A Response to Paul Krugman

Paul Krugman, looking left

Paul Krugman's existence in the popular consciousness, mostly through his New York Times column and blog, the Conscience of a Liberal, largely rests on ideological antagonism.  Krugman's famous September, 2009 straw-man New York Times Magazine editorial, "How Did Economists Get It So Wrong?", attacking University of Chicago economist John Cochrane and others, was the "Hit Em Up" of economic policy debate. 

Krugman's near-constant invocation of "saltwater" and "freshwater" economics suggests two irreconcilable and antagonistic schools corresponding to two irreconcilable and antagonistic political parties: one urbane and sophisticated, one backwoods and boorish.  In Krugman's world, neither heterodox economists nor heterodox politicians can work together to solve problems honestly.  This is hackery.  In reality, the economics discipline is a nuanced conglomeration of disparate ideas.  The unholy marriage of economics and politics which Krugman represents only threatens to undermine the credibility of economics as rational discourse on human behavior.  

Krugman recently wrote a blog post, Antipathy to Low Rates, in which he stereotyped his opponents, associated the stereotype with something unpleasant, and then quoted people he doesn't like as representative of his odious caricature to discredit them.  This is an unacceptable rhetorical device called a straw man which charlatans (and Nobel Prize winners apparently) use when their premises cannot be built on any logical foundation.  Krugman quotes (the dead) F.A. Hayek (way) out of context to characterize today's opponents of further stimulus as ideologues:

(Krugman:) And Hayek found it

(Hayek:)…still more difficult to see what lasting good effects can come from credit expansion. The thing which is most needed to secure healthy conditions is the most speedy and complete adaptation possible of the structure of production.If the proportion as determined by the voluntary decisions of individuals is distorted by the creation of artificial demand resources [are] again led into a wrong direction and a definite and lasting adjustment is again postponed.The only way permanently to ‘mobilise’ all available resources is, thereforeto leave it to time to effect a permanent cure by the slow process of adapting the structure of production.

(Krugman:) These days, relatively few economists are willing to say straight out that they regard persistent high unemployment as a good thing. But they find reasons to oppose any and all suggestions to use government policy — including monetary policy — to alleviate the slump. Same as it ever was.

Krugman knows that Hayek was not supporting high persistent unemployment, yet here he suggests that Hayek's opposition to the New Deal was born out of disregard for the struggles of the poor.  On the contrary, Hayek's opposition to stimulus lay in the understanding that the negative externalities of using policy to redirect such a large portion of the economy towards unproductive pursuits would ultimately snowball, and the economy would rot from the inside. 

Before this takes on the characteristics of a Krauthammer editorial: economic theories must have demonstrated predictive power to be considered legitimate.  It is often said that World War II, and not the economic growth of the late 1930s, vindicated Keynes.  However, it is more appropriate to say that the war interrupted and contaminated the Keynesian experiment.  Hayek believed that too aggressive policy had progressively distorted consumer preferences throughout the 1920s, only to be met with expansions of credit to further fuel ten years worth of malinvestments.  The economy was suddenly and viscerally refocused on reality in 1941 in the form of an economically overwhelming war effort.  Were it not for the war, only one of the two theories would be standing today.  

Keynes believed that, if the war had never happened, the economy would have continued growing steadily, government planners would have compensated for New Deal stimulus during subsequent boom periods, and the economy would ultimately return to equilibrium with the number of people negatively affected by the natural trough of the natural business cycle minimized.  Perhaps he was correct.    

Hayek believed that, if the war had never happened, New Deal stimulus would have continued to imperfectly direct production towards probably value-less pursuits, government planners would grow complacent and forgetful during subsequent boom periods or that there would be a change in policy as the result of electoral replacement, and America would suddenly discover that, instead of using the bust to clean house and purge unproductive entities, it had merely prolonged a disaster made worse by the further concentration of economic power in either corporate or government hands.  Perhaps he was correct.

Whatever shape the economy was in when the United States entered World War II, whether steady recovery as Keynes hypothesized, or deceptive crash course as Hayek hypothesized, this all changed when the nation's resources were redirected towards the (very real) war effort.  

