Paul Krugman Doesn't Get It, Part Whatever

What would Christmas be without more idiocy from Paul Krugman?  My present to Paul is a good fisking.  Here is the entirety of Krugman's blog post from today's NYT, with my commentary interspersed in italics:

Just a quick question for those who think that FDR prolonged the Great Depression by preventing a fall in nominal wages: what would be the benefits, right now, if the United States were to implement a Latvian program and cut everyone’s wages by, say, 15 percent?

First of all, it was both HOOVER AND FDR who are to blame in this story.  Second, those of us who take this position have not argued for the need for an across the board decline in wages.  The argument is that given the decline in prices caused by the Fed allowing the money supply to fall, not allowing wages to adjust in individual labor markets caused both high aggregate levels of unemployment and serious misallocation of labor across labor markets.  An across-the-board cut might have helped the first problem somewhat, but possibly worsened the latter. 

Why is it that people like Krugman can only think in terms of aggregate "programs" that have to be "implemented" rather than simply allowing markets to work?  It doesn't take a "program" to generate the needed declines in nominal wages, it just requires politicians (and expert economists) to stay the hell out.

Seriously, how would it help? The real monetary base would grow — but the Fed is already expanding the monetary base enormously, with little effect because short-term interest rates are essentially zero. (Yes, there would be a real balance effect, but it would be trivial.)

And now the real kicker:  no one is arguing for a fall in wages at the moment because we are not in the deflationary spiral that we were in from 1929 to 1933.  Geez Louise Krugman, do you actually read the arguments you claim to be responding to?  The whole rationale for allowing wages to fall instead of propping them up artificially was that nominal wages needed to fall so that real wages didn't rise and cause really high unemployment rates, like say, oh I don't know, 25%.  Somebody hit Krugman over the head with a copy of Friedman and Schwartz, then follow up with a slug of Vedder and Gallaway.

In other words, it won't help right now because we are not where we were in 1929-33, mostly because the Fed has supplied the necessary liquidity (if, perhaps, too much and with no clear way to absorb it back when the demand for money eventually falls).

Meanwhile, a general fall in prices would raise the burden of debt on everyone, almost surely having a contractionary effect on the economy.

So here’s the thing: if lower wages wouldn’t help now, why would they have helped in, say, 1935? Yet if you take away the wage argument, the whole FDR-made-the-Depression-worse thing falls apart.

ARGH!  Let's take the last point first:  now it's time to hit Krugman over the head with a copy of anything Bob Higgs has ever written on "regime uncertainty."  The argument that FDR prolonged the Great Depression hardly rests only on the claim he and Hoover didn't allow nominal wages to fall to adjust to the declining price level.  Higgs' work convincingly demonstrates that the bigger problem during FDR's years (including, say, 1935) was the regime uncertainty created by his constant "experimentation" and attacks on private enterprise, leading to very low levels of private investment.  So even if Krugman were right about wages, which he's not, the "thing" does not fall apart.

That aside, wages were already coming down by 1935, which is why unemployment rates were down from their worst years in 32-34.  Declines in nominal wages might have helped in 1935, although it's not clear how much of the unemployment then was due to wages being too high or private investors scared off by regime uncertainty.

So congratulations Professor Nobel Prize 2008, you have very successfully pushed over a strawman, making it abundantly clear you have no clue what people who you disagree with actually argue, and illustrated the fallacies of thinking in terms of "across-the-board solutions that have to be implemented."  And you did it all in one short blog post.  That might be a record for idiocy, even for you.

Comments

[Matt C.]

PREACH IT!

[Bill Woolsey]

The short answer to Krugman is that a 15% increase in base money would have been better than a 15% decrease in nominal wages. But failing to allow the second compounds the problems caused by the first. (Let's not
blow his mind with talk of the option clause,
gold suspension, and clearinghouse certificates.)

Sure, allowing a drop in prices (including nominal incomes) to adjust the real supply of money to meet the demand disrupts contracts. But, Krugman should at least note in passing that there is a creditor for every debtor.

