Economics, Krugman, and the Truth

Monday, June 1, 2009

I know many conservatives are going to wonder why I’m wasting my time with Krugman. However, Krugman highlights a thinking and attitude that as Krugman spews, the rest of the media in the US prints. I want to plug Nick’s blog, It’s just my opinion, I could be wrong, who posted on Krugman’s Op-Ed late last week called “The Big Inflation Scare” and did an excellent job.

I need to backup and preface my discussion a little before I continue. First of all, economics is a fickle subject, which is one of the reasons I chose Business and Accounting to study for my Masters. For every Nobel economist like Krugman trumpeting one policy, there is another Nobel economist with as many accolades trumpeting the exact opposite policy. After all the chips settle, both will still be arguing who was more right and both would cite reasonable points to back themselves up. Even Krugman in his piece points out, that economists do not always see things in the same way. Also it should be noted that I am an economics light weight in comparison to Krugman. The pinnacle of my economics profession peaked as a TA teaching intro to economics and giving a single presentation on the economic development of Asian nations to the NYS Economics Association. Krugman on the other hand, owns a Nobel Prize and does economics for a living. I highlight these differences because Krugman’s arguments are so week in his recent piece, that even I, do not have a problem picking out his flaws. In short, his piece was big on political spin BS and very light on actual economic reasoning.

Krugman writes:
“But it’s hard to escape the sense that the current inflation fear-mongering is partly political, coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy. And their goal seems to be to bully the Obama administration into abandoning those rescue efforts.”

This is Krugman’s big conclusion so I figured I’d handle it first. Here Krugman is claiming that the economists opposed to his ideas are simply being “political.” He obviously hasn't thought of this, but if you are going to accuse other’s of being motivated by politics you may not want to be speaking via the progressive Obama mouthpiece called the NY Times. The same Krugman who regularly writes on politics, often leaving the realm of economics to do so and who vehemently supports Obama is accusing other’s of being political in their economic ideology. Here is a recent blog post from Krugman displaying his one-sided political world-view on conservatives (on a side note: I can’t believe these quotes are the best Krugman’s got on 2 out of how many conservative representatives), now you tell me if Krugman is not political.

Without even looking at the economics of Krugman’s arguments, Krugman discredits himself in part for his political views.

Here are the highlights of his political arguments:

* Reports that the FED and US government are printing money are false. They are buying lots of US debt and paying for it by crediting banks with extra reserves. C Gen’s response? THAT’S THE SAME THING AS PRINTING MONEY! Whether you are playing with financial monetary accounting or printing dollars, both expand the money supply.

* We inflated our money supply during the Great Depression and never saw inflation even as people were screaming that inflation was on its way. First of all, today’s economy is nothing like the economy of the Great Depression. Also, there is a very good reason why the US never saw inflation from FDR’s policies. The answer is WWII. After WWII, the only economy standing was the US. As a result of this and the gold standard, the world soaked up all the extra dollars the US had printed thus saving the US from the throws of inflation.

* He also goes on to state that there is no reason to worry about debt-to-equity in the US exceeding even 100%, because “hey, Belgium, Canada, and Japan got away with it.” Yet he doesn’t want to mention the UK, which is having trouble at this very moment for the level of debt that they are carrying.

* Krugman writes, “Still, don’t such actions have to be inflationary sooner or later? No.” Krugman clearly believes that inflationary fiscal and monetary policy will fight deflation, but somehow inflation will magically stop once the economy has turned around. If inflating your debt and currency doesn’t cause inflation, then I’m not sure anything causes inflation. In fact, I would have to doubt that inflation was even possible. While Krugman is able to quote a few places where inflation hasn’t occurred, I could quote thousands where it has. For example, just about every single developing nation in the world.

Here is the deal with Krugman. It’s not that he doesn’t know what he’s talking about that makes him sound a little silly. It’s what he does know and might be correct about, but not telling you that explains why his arguments are light on substance. The reason why Krugman and the FOMC are not worried about inflation in the short term is because the economy is not really turning around. Sure we may see a little bit of positive GDP growth over the next few years (that’ll be enough to call the recession ended), but the real story that is emerging is that we are going to have lots of unemployment. So long as there is unemployment, the progs are not worried about inflation. Why? Because when people are unemployed, prices become inelastic and businesses cannot pass cost increases onto consumers. So the companies are going to foot the costs instead of pass them onto consumers? No! What they are going to do is hold wages down, or decrease them, or better yet, put more people out of work.

To sum it up! The progs are betting that we don’t have to worry about inflation, because their policies are so bad by creating debt and increasing money supply they hope that they will put enough people out of work to stop inflation.

