Krugman again
Posted by WARREN MOSLER on January 12th, 2009
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In case you thought Krugman isn’t part of the problem.
From his recent column:
Ideas for Obama
by Paul Krugman
Jan 12 (New York Times) — OK, I’ll bite  although as I’ll explain shortly, the “jump-start” metaphor is part of the problem.
First, Mr. Obama should scrap his proposal for $150 billion in business tax cuts, which would do little to help the economy. Ideally he’d scrap the proposed $150 billion payroll tax cut as well, though I’m aware that it was a campaign promise.
Money not squandered on ineffective tax cuts could be used to provide further relief to Americans in distress  enhanced unemployment benefits, expanded Medicaid and more.
If he understood non-convertible currency, he wouldn’t make this statement.
First, it’s not a trade off.
Second, tax cuts not spent indicate the tax had no value in reducing demand in the first place.
Third, a tax cut that goes unspent is not ‘squandered’. Government squandering would take the form of wasting real goods and services (which does happen too often but that’s another story), not the funds spent per se.
There is not a finite pot of funds that government can spend. The limits of government spending are inflation tolerance, not any specific quantity. Government can do both tax cuts and relief payments if the political will is there, and if the tax cuts are ‘ineffective’ all the better as other government spending can be higher than otherwise without any extra movement of the inflation needle.
And why not get an early start on the insurance subsidies  probably running at $100 billion or more per year  that will be essential if we’re going to achieve universal health care?
Krugman is contributing to more real damage than the dynamite that funded his nobel prize.
If anyone reading this knows him, please forward, thanks!
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January 12th, 2009 at 1:52 pm
OT, but I was wondering – the CBO revised the FY09 deficit to $1.2T . It seems to me the automatica stabilizers are doing a pretty good job on their own – unless they’re counting the the TARP money, which I haven’t been able to figure form the stories. I think, with that base and if Congress can do what it does best and lard up the stimulus with a lot more spending, we might have a boom next year that will take everybody by surprise…
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January 12th, 2009 at 2:10 pm
Previously they were counting TARP funds. Don’t know about this report, but assume yes.
The autostabilizers do work but generally take quite a while. Check out the early 90′s for example.
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January 12th, 2009 at 2:16 pm
So if tax cuts were “effective”, they would raise AD and put pressure on prices, inhibiting further govt spending and therefore leaving the budget deficit at a sub-optimal level and threatening the recovery?? Is this what you mean?
Also, is the optimal tax policy the one that minimizes tax revenue while maintaining sufficient demand for the currency so that govt can spend without (non-inflationary) constraint? Or, put another way, should tax rates be high enough to create demand for the currency but no higher?
BTW, Krugman isn’t the only blogger trash-talking the stimulus plan. Check out Greg Mankiw in NYT editorial yesterday or over at his blog. As the markets have stabilized, the mainstream volume has been turned up against aggressive stimulus. Stability is destabilizing.
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January 12th, 2009 at 3:19 pm
WARREN: Krugman just wants bigger G and does not care about the cost. It’s really depressing. And he has Obama’s ear.
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January 12th, 2009 at 3:24 pm
Sort of. Govt. spending would only be inhibited by a concern over inflation. That doesn’t usually come until unemployment is closer to 4%. Don’t know what will happen this time around. Depends on what happens to crude oil. I think it won’t take much of a recovery to get demand back up to where even the Saudis won’t be able to keep up. But that’s just a guess on my part.
Re opt tax policy- yes, taxes that don’t reduce demand are ‘worthless’ (unless intended to discourage activities, such as smoking, etc.)
If you tax someone who was never going to spend it in any case all you did was get him mad with no further economic consequence, for example.
And yes, Krugman/Mankiw and thousands of others. Hard to find anyone at all apart from this website that’s on paradigm.
Pretty lonely over here! And isn’t there some clever saying about when everyone else is wrong and you are right???