As an aside, why is it that real balance effect won't impact longer term interest rates? I am not sure that open market operations with T-bills are parallel to decreases in the price level.

[Mario Rizzo]

It is quite frustrating that the level of misunderstanding with regard to non-Keynesian ideas is so high. And that so many visible commentators not only permit it but promote it. Surely Krugman has the IQ points needed to do the homework. But why should he? There is nothing to be gained for him in getting the non-Keynesian story right. The love of truth is not enough to make the world go 'round. Incidentally, Martin Wolf in today's Financial Times adds to the intellectual confusion. Let me shamelessly advertise my own comments on him:
http://thinkmarkets.wordpress.com/2008/12/24/microfoundations-are-not-a-morality-tale/

[John V]

"Why is it that people like Krugman can only think in terms of aggregate "programs" that have to be "implemented" rather than simply allowing markets to work?"

I've been asking myself that a lot lately.

[John V]

" Geez Louise Krugman, do you actually read the arguments you claim to be responding to?"

I've been asking myself that a lot FOR YEARS.

I say to myself:

"Krugman's argument sounds really strong if you can actually find out who is rebutting.

Stiglitz is another who does this. You'd think such highly regarded economists would want to tackle precise, accurate and strong arguments instead of strawmen-reductions and misnomers.

You'd think.

[TM]

Mr. Rizzo,

You have hit upon the crux of the problem, which is endemic. There is no intellectual honesty in the arguments of Krugman and his ilk. In contrast and as an example, intellectual honesty is the hallmark of Clarence Thomas, who is one of the greatest SC Justices of all time. He goes where the facts and the law take him. And, those with a social(ist) agenda hate him for it. Krugman will never let the facts or the science of economics get in the way of his outcome-based thinking.

TM

[Grant]

I find it depressing when I, as someone with no significant formal education in economics, could have poked similar holes in Krugman's post (though not as well as Steve Horwitz did here). I don't think I could do the same to a physics PhD, though I admit I've never tried. I know I can't do the same to Dr. Horwitz's posts or papers, or many other economists without Nobel prizes.

I hope Dr. Krugman's work in trade was really worthy of the recognition he got for it, because I know his blog posts aren't worth the bits they're printed on.

On another note, doesn't orthodox Keynesian theory agree with everyone else that a decline in the supply of money is going to necessitate a decline in prices and wages in the long run? Is it the medium and short runs where the disagreement is, and if so, how does the Keynesian distinguish between them?

I'm reminded of a section of "Free to Choose" where a central banker from Britain tells Milton something to the effect of: "the unions were so effective in driving wages above their market rates, we had to keep inflating to prevent a rise in unemployment".

[Sukrit Sabhlok]

There's no reason to be pessimistic or bang our heads in frustration when coming up against un-reconstructed Keynesianism. In the long-run, liberty will win. It is inevitable!

First of all, we have truth on our side. As a result, our side gets all the really passionate defenders, who will promote sound economics through rain, hail or sunshine. The likes of Krugman know (deep down) that they are intellectually frauds. They hold their opinions due to a variety of factors unrelated to truth (e.g. acceptance by the mainstream, and hence greater pecuniary benefits). Therefore, they are not revered as libertarians revere the likes of Mises and Rothbard, who personally sacrificed and were relegated to the margins of academia because of their opinions.

Secondly, the more governments pursue Krugman-inspired policies, the better the prospects for liberty. As the problems of bad economics become more and more evident, the masses will come around to an alternative set of ideas. Our job is to be there when it happens.

So, in short, we can all enjoy Christmas and the New Year with happiness, knowing that the prospects for liberty grow brighter every day.

[Curt Doolittle]

I would not be so comfortable that truth will win. There isn't a lot of evidence of that in history. Just the opposite. We're not even sure we have the 'truth' so much as that our methods are better at long term prediction, and the preservation of freedoms. Their methods give them the impression that they are better over the short term, and that freedoms are less important than short term efficacy. Our methods invalidate government, theirs reinforce it.

