Monday, November 26, 2012

Krugman Channels His Inner Crank

For many years I have said that Paul Krugman, academically-decorated as he is, really is not an economist but rather is a political operative with an academic pedigree. Today, I must add another description: crank. Yes, with his column today, Paul Krugman demonstrates beyond a doubt that he is a crank, a pure inflationist on the same level with that most famous crank, Silvio Gesell.

For all those who claim I exaggerate, I will let Krugman's own words speak for him:
For we have our own currency — and almost all of our debt, both private and public, is denominated in dollars. So our government, unlike the Greek government, literally can’t run out of money. After all, it can print the stuff. So there’s almost no risk that America will default on its debt — I’d say no risk at all if it weren’t for the possibility that Republicans would once again try to hold the nation hostage over the debt ceiling.

But if the U.S. government prints money to pay its bills, won’t that lead to inflation? No, not if the economy is still depressed.

Now, it’s true that investors might start to expect higher inflation some years down the road. They might also push down the value of the dollar. Both of these things, however, would actually help rather than hurt the U.S. economy right now: expected inflation would discourage corporations and families from sitting on cash, while a weaker dollar would make our exports more competitive.
This hardly is out of place with Krugman's other writings on the subject. Like all cranks, Krugman looks only at one side of inflation, the "deleveraging" side in which inflation in essence repudiates debt. He absolutely is correct when he says that since U.S. Government debt is denominated in dollars, should the government make its payments via newly-created money (ostensibly done by the Fed directly purchasing U.S. Government short-term debt from the Department of the Treasury), it will have fulfilled its paper obligations.

And he is right that such actions would create future inflationary expectations, but that also is good because that would force more investment or spending, and we could export more. You see? There is no downside to this scheme! Print, print, print, and print some more!

Yet, there IS a downside, and it is huge. First, let us deal with the "little guy," the one who Krugman claims will benefit most from inflation. Krugman assumes that this person, who ostensibly has little or nothing in savings, will not be hurt as prices rise. Yet, it is precisely the "little guy" who does not get the new money first, who does not receive the benefit of getting pay raises that allow him to keep up with the rising prices.

Instead, this person is faced with the prospect of becoming poorer in real terms. Certainly the Obama administration has pursued a policy of inflation, and I wonder how many readers have seen their incomes go up proportionally to their expenses for food, fuel, and other necessities. I doubt seriously that most readers can say that has happened, but that many more will say that prices for goods and services have gone up faster than their incomes.

Second, Krugman really wants us to believe that an inflationary climate will improve investment conditions. I'm not sure how that would happen, given that when there is noticeable inflation, people will put their money into things like gold, silver, and other items that tend to hold their value, something we saw during the late 1970s when we had double-digit inflation.

The other thing that would happen would be people getting out of the dollar, which also was the case during the late 1970s. No doubt, if such things happened, Krugman would call for capital controls, a prohibition on buying gold, and a general investment police state, as though such coercion and prosperity go hand-in-hand.

There is one other inconsistency to which I would like to call the reader's attention: If Krugman really does believe that printing money is a permanent solution to our budget problems, then why raise tax rates? For that matter, why have taxes at all, since we can print our way to prosperity?

I doubt he has a good answer for these questions other than to say that he doesn't want hyperinflation, just enough inflation to repudiate debts and cover the government's budget shortfalls. After all, Warren Buffett on the same editorial page has made the incredible claim that tax rates have absolutely no effect at all on investment. (I challenge readers to find anywhere in Buffett's article where he says tax rates matter.)

Those of us who were adults during the last wave of double-digit inflation remember that most people did not see inflation as a solution, but rather an outright crisis. Certainly, Jimmy Carter did not run for re-election on a platform of even more inflation. I guess he should have had Paul Krugman as his chief economic adviser.

29 comments:

sol-moras-segabinaze said...

Salvation through inflation, I don't even know what to say, this guy is a Nobel prize winner, he must know something we don't... Geez, that is sad.

Anonymous said...