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January 12th, 2009 at 4:06 pm
Warren,
Yes, and all your stories about talking to people like Summers, Weiker, etc. who still don’t get it even after you walk them through step by step are even more depressing.
But then, I always though Hans Christian Anderson was much too optimistic when he wrote “The Emperor’s New Clothes”. In the real world, the kid would have been put in a mental institution, the medical journals would have published special issues exploring the mystery of the Emperor’s case of frostbite last winter, and the tailor would have been made “clothing czar”…
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January 12th, 2009 at 5:01 pm
Hi Warren:
When I said Krugman just wants larger G, what I meant was that Krugman wants a greater proportion of the US Economy to be Government owned/directed, etc.
So, if/when unemployment picks up, Kurgman’s answer will be to raise T, not to reduce G.
“Re opt tax policy- yes, taxes that don’t reduce demand are ‘worthless’ (unless intended to discourage activities, such as smoking, etc.)”
Hah! Economists would argue the opposite. They would say that the best thing to tax is the thing that causes no change in behavior. This is because if you must tax, it’s best to tax in a way that impacts the real economy (as manifested through people’s purchasing decisions, and therefore price signals) as little as possible.
Even if you don’t believe this is true for Federal Government, it may be true for city/state government, who cannot issue currency and are budget constrained like the rest of us poor slobs
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warren mosler Reply:
January 12th, 2009 at 7:31 pm
it is true for all but the federal gov. as you suggest.
krugman could know better if he tried harder.
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January 12th, 2009 at 5:28 pm
Here’s an idea: get rid of 401(k)s, allow a “tax creditable” savings account. The government still deducts money from your paycheck every week, but puts it in a savings account at the Fed instead making it disappear. (There might be some limitations on withdrawels to prevent too much demand from swamping the system at once…) You could run the whole government without having to charge ANY taxes. I bet even Austrians could get behind that!
Ah, the stuff we could do if policymakers understood money! The more you study this stuff, the more simple it seems, and the more tragic and irrelevant most of our economics debates seem…
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January 12th, 2009 at 7:32 pm
the federal gov doesn’t need revenue per se. it just needs to reduce demand so it’s spending isn’t deemed too ‘inflationary.’
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January 12th, 2009 at 7:49 pm
WARREN: Exactly right, simple when you think about it, but so different from what we’re taught it’s extremely difficult to make the jump.
And I don’t think Krugman could do better if he thought about it. He’s had 40 years of training in the *wrong* thing. That is almost impossible to shake.
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January 12th, 2009 at 9:17 pm
Zanon,
exactly – we are going to have to wait for people to die before we have people understand the money creation process.
Not only that, economists are not traders. As a result, they do not see the relative value process that is controlled/defined by money take place with enough variation and frequency to know that money must be included in any viable model of an economy. They think of a currency’s place in the economy – if they consider it at all – to be an afterthought rather than of fundamental importance. Somehow, they separate accounting from fiscal and monetary policy at the very first step of the process. They do not balance their books at step one! As Warren says over and over, it is an accounting identity.
That said, I do think we have to choose our battles. For one thing, Paul is not evil, he is just ignorant. Next, while PK is guilty of reasons 1,2,3 as you noted Warren, he is at the very least advocating for following Mosler’s Law! He wants to spend our way out of this crisis.
Finally, in the rest of the article, something else is clear that he does not understand. It is very difficult to spend over $1T in a short time on any amount of projects. We simply do not have the existing government apparatus in place that could identify, fund, and execute $1.5T of spending in 12 months. His 1 1/8 people or 50,000 people – it does not matter at all, it would be almost impossible for the U.S. government plus the 50 states to identify viable projects in the amount of time necessary to avoid slipping into a depression.