World War II was effectively a reset button, and for this reason, economists still remain divided on the efficacy of intervention.  Krugman at least knows this, and despite the need to pander to his audience, should not assume malicious intent, indifference to the struggles of the poor, or stupidity in those with whom he disagrees on the efficacy of interventionism.  Paul Krugman should stop being a ringmaster and go back to being an economist.

Comments

[Joseph Cox]

Keynesian economics focuses largely on monetary policy- not fiscal stimulus- so I think your characterization of WWII as a contamination of Keynesian economics is willful misreading. Keynes said the US should run up a massive deficit to inject sufficient demand into the economy to counteract deflation and start growth. It's true that he would have preferred that once robust growth occurred that the government run surpluses to keep things from overheating and WWII forced continued government deficits and demand (though the massive purchase of bonds to finance the War effort in a way did keep demand reduced and prevented huge inflation). I think you might be guilty of your own cherry pick here, because Krugman has written many many times about the need for further deficit financed stimulus and you instead focus on a criticism of someone historical you admire. Look at China today, they did by far the biggest stimulus package and now they are doing the best. We went for timid half measures and now we are trudging up instead of robustly recovering. A second stimulus is absolutely necessary unless we want 8+% of unemployment for another 2-3 years and a permanently damaged economy. You don't decide to try out Hayek in a time of crisis, but in a relatively safer time to back off of micromanaging the economy.

I know that this is a fundamental disagreement between us, but I think my preference is only for timing not to say that Hayek didn't have some real insights into the cycle we have created.

[Christopher Carr]

Monetarist (Milton Friedman) economics focuses on monetary policy. According to Keynes, fiscal and monetary is a double-edged sword. It doesn't matter which is used. They have the same effect. It is true that nowadays, monetary policy is preferred, but this is more thanks to Milton Friedman than John Maynard Keynes.

WWII was a contamination of the New Deal experiment at stimulus. No one disagrees that creating jobs creates jobs, or that lowering the interest rate increases demand for borrowing. What economists do disagree about is the long-term effects of stimulus and other policy. When government policy interferes with markets, consumer preferences are distorted, and economic resources are redirected to producing things which have no inherent value. (In an unrelated note, I find it entirely inconsistent that someone could claim to be an environmentalist and a Keynesian.) Whether this distortion is a fair trade for the creation of jobs is what economists disagree on. To pretend there is no disagreement and declare victory as Krugman does is hackery.

In the case of the New Deal, the long-run prediction of Hayek that malinvestments would create an even bigger crash never came to pass, because all economic resources were directed towards real investment in war, and since we destroy everything we've built in wars, they are always followed by real, not policy-created, economic booms.

I will also admit that I don't regularly read Krugman's blog, but I have read a fair bit of his columns, magazine articles, and professional literature, and I would be happy to go through it all in the future and pick it apart in a more comprehensive fashion.

You claim that China is doing the best because of their large stimulus package. There are several faulty premises underlying this claim: (1) correlation does not imply causation. (2) China's growth is real, infrastructure and technology driven. (3) Japan and Switzerland did by far the smallest stimuli and those countries's purchasing power parity have increased dramatically in the last couple years. Their currencies are particularly strong, while America continues to steal from responsible savers, and the Euro teeters on the brink of collapse. (4) We didn't go for timid half-measures. The stimulus was huge. Did you see the charts of M1?

I might agree with you on the need for a second stimulus, if only because we've malinvested our way to a point of no return, but I think it'd be a lot easier if we allowed all those unemployed people to sell their artwork for a dollar on the sidewalk or teach Spanish as freelancers, instead of having them fill out forms and stand in line; what I mean by this is that all our laws serve as barriers to entry to do anything but work for a large corporation. The contribution of self-employed people to the Japanese economy is three times ours, half of which already comes from government spending.

I know that you have a fairly sophisticated take on this, and can appreciate your preference for Keynes when the economy is bad, but when can we stop misinforming people? When we've reinvested all our resources in pointless wars, and golden parachutes for banks, and cars nobody wants, and healthcare which we can't provide, and burning fossil fuels? Is that worth a few percentage points?