Krugman is so intellgient that he's successfully figured out how to incorporate the genius of 4th grade logic into his articles. His experiences at MIT and Yale helped him to be the economist that he is today. Take his words seriously, Mr. Anderson. He is the economic Messiah that will save the economy. The rich will pay their fair share, the Republican Party will never win another election again, and Krugman will win another Nobel Prize for being the smartest economist in the world.

Good luck with that. John Maynard Keynes must be proud.

American Patriot said...

Nothing coming out of the mouths of progressives amazes me anymore. Not even the BEST of them has the logic and true intellect of a 10 year old when it comes to economics.
I mean just look at our esteemed president; the guy who admittedly thinks that profits and job creation are wholly unrelated matters.

That brings me to my larger point. Folks, I realize many here are libertarians and, as such, are not too keen on taking likes of Obama and his progressive ilk seriously. I am saying this because I know way too many libertarians who voted for Gary or not at all this past election. In the key states of FL, VA, and OH they made up more than the difference in votes Obama won by. So, consequently, we are stuck with progressivism run amok - unhindered by any force as Republicans in Congress are shameful bunch of enablers for these enemies of free society.

Whether you like it or not, between the libertarian stubbornness and the apathy of the 40% of electorate that didn't vote, our country is finished as a free nation. I am not saying that Romney would have been a great president, but he certainly would be more loyal to the spirit of our founding than any progressive.

So, why are we finished as a free nation? Have you seen the constitutional power grab by Obama during his first term? Federalism or the separation of powers mean nothing to this fool. He has no opposition and a corrupt judiciary to boot. He has succeeded in increasing the ranks of the dependancy class and will further increase it over the next 4 years. The critical mass that they need has been, or certainly will be by 2016, reached.
And the fiscal cliff? What cliff? They want us to go over it. Tax increases will all happen and none of the spending cuts (other than military) will materialize.

As the well known Piven strategy holds, they are collapsing the society so that they can build their utopian collectivist society from its ashes.

Finally, no, I am not a Glenn Beck style doomsayer. I just use my superior intellect and my knowledge of history as well as who these people are in arriving at the obvious conclusion that many do not want to see.

At this point, nothing short of a divorce between the two ideologies of individualism and collectivism can save us freedom lovers. It is secession or serfdom for us, as time will prove me right.
R.I.P. America. The requiem for us has been in the making for over a century now. It was nice while it lasted.

JFF said...

Heh, that Wikipedia entry on Gesell is comical to say the least. The "Opinions about Gesell" section is priceless; it reads like a TV advertisement for a really horrible movie that the studio has a boatload invested in, i.e., filled with gushing reviews by second-rate, no-name critics whose opinions don't matter to anyone.

Bob Roddis said...

I learned of the existence of MMT from the comments of "APLerner" on this very blog.

I predict that the entire Keynesian universe will go the way of MMT and simply propose that the government (without the help of central banks) can and should just print money out of nothing to fund their entire operations. As a bonus, there would be no need to tax anyone and thus get people mad at the government. Government funding would be through theft of purchasing power which the rabble seem unable to recognize.

On a related topic, MMT princeling Mike Norman yesterday posted a video of Peter Schiff explaining to Norman on TV in 2006 that housing prices were about to collapse. Norman laughed at him then. Norman's post of the old video yesterday has Norman suggesting that Norman got the better of Schiff then and now. Bizarre.

http://mikenormaneconomics.blogspot.com/2012/11/me-mmt-and-my-videos-getting-under.html

In other news, a Keynesian hack "Noahpinion" announces that "The Road to Serfdom" is about how Keynesian macroeconomics leads to serfdom which has been proven false. But not before mentioning "libertarian flirtations with 'scientific racist' ideas".

http://noahpinionblog.blogspot.com/2012/11/keynes-hayek-by-nicholas-wapshott.html

Our opponents are liars and morons. There is no other explanation.

Anonymous said...

Apparently for Krugman the "Confidence Fairy" is alive and well-- provided it is only described in the context of government behavior. And even then, so long as it is spending and/or regulating and/or inflating.

Any deregulation or spending reductions and we now have an unstable regime with very little actual multplier that you can put your finger on.

Anonymous said...