Suprisingly, even causing unemployment might not be enough. Here are several reasons why we may see inflation anyways. Mortgage foreclosures hit a record high of 12%. That means that those banks that we were thinking were starting to fix their liquidity problems are really still in very big trouble. We may just have to do more of that printing, but not really printing money scheme to bail them out further. Also, there is a quickly growing trend to move away from the dollar as a world currency. China, Brazil, Saudi Arabia, and now South Korea are all starting to divest in the dollar. Moody is considering down grading the US Treasury ratings and have already done so to the UK (the UK is in the same economic monetary and fiscal position that the US is in). Krugman and the progs may not think that the US dollar is going to be inflated anytime soon, but increasingly the rest of the world is.

You’d have to go outside the US to find harsh economic criticism regarding Obama’s economic policies, but here it is:

Here’s one from Canada
Here’s one from Australia

Here’s one from Russia
Here’s one from Warren Buffet (ok he’s in the US, but he did support Obama)

It’s clear that Obama continues to treat the US population like children and spoon feed them ideas of hope. He’s letting people believe that there is hope in our time. He’s making very important economic decisions without being frank with the American people. You have to ask yourself, “is this exactly what I voted for?” A candidate that is pro-unemployment?


Update #1:

Here is an interesting article from Reuters about bond yields increasing.

Update #2:

Geithner gets laughed at today by Chinese students as Geithner reassured that the dollar's value is safe.


Devrim said...

According to Keith Hennessey the government puts in $50 B and gets 60%, UAW gets 17.5% for $10 B, bondholders get 15% for $27 B. I am not a math genius but something doesn't look right here.

If the math they are using on economic models is the same math they used in GM, it will work, on paper. According to Nixon, Amtrak would turn a profit or dissolve itself in 5 years, that was 1971, 38 years ago. Let's see how "a little inflation for a while" is going to last.

June 2, 2009 at 1:13 AM
The Law said...

In the here and now, I find it difficult to argue with your logic. But I think the primary issue here is that conservatives look at the economy as if it were static.

As I agure in in Episode 60 (, we have maximized the potential of the 20th century economy. The key to turning the economy around is the development of new industries. Unemployment is low because the bubble busted for everyone, and the stock market reflects a more accurate assesment of a company's worth. And I think employment *is not going to come back.* Those who lost their jobs in all likelyhood lost them for good.

So while I agree with your short term assesment, I think you forget about the long term plan. Let's take GM for example. Something like 8000 workers in Michigan lost their jobs with the collapse of GM. If they sit around waiting for their assembly line job to come back, they will be waiting for a long time. What needs to happen is these displaced workers need to start building new things... wind tubines, geothermal power plants, solar panels, electronics, etc. Then we need to license and sell these technologies. And then we need to reverse our roles, becoming the worlds supplier of batteries and engines, and metal, and electronics. If we do this, I believe that increased budget cuts and increased revenue will make us stronger than we've ever been. This is the economics that Krugman is talking about I think. I and think that the administration needs to drum the long term plan into our heads better.

GM to me, seems to be part one of beginning a new manufacturing movement in America. Because, lets be real, America's car company was mainly being supplied overseas. And the new GM, whenever that comes out will hopefully return to being America's brand.

June 2, 2009 at 2:26 AM


You're arguments are certainly in the realm of possibility although I think that they are not likely. As I tried to point out, in the end you may have some of it right and I may have some of it right and we'll be spending a few years arguing who's more right.

However, and I forgot to make this point in my post, although anything can happen, I think it is wise to stick with the economic theories and laws that are proven and we know. I believe that my outlook is based on the future and is based on the idea that Obama passes the legislation he wants. The larger body of economic study shows that Obama policies are going to cost even more jobs. The autoworkers are going to be competing heavily with coal workers and steel workers and new college grads because of Obama's policy...I agree that we need to create new jobs, but think that the "Green Job" idea is practically a myth. I've seen stats that say only 1 out of 10 green jobs are long term. I've also read that it costs 3 private sector jobs for 2 green jobs. Economics also shows that expansionary monetary policy will bring inflation and if not inflation we must have unemployment.

I believe we need to get new industries and new jobs, but government is not the answer there. Government has high costs associated with spending and with taxing. It's very existance is inefficient and unprofitable. What has been happening over the last decade is that the government has been choking the American economy and in turn the economy has been choking the American worker. If we decapitate the economy, how much worse will the worker be?

June 2, 2009 at 1:57 PM
Devrim said...

tL, have you Googled how much CO2 is generated during the production of a electricicty producing windmill yet ?

How are we supposed to create "green" jobs here in the USSA (no typo there SS, Socialist States), when you promise to tax the shit out of every CO2 molecule ?

Geothermal, wind etc works as long as you have the resources. For a good read on geothermal I suggest you look up Afyon, Turkey. It works within a 1 mile radius. When you try to turn geothermal into electricity and transfer it over states, the costs exceed the benefits.

Remember the Mattel toy recall early 2008 ? Since then I have not purchased a toy that was made in China (consumer confidence ?), since my "stainless steel" tool kit rusted off, I haven't bought any tools made in China... How about we bring those jobs back ? I'll pay $40 for a tool that won't rust rather than a tool that will rust away in a year and just costs $20.

June 2, 2009 at 9:26 PM

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