Tag: economics

Paul Krugman attempts to whitewash his record on the failed stimulus program:

Those of us who say that the stimulus was too small are often accused of after-the-fact rationalization: you said this would work, but now that it hasn’t, you’re just saying it wasn’t big enough. The quick answer to that accusation is that people like me said that the stimulus was too small in advance. But the longer answer is that it’s all in the math: Keynesian analysis provides numbers as well as qualitative predictions, and given reasonable projections of the economy’s path in January 2009, the proposed stimulus just wasn’t big enough. Let’s go back to the tape, January 9, 2009:

Even the C.B.O. says, however, that “economic output over the next two years will average 6.8 percent below its potential.” This translates into $2.1 trillion of lost production. “Our economy could fall $1 trillion short of its full capacity,” declared Mr. Obama on Thursday. Well, he was actually understating things. To close a gap of more than $2 trillion — possibly a lot more, if the budget office projections turn out to be too optimistic — Mr. Obama offers a $775 billion plan. And that’s not enough.

Brilliant stuff! How does he do it? And now let’s go back to the tape only two months before, to November 8, 2008:

I wrote this morning’s column partly because I had a hunch that the Obama people might be thinking too small on stimulus. Now I have more than a hunch – I’ve heard an unreliable rumor! So let’s talk about stimulus math, as I see it….So we need a fiscal stimulus big enough to close a 7% output gap. Remember, if the stimulus is too big, it does much less harm than if it’s too small. What’s the multiplier? Better, we hope, than on the early-2008 package. But you’d be hard pressed to argue for an overall multiplier as high as 2. When I put all this together, I conclude that the stimulus package should be at least 4% of GDP, or $600 billion.

Now, I may not be a Nobel Prize winner or a professional economist, but even lacking such credentials, I think I can successfully work out that $600 billion is SMALLER than $775 billion. Put not your trust in Keynesians.

“The development of a profession of economists is an offshoot of interventionism. The professional economist is the specialist who is instrumental in designing various measures of government interference with business.”
– Ludwig von Mises, Human Action

In other words, if you want to understand what’s actually happening as opposed to learning the latest justifications for more government intervention, you would be wise to find yourself an informed amateur. It wasn’t as if Smith, Ricardo, or Marx had any professional credentials, after all. And consider, for example, that Bruce Bartlett is the first professional economist to finally reach the conclusion that I have been telling everyone for literally years: there is nothing that either the government or the central banks can do to “fix” the financial crisis or the economic contraction.

For the last three weeks, my Fiscal Times columns have been focusing on Fed policy. The main reason is that although I think there is scope for additional fiscal stimulus, there is simply no support in Congress for doing more than has been done. Like it or not, those favoring stimulus got one bite at the apple and they didn’t do enough….

That basically leaves two things that the Fed can do: buy longer term securities and buy very unconventional assets such foreign currency denominated bonds. The first it has already done some of without doing much to get money circulating. The second would put the Fed at war with the Treasury, which jealously guards its dominion over exchange rate policy. It will also raise holy hell with the “strong dollar” crowd and undoubtedly invite foreign retaliation. It’s even possible that China could effectively sterilize the intervention by soaking up all the dollars created by the Fed.

Thus it appears that there is virtually nothing that can be done to stimulate the economy. For various reasons—political, institutional and substantive—there is no prospect of either fiscal or monetary stimulus.

More importantly, it wouldn’t work anyhow! Bartlett, who is correct in discerning that there is no realistic political chance for more fiscal stimulus even though he is incorrect to think it could possibly help, calls for “new thinking” on stimulus. I’d be happier if they’d all just throw up their hands in despair, admit that they have no idea what they’re doing, and stop digging the damn hole deeper.

David Brooks sounds uncharacteristically immoderate:

When historians look back on this period, they will see it as another progressive era. It is not a liberal era — when government intervenes to seize wealth and power and distribute it to the have-nots. It’s not a conservative era, when the governing class concedes that the world is too complicated to be managed from the center. It’s a progressive era, based on the faith in government experts and their ability to use social science analysis to manage complex systems.

This progressive era is being promulgated without much popular support. It’s being led by a large class of educated professionals, who have been trained to do technocratic analysis, who believe that more analysis and rule-writing is the solution to social breakdowns, and who have constructed ever-expanding networks of offices, schools and contracts….