Inflation always appears to be Krugman's sole remedy for recession conditions, so I am none too surprised to learn that he is being this brazen about it lately. I read his book, The Return of Depression Economics, a while back, in which he opens using the infamous baby co-op analogy. The solution? To "print more coupons," of course. How should Japan deal with its recession after years of failed deficit spending and money printing? Why, more money printing of course! What caused the Great Depression? Hoover's failure to print more cash and rack up deficits (??)!

And this clown considers himself an empiricist?

jack said...

Here, Gary North neatly and succinctly ties together the four leading monetary cranks--Gesell, Irving Fisher, Keynes and Milton Friedman. Krugman begs to be added to the list. It'll go nicely with his Nobel.

Anonymous said...

Anderson - why don't you address this post from a few years ago?

http://krugman-in-wonderland.blogspot.co.uk/2010/06/commentary-on-current-bond-rates.html

how long do you have to be wrong before admitting how clueless you truly are?

Mike said...

Bob@11:07 said “…and simply propose that the government (without the help of central banks) can and should just print money out of nothing to fund their entire operations. As a bonus, there would be no need to tax anyone…”

Bob, in a perverse way, wouldn’t that had been a better path? Consider the following:

The Federal government has not balanced a budget in the last 25 years, thus has in fact borrowed money to pay interest on the Federal debt.

The accumulated interest payments for the last 25 years is approximately $8.6T which is about 52% of the $16.3 T in debt presently stated. Accordingly if the Treasury had just printed and spent the money instead of borrowing it there would be half of the imbedded “debt” burden on the economy. (I am using the word debt loosely here)

Now people will yell that would be inflationary to do so and yes it would be. But is it not less so because of the interest being absent? Would it not be more honest as well instead of burying the spending in debt instruments and pretending it will be paid back?

It’s the magic of compound interest in reverse that is going to kill this country. Don’t get me wrong, I’M not advocating the country live beyond its means only that printing may have been less harmful in the end than the fa├žade of borrowing and making banker rich in the process.

Mike said...

Anonymous @1:22
Is your suggestion that he was wrong based on the fact it hasn’t happened yet? Are you suggesting the laws of supply and demand do not apply to currencies and government bonds? Are you disregarding the distortions in the yields because Fed monetization of bonds? Are you ignoring the prospective manipulation due to interest rate swap agreements?

None of these things will work forever and there will be reconciliation. For the longest time the citizens of Pompeii ignored Mt Vesuvius. It hadn’t erupted yet so what was the big deal.

Bob Roddis said...

Just listen to Krugman 2003: (HT Bob Murphy)

…last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.

…we’re looking at a fiscal crisis that will drive interest rates sky-high….But what’s really scary — what makes a fixed-rate mortgage seem like such a good idea — is the looming threat to the federal government’s solvency.

…How will the train wreck play itself out? ….my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar.


http://www.nytimes.com/2003/03/11/opinion/a-fiscal-train-wreck.html

Tom E. Snyder said...

Krugman needs to watch these:

http://tomesnyder.blogspot.com/2012/11/quantitative-easing-explained.html

http://tomesnyder.blogspot.com/2012/11/austrian-business-cycle-theory-explained.html

William L. Anderson said...

Bob, you are a genius! Thanks for that one.

Bob Roddis said...

Bob Murphy found it. Where's Lord "Rain Man" Keynes?

http://consultingbyrpm.com/blog/2012/11/an-oldie-but-goodie-2.html#comments

Bob Roddis said...

And Krugman admits his error:

http://krugman.blogs.nytimes.com/2012/01/02/mistakes-and-how-to-deal-with-them/

R.R. said...

Krugman is a socialist. He is just inventing excuses for government to increase its power over the economy. He doesn't care that it is false, or that it will hurt the economy.

Russia had high inflation in the late 1990s. It was not good for the economy, it was terrible. People got poorer from inflation. Investors fled the country. Krugman pretends they can't flee and that "the little guy" never has to visit the grocery store.

He got the Nobel Prize only because the government-owned central bank in Sweden is also run by socialists.

Pulverized Concepts said...

