running at full tilt, and the ultimate result was the “stagflation” of the ’70s. Now, amid a deflationary financial freeze, their answer is yet more Keynesianism. When the only tool you’ve got is a hammer, every problem looks like a nail.

Don Boudreaux on the Keynesian demand-side obsession: “It’s ultimately futile as a means of restoring vigor to a market economy.” More comment from Bill Anderson and McQ.

If you don’t get what’s wrong with Keynes (and Krugman), let me try to explain what is really meant by “supply-side” economics. Keynesians have always focused on the demand side of the supply/demand market equation, trying to figure ways to boost consumer buying power. The genius of Art Laffer and the other so-called supply-siders was to realize that the secret of capitalism is . . . (wait for it) . . . capital.

You might have figured this out yourself, if you’d ever tried to start a business with change you found under the sofa cushions. Capital investment is the secret of creating new jobs, and the secret of promoting capital investment is a business environment that offers the opportunity for . . . (wait for it) . . . profit.

Once you understand that, political economy (which is what most people mean when they talk about “economics”) becomes fairly simple. Governments worldwide make policies that have economic impacts on the business environment. The secret of success is to make policies that allow the kind of profit opportunities that will attract capital investment.

Keynesianism doesn’t address this fundamental economic reality. The Keynesians suffer from a fixed-pie (static) conception of capital investment, and can never seem to grasp how their tax/spend/regulate approach serves as a disincentive to investment in a dynamic economic environment. They bitch, bitch, bitch about “outsourcing” and “offshore investments” without ever confronting how their policy schemes contribute to this exodus of capital.

UPDATE: Marion Maneker sneers at the “troglodyte right” (!) for their admiration of Shlaes’ book, and then cites Megan McArdle’s criticism of Shlaes: “There is an academic argument that the National Recovery Administration prolonged the Great Depression. . . . But the Great Depression is complicated, and it’s hard to make the case that government intervention was the main problem with the economy.” A criticism that, even if accurate, does not vindicate Krugman!

It is not necessary to believe that “government intervention was the main problem with the economy” in the 1930s to believe that the interventions were, both specifically and generally, an impediment to recovery. There were fundamental economic problems (including the moribund condition of Europe) that, in the 1920s, led to the Crash — a classic financial “panic” of the sort that the American economy had experienced before.

In the past, these panics had been sudden and severe, followed by a year or two of sharp recession, and then a gradual recovery. The fact that the normal historic boom-bust-recovery cycle didn’t happen after 1929 — that instead the crisis extended for a full decade and did not end until World War II — is the salient fact to be explained. And this Shlaes has sought to do. (See also Jim Powell’s FDR’s Folly and Burt Folsom’s New Deal or Raw Deal.)

Obviously, the Smoot-Hawley Tariff was a big contributing factor to to the Depression (protectionism doesn’t work), but since that was a Republican policy, liberals don’t waste their time defending the tariff. Where they get flinchy is when Saint Franklin comes under attack, because Roosevelt’s approach — programmatic interventionism — is still the basic liberal economic policy 75 years later. To say that the New Deal didn’t work, that it in fact made the Depression worse, is to undermine the entire economic rationale of the Democratic Party. And thus Krugman’s partisan hostility to Shlaes.

Say what you will about Bill Clinton, at least in his embrace of global free trade, Clinton tried to break free of partisan dogma (Democrats having adopted protectionism about 40 years after Republicans abandoned it). As is becoming increasingly clear in the current crisis, most liberals are still clinging desperately to Keynesian nonsense like a frightened child clings to a security blanket. They would rather preserve their dogma than do things that might actually foster economic recovery. And I’m a troglodyte?

UPDATE: Krugman fires back. Nothing like a full-on pissing match between the Wall Street Journal and the New York Times. Life is good. And Alabama’s leading Auburn 10-0 at the half.

UPDATE II: Linked by Fausta. Thanks.

November 28, 2008


Harvard economist Greg Mankiw:

Of course, if one defines “grownup” as a person who agrees with Paul Krugman, and “hack” as a person who does not, then one might come to a different conclusion.

The important thing is not Krugman or his opinion, but the fact that nothing proposed by Team Obama will fix the economy. It’s all warmed-over Keynesianism, and it won’t work. But when it comes to simple arithmetic, Mankiw smokes Krugman.