This progressive era amounts to a high-stakes test. If the country remains safe and the health care and financial reforms work, then we will have witnessed a life-altering event. We’ll have received powerful evidence that central regulations can successfully organize fast-moving information-age societies. If the reforms fail — if they kick off devastating unintended consequences or saddle the country with a maze of sclerotic regulations — then the popular backlash will be ferocious.

The so-called “reforms” will fail. The entire Progressive Era dating back to Woodrow Wilson is in the process of coming to an end and there is absolutely no doubt about it. We can be assured they fail, beyond any shadow of a doubt, because centralized planning always fails in the end. The more complicated the latest iterative attempt to repair the incipient failure is, the faster the next failure arrives. The Misean concept of central information deprivation – not to be confused with F.A. von Hayek’s later refinement – first foresaw and explained this certain failure not long after the Progressive era began, in a monograph entitled Economic Calculation In The Socialist Commonwealth, published in 1920.

And yet, 90 years later, the technocrats still believe that this time, they’ll somehow be able to get it right. They won’t. The elites are still caught up in their fantasy that 2+2 can equal 5 if they can only come up with just the right bureaucratic incantation. But they never, ever will. What the technocrats keep failing to understand is that no amount of technological assistance in information gathering can resolve the problem, because in replacing the supply and demand mechanism of the market, the central planners have removed the very engine that produces the necessary information.

Let me explain. A computer can theoretically keep track of how many people wear tennis shoes, their usage patterns, and when those shoes are likely to wear out and require replacement. But what it cannot track or simulate for even a single individual is the marginal utility of a pair of new shoes to that individual in comparison with all of the various competitive options, which, it should be kept in mind, are not limited to footware. Nor can it even begin to calculate the way in which all of the possibilities and preferences of all of the individuals in the economy will interact, thus preventing it from being able to tell the planners how many pairs of tennis shoes or how much electricity must be produced next year.

As I wrote in RGD, the Story of the Pencil only tells half the story. It is a supply-side story that ignores the more important demand-side one, which is the story of the myriad assignments of subjective value assigned to a pencil made by the tens of millions of potential pencil-buyers who could have bought pencils but elected not to buy them at the available price. Until a computer can correctly calculate the statistical probability of events that never happened, technology cannot even begin to help central planners solve the economic calculation problem.

Ireland’s debt is downgraded:

Credit agency Moody’s has downgraded Ireland’s government bond ratings to Aa2, blaming banking liabilities, weak growth prospects and a substantial increase in the debt to GDP ratio…. The general government debt-to-GDP ratio was at 64 per cent at the end of last year, up from 25 per cent before the financial crisis took hold, and is continuing to rise.

I had Ireland, Spain, and the Baltic countries as the first to be downgraded. Instead, it was Greece, Spain, and Portugal that kicked off the sovereign debt spiral earlier this year. But it was only a matter of time before Ireland joined the party.

For those who are interested, here is a debt specialist’s opinion on what will happen in the Great Depression 2.0 scenario that I have been predicting: “Here is the Really Bad scenario. It’s not a worst possible scenario. It is more like the Long Depression or the Great Depression reoccurring under 2010 conditions. In the Really Bad scenario, 45% of the countries with large outstanding sovereign debts are in default within a 2-3 year period.”

HH dives in:

I’m just over halfway through RGD, and I’m really enjoying the read and the information. I’ve just become interested in economics, and I haven’t yet read much from many of the people you discuss in your book, but it blows my mind how Krugman could seriously believe any of what he writes. It would seem more reasonable to think that he has a mental illness or is a sociopath.

And it belatedly occurs to me that perhaps I shouldn’t have sent a copy of RGD to so confirmed a pessimist as Derbyshire:

“The car has already hit the tree and the bumper is already in the process of buckling inward, so there is no time to turn the wheel or fasten seat belts. It is too late to do anything but scream.”

Thus writes Vox Day in his recent book The Return of the Great Depression. Are things really that bad? And going to get that much worse?

I’m betting that they are. That’s a novice bet, as I am not a trained economist. I base it on a complete lack of seriousness among our political classes. It is obvious that our governments, at all levels, are spending far too much; yet there is little evidence of anyone being willing to do anything about it.