Krugman's prescription is exactly that of the most enthusiastic MMT proponents, Warren Mosler and the economics dept. at U. of Missouri-Kansas City.

Bob Roddis said...

FYI, I think everyone should be aware of the tactics and proclivities of former Austrian Gene Callahan, such as this:

http://noahpinionblog.blogspot.com/2012/11/keynes-hayek-by-nicholas-wapshott.html?showComment=1353972129707#c5255794588528043988

Bob Roddis said...

From the “Krugman Ignores His Own Theory and Misses An Important Piece of European History” post, Bob Murphy quotes Krugman saying:

What [a critic of the fiscal scaremongers] doesn’t note, however, is that the problem with bond vigilante scare tactics runs even deeper than that — because it’s actually quite hard to tell a story in which a loss of confidence in U.S. bonds hurts the real economy. Why wouldn’t it just drive down the dollar, and thereby have an expansionary effect?

http://consultingbyrpm.com/blog/2012/11/krugman-ignores-his-own-theory-and-misses-an-important-piece-of-european-history.html

The only way that driving the dollar down would have an “expansionary effect” would be because people did not realize that the prices and wages they accepted were being lowered without their knowledge or permission. And Gene Callahan wants to know the importance of Hayek saying on TV in 1977 that the purpose of “The General Theory” was as an ad hoc policy proposal designed to inflict the same thing on British workers. No news there.

So again, why can’t we just explain the situation to people like adults that monetary policy has resulted in their wages and prices being too high? Why the Keynesian emphasis in practice upon subterfuge through money dilution and how is that possibly “democratic”? And why are opponents of the policy fools and idiots?

Further, Noahpinion wrote this:

This foreshadowed the unfortunate libertarian support for dictators like Augusto Pinochet, as well as more recent libertarian flirtations with “scientific racist” ideas.

http://noahpinionblog.blogspot.com/2012/11/keynes-hayek-by-nicholas-wapshott.html

So, in response to me linking to Hayek’s interview on “Firing Line” in 1977 and posting a transcript in the comments, Gene Callahan wrote:

It is true that Bob Roddis’s comments are much more disgustingly wrong than Noah’s were!

FYI. For future reference.

Bob Roddis said...

For some reason, Gene Callahan does not like that 1977 Hayek video interview.

http://tinyurl.com/c2d9dxc

PaulTheCabDriver said...

@ American Patriot: So Romney was our saviour, and we rejected him with cries of "Barabbas, Barrabas!"? Is that what you're trying to say??
HAHAHAHAHA!!!!!
In case you didn't notice Romney held the exact same opinions as Obama, and the exact same supporters.
Constitutional power grabs? Hell, presidents have been doing that since Washington (who committed treason by leading an army into Pennsylvania). That Obama's power grabs are more obvious is only because they are so recent.
You say "At this point, nothing short of a divorce between the two ideologies of individualism and collectivism can save us" and you are absolutely right. Now, why not practice what you preach and divorce yourself from the collectivism of the Repulsive Party?

William L. Anderson said...

For me, that divorce took place years ago. I registered as a Republican in order to be permitted to vote for Ron Paul in the primary. Now that the election is over, I will have to go back to being an independent.

The real problem is that both parties are so corporatist that it is almost impossible for any entrepreneurial firm to operate independent of politics. Both parties have made it clear that they have to choose sides...or else. Before Clinton went after Microsoft, the company (along with a lot of other high-tech firms) did not have an office in Washington nor did it send much to Washington in the form of political contributions.

Following the DOJ's attacks on the firm (promoted by the NY Times and Washington Post and the broadcast media, of course), Microsoft and the other firms got the message and now have joined.

We tend to blame the business firms for the corporatism, but in the end, they have to be that way if they want to survive. This is not to excuse their behavior, but rather to point out that Fred McChesney was right when he said that a lot of campaign contributions really are nothing more than protection money to protect firms from predatory politicians.

Bob Roddis said...

Just last night, I had similar thoughts as Prof. Anderson on Warren Buffett:

http://www.economicpolicyjournal.com/2012/11/norquist-buffett-is-crony-capitalist.html?showComment=1353976284484#c218107630872573404

G Wolf said...