Contrary to your hope, the masses usually, if not universally, take the most self-serving pragmatic approach. Which is why they tend to encourage despotism and intervention.

So I would have less faith in the masses. I have more faith in a dedicated and disciplined minority creating a plan to undermine, then replace such a system of though.

Reliance on the masses and on democracy in particular, is simply a hope. It is faith. Hope and Faith are not strategies. They are an acknowledgement that one does not possess a strategy, and has surrendered to it.

[Steve Miller]

I'm impressed that you are all charitable enough to blame Krugman's wrongness on ignorance. I believe that in his non-academic, partisan persona he *deliberately* misrepresents the positions of his ideological and even theoretical enemies. His style reminds me very much of Ellsworth Toohey. Who knew a fictional caricature could be so realistic? The worst example was shortly after Milton Friedman's death, when he argued that Friedman made important academic contributions, but was a dishonest hack when it came to his popular writings. Nevermind the total hypocrisy of such an attack, the worst thing was that someone with no integrity or intellectual conscience was attacking the rare man who actually believed everything he said.

[Jay Chambers]

Man, I love this blog.

[Jeffrey Horn]

*Sigh*

I remember when Krugman knew something about wages. You know, back before he found a "niche" that lead to his Nobel Prize.

See the following article on slate.com: http://www.slate.com/id/1918

Seems like he *used to* believe markets could work for "creating" jobs.

[Dave Prychitko]

When did Liberty win after America's Progressive Era, or WWI, or the Great Depression, or WWII, or the Vietnam War, or the Great Society, or Nixon's price controls, or Carter's inflation, or Reagan's deficits, or Bush Sr's "Thousand Points of Light," and so on? Why is liberty winning out "inevitable"? Is liberty-->truth-->long run victory more like a tautology? How, in other words, will the real-existing chains of cause-and-effect clearly work itself out in the longer run? The burden is on you (actually, on anybody who holds this claim) to clearly demonstrate the chains of reasoning in the empirical world, wherever they take us.

Frankly, I think that project is even more difficult than arguing that empirically market process actually tend toward a general economic equilibrium!

[John V]

Yeah. Good find, Jeffery Horn.

I've seen many articles like that by Krugman over the years. Those were written back when PK stuck to economics and sought to enlighten rather than rouse.

But with the election of Bush and his new stint at the NYT, Krugman discovered something so tantalizing:

Fame, praise and fortune outside of his circle of peers. He began to see that by shifting his content and tone away from well-founded and non-partisan and non-shrill economics toward the exact opposite (partisan punditry), readers liked him more and he became much more popular in a far, far wider circle a news consumers.

More power to him I suppose (?). After all, there are plenty of conservative pundits and other liberals making a handsome revenue stream from it. Why not him?

Pundits get all the glory.

I'm sure his book sales are much higher now.

In the end, all people want to be loved and accepted. It's natural. And since he launched his side-career as a partisan hack, he's found gobs of love and acceptance that have made him far more popular and famous than he could have ever imagined as a steadfast economist.

Perhaps the Austrian Economists Bloggers should take cue. But then again, it would be harder for them since they are not Republicans. One of the keys to PK's success as a partisan political pundit was just that: being a partisan. He was able to hone and meld his POV to the Democratic Party's base's tastes. A good dose of cognitive dissonance helped as well....along with an ability to choose his battles wisely in order to make ALL economic news a partisan affair.

Articles like the one you cited are simply ignored and left in the dustbin of history.

[pmp]

Let's not mince words: Horwitz is a mack.

He just wrecked Krugman. He was thorough, concise, brutal. Horwitz has style, but no mercy. I mean, that wasn't a pounding--that was annihilation.

It's not New Year's Eve yet, nevertheless I raise my glass to Steve Horwitz. (May I never learn of his fury).

[Rafe Champion]

Daniel Klein fisks 654 Krugman columns.

http://www.econjournalwatch.org/pdf/KleinBarlettCharacterIssuesJanuary2008.pdf