I completely understand those who don’t buy into the economic crisis talk; I can remember back in college how Marxists were supposed to have predicted 12 of the last two crises. But this isn’t the usual airy conjecture about the effect of the rise of Japan or the implications of the Chinese currency peg. This is relatively hard economics based on straightforward math. Unless you seriously believe that an economy can support an INFINITE amount of debt, there is a breaking point. Precisely where that is happens to be unknown, but that doesn’t mean the point does not exist.

But it appears, as per Derb, that I am no longer an outlier… alas. It would appear that my days as a rogue contrarian economist defying the staid order of the mainstream Neo-Keynesian orthodoxy in a bold and sexually thrilling manner are at an end.

On Hayek vs Keynes. Krugman redefines the concept of bizarre:

First, Hayek was as bad on the Depression as I thought. The claim that “many of the troubles of the world at the present time are due to imprudent borrowing and spending on the part of the public authorities” — in 1932! — is bizarre.

Yes, this graph of sovereign defaults from 1921 to 1980 quite clearly shows that there was absolutely no problem with imprudent borrowing and spending by the public authorities.  Here is the list of the 25 sovereign defaults covering the time that Hayek and Keynes were debating; from 1930 to 1934.  Notice that the bulk of them happened to come precisely in 1932.

Mexico, Ecuador, Bolivia, Brazil, Chile, Dominican Republic, Peru, Turkey, Liberia, Austria, Bulgaria, Colombia, Costa Rica, El Salvador, Germany, Greece, Hungary, Nicaragua, Panama, Paraguay, Cuba, Guatemala, Romania, Uruguay, Yugoslavia.

And the Keynesian “solution” to the problem didn’t help much either, since there were 14 more sovereign defaults before WWII ended in 1945:  Colombia, Poland, Brazil, Austria, Czechoslovakia, El Salvador, China, Germany, Austria, Japan, Poland, Turkey, Hungary, Japan.

The only thing that is bizarre here is Paul Krugman’s inability to connect “imprudent borrowing and spending by the public authorities” with historical sovereign defaults. Now consider how much panic has rocked the markets due to two mere threats of sovereign defaults by two very small nations, Dubai and Greece. Think about how many banks failed or were nationalized after the credit crunch of 2008. Then think about the possibility that no less than 25 nations default on their debts before 2014. Do you think that just might, perhaps, have some effect on the international financial system? Krugman’s Keynesian know-it-all act was always ridiculous, but now he’s fast approaching self-parody with his astonishing inability to comprehend that debt really is a problem despite the Keynesian model’s insistence otherwise.

And ignorant. And most importantly, demonstrably and provably wrong.

I’m Gonna Haul Out The Next Guy Who Calls Me “Crude” And Punch Him In The Kisser….

All through this debate, a recurring theme among anti-Keynesians has been that Keynesians like me or Brad are ignorant primitives who don’t know anything about modern macro. It’s really hard to see where that comes from, since I’ve done plenty of intertemporal optimizing in my time

Bring it on, Internet tough guy. Tell you what. I won’t even duck. And then, in the immortal words of one River Tam, my turn.

Oh, and as for why people think you are an ignorant primitive, this display certainly belongs on the list.

David Brooks is ever so polite as he expresses his doubts about the Neo-Keynesians call for a Third Stimulus, but there’s no question as to whom he is putting his genteel, moderate boot:

These Demand Siders have very high I.Q.’s, but they seem to be strangers to doubt and modesty. They have total faith in their models. But all schools of economic thought have taken their lumps over the past few years. Are you really willing to risk national insolvency on the basis of a model?

Moreover, the Demand Siders write as if everybody who disagrees with them is immoral or a moron. But, in fact, many prize-festooned economists do not support another stimulus. Most European leaders and central bankers think it’s time to begin reducing debt, not increasing it — as do many economists at the international economic institutions. Are you sure your theorists are right and theirs are wrong?

The Demand Siders don’t have a good explanation for the past two years.

No, they don’t. Nor will they have one for the next ten years. They’ll have an explanation all right – the bitter-end liquidationists didn’t let us spend enough money – but it won’t be a good one or a correct one.

UPDATE – And Krugman is forced to immediately start lying in response. “Funny, I thought we had a perfectly good explanation: severe downturn in demand from the financial crisis, and a stimulus which we warned from the beginning wasn’t nearly big enough. And as I’ve been trying to point out, events have strongly confirmed a demand-side view of the world.”

Krugman hopes we’ve all forgotten that he calculated a $600 billion stimulus was needed before the Obama administration championed the $787 billion stimulus passed by Congress.