@American Patriot:
You wrote:
"In the key states of FL, VA, and OH they made up more than the difference in votes Obama won by."
That's just incorrect.
In FL, the difference was about 74K, while Johnson got about 45K votes. In OH, it was about 104K, while Johnson got 47.5K. And in VA, the difference was about 149K, while Johnson got 31K votes.
Florida was actually the closest Johnson came to influencing the vote, where his total was about 60% of the Obama-Romney difference. In NC it was about 48% of the difference, and about 46% in OH. The only other state that came close was NM, where his 28K votes were about 35% of the Obama-Romney difference (79.5K votes).

Bob Roddis said...

I think it's best that Obama will preside over the ghastly implementation of Obamacare and the coming economic collapse. If Romney were elected, the media would be blaming everything on laissez faire dog-eat-dog capitalism.

American Patriot said...

I agree with Bob that it is better that Dems (collectivists) will preside over the great collapse. Romney would have just put it off by a few years. No politician under our current system will be able to (or want to) reform the entitlements as the system is wholly corrupting and punitive towards honest, patriotic politicians. Neverthless, Dems will probably successfully blame the Reps for the collapse anyways.

That being said, Paul (the cab driver) needs to learn to distinguish between shades of collectivism. He is clearly clueless of what has happened over the past 4 years. I defy him, in fact challenge him, to find a more corrupt and outwardly hostile president towards our constitution as Obama has been in the past half century (and yes, that includes LBJ).

As to G Wolf's comment, I said "between libertarians and apathetic voters who didn't vote". You are right in that Johnson votes by themselves were not sufficient to swing the election.

Finally, professor Andersen, you are right about corporatism. That brings me full circle back to the need for political reforms without which NOTHING will be reformed and we will collapse as a society in the worse way imaginable. So, how do we make politicians responsive to the needs of the country? By making them powerless to a great extent. At a bare minimum, we need:
§ strict term limits (2 terms in Senate and 4-6 in the House)
§ cut all benefits of politicians including eliminating life time pensions, Cadillac health plans, various immunities from law, etc.)
§ take all private money out of politics so that elections are publically funded with set small amounts for each seat
§ politicians must be banned for life-time from lobbying once elected to Congress

These are the minimum reforms required with more to come regarding laws themselves, the powers of the presidency as well as the judiciary, etc. If politics doesn't pay (in power and financially), then it will no longer be the magnet that it is for those who are corrupt or get in to it for their ego only.

None of this will happen because a) politicians will never cut their own throats off, and b) the extensive nature of constitutional amendments necessary makes it impossible for 2/3 of the states to agree (since about half are blue states controlled by collectivists).
Hence my divorce conviction. Like the professor says, divorcing one's self from the political parties does nothing to save the country. It is the states that have to divorce themselves first. Then the more classical liberal states will need to revise the constitution so that this mess can hopefully be avoided in the future.

P.S. Sorry to rain on your parade but none of what is being discussed here ultimately is all that relevant. I realize this is an economics related blog, but i am sure they - the dissidents - were discussing free market ideas even in the U.S.S.R. and China in the 70s and 80s. If the political environment isn't condusive, it is all irrelevant.
Rome is burning guys. Wake up and stop being selfish (meaning isolationist in this case)

Anonymous said...

Buffet was being a little more subtle than just saying that tax rates affect investments. He was saying that he never stopped making a profitable investment because of the tax rates. What he did not say is that he uses the tax rates in his analysis of the future profits of the investment and on the future returns from the investment. Is this playing “Lawyer Ball” with the facts, sure but this is politics and Buffet has been for years trying to buy his way into the good graces of the Democratic establishment.

In my opinion he and the rest of us would be much better off if instead of playing politics, he uses the more traditional and direct method to get power and have everybody love you. That is to buy a NFL Franchise. And that will only add to society or at worst keep it the same instead of working to hike up tax rates on the most productive and innovative people which is guaranteed to make it worse.

Mike said...

" he uses the more traditional and direct method to get power and have everybody love you. That is to buy a NFL Franchise."

LOL That is FUNNY! Sadly because its true. Good one.