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January 13th, 2009 at 1:48 am
Mike,
Your points are well taken. I hope that by saying “we’re going to have to wait for people to die” you mean that a new intellectual generation will have to take over, and not that we’ll have widespread riots and violence, but I don’t see any young turks who are “in Paradigm” waiting in the wings : (
And your point about this huge gulf between academic finance and macro finance is right on. It really is a disgrace. When an applied trader like Soros writes a book, the Academy laughs at him as not being rigorous enough in this thinking. When a more academic practitioner like Taleb writes a book, he’s ignored by the trade as being “too abstract”. The gulf between theory and practice here really is too wise.
Paul does not want to spend “our” way through a crises — that’s my whole point — he just wants higher government spending as a % of the total economy going forward, and the crises is how he will ratchet up G. This is why he is opposing any increase in the deficit that is 1) fast, 2) reversible, 3) a tax cut, and instead advocating for slow, structural increases in G that will take an age to turn on, and never turn off. He wants high unemployment now, high inflation later, and low growth forever. That is not Mosler’s law!
Your next para on how it’s impossible to spend $1.5T in 12 months proves this point.
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January 13th, 2009 at 1:45 pm
Hi Z,
I’ve been reading Minsky and it is surprising how much better he “gets it” than traditional economists. At least he recognizes the importance of money and finance, and how economics must recognize the shocks are not exogenous but rather part of the system. When Soros talks about reflexivity, and economists make fun of him, it is embarrassing for someone, and economists do not know it is them.
got you on the ratchet up G – I did mis read your post and it is clear to me now. I disagree as I do not think PK is a socialist or thinks that G spending is by def good, but rather he thinks that health care and some other spendings are market problems and cannot be easily solved by the private sector. That said, I guess that the reasoning behind it is irrelevant if the outcome is the same.
I do disagree with your take on what he wants. He does not want suffering, high unemployment, low growth, and high inflation. I read the first version of “the return of depression economics” and if anything is clear about his take on the world, it is that he wants higher growth and low unemployment. You can tell it gives him great satisfaction when the world is being successful. His prescription might be incorrect, but that doesn’t preclude his intentions being good.
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January 13th, 2009 at 6:23 pm
Hi Mike:
Do you have recommended links for reading Minsky? I know about “Minsky moments” but little else.
Soros on “reflexivity” is absolutely right, and it’s a shame he communicated it as poorly as he did, and that the reception was one of ridicule. It’s reflexivity that screws up financial models, and as we’re experiencing, that’s a big deal.
I don’t want to get into Paul’s politics — they are crystal clear to me in his NYTimes articles — but I would add that good intentions and terrible harm are not even *slightly* mutually exclusive. He wants the Government to help people. His prescription is higher Government spending, and higher taxes. He’s using this crises to push for higher G, when it is obvious that its fiscal effect will be 1) slow to turn on, and 2) impossible to turn off. The results will be dire in the short term, dire in the medium term, and dire in the long term. But I am sure that Krugman will maintain the utmost concern for the polis throughout.
The economics profession is not malignant, but look where it’s got us! Sooner or later, you have to put intentions aside and judge people based on the consequences of their actions.
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January 13th, 2009 at 6:57 pm
Lots of Minsky and lots of stuff about Minsky at levy.org. See Randy Wray (Minsky’s best known student), Jan Kregel, and Eric Tymoigne’s work there, in particular.
Problem with reflexivity, as true as it is, is that there’s very little to the theory that Keynes didn’t say. As an academic, I don’t have a problem with Soros’s method as much as I do with the fact that he doesn’t realize someone already said most of it. That’s a no-no in our world.
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January 13th, 2009 at 9:32 pm
Scott:
Thanks for the pointer.
As for Soros, yup, half the people said he wasn’t saying anything new, and the other half said he was talking nonsense.
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January 13th, 2009 at 9:46 pm
Yes, put me in the former group. That said, I do think academics should read him (a lot has happened since Keynes, obviously, and there’s always the issue of applying and reinterpreting theories in new and evolving contexts). Taleb, too (while also reading Keynes on probability and uncertainty, though, and some others like Mandelbrot).
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