Paul Krugman seems to have gotten a lot of negative attention lately, some by people legitimately critical who do take him seriously, and some by people who should take him a lot more seriously than they do. Sometimes he's too cavalier, sometimes he's too partisan - all of this is true. But the fact is the man is brilliant, he's one of the most important economists around today, when you say he's dumb or a hack you sound like an idiot, and it's fine to disagree with him (I do fairly often), but just know that when you do you have an excellent chance of being dead wrong. So here's a little Krugman-love in the first Assault of Thoughts I've done in a while.
- This is the column that bothered a lot of people - Krugman argues that WWII was the fiscal jolt that ended the great depression. I think this is probably true, but the empirical waters are very muddy. Millions of working age men went off to war, which is the single most challenging empirical wrinkle to get around. We also had substantial price controls, which make the picture more confusing. After the war (because Bastiat is about stocks, not flows of output - read Ropke if you're still confused on this), demand from Allied and Axis powers alike was strong (demand from war-torn enemies isn't a traditional outcome of fiscal policy). So long story short I agree that story is more complicated than Krugman makes it out to be. It's also more complicated than guys like Higgs make it out to be. Rather than simply say "there are a lot of problems in assessing this case", Higgs simply redefines what recovery means so that he can conclusively refute Krugman.
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- I thought this was one of his best posts in weeks, and I was shocked to see Jonathan Catalan call it one of the worst. Krugman argues basic externality logic about infrastructure and then suggests that it might be good to... ummm... spend money on it. If we need to augment aggregate demand, a positive externality is a great place to start. Krugman makes the additional point that in these sorts of cases, spending even starts to make the crowding out worries irrelevant. Another way to think about positive externalities is that private spending crowds out public spending. As he says - this is econ 101. I come close to feeling like one of the missions of this blog has failed if the logic of externalities is actually controversial to anyone. See Jonathan's post for an exchange, though.
- I haven't read it yet, but I've heard good reviews of Krugman and Wells's new piece in the New York Review of Books on why we're still in a slump. I'm guessing it's pretty standard stuff.
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- A good post on using the bond market to determine interest rate policy - and on the inconsistency in the way that the critics use it. The use of the bond market as a guide to policy is one of those cases - like talking with Jonathan about positive externalities where he claims to know from experience that Spanish agricultural roads are optimally provided - that I seriously question the dedication of some self-styled libertarians to the concept of the price mechanism. If austerity advocates can second-guess the bond market, what prevents central planning from working? If Jonathan can look at Spanish roads and determine whether they are optimal or not, what prevents central planning from working?
- And here is a fascinating post by Krugman on the asymmetry between debt-deflation and debt-inflation. Somebody is hurt and somebody is helped in either case, so why do we worry more about debt-deflation? Well, aside from the stunting of investment and economic activity caused by deflation - looking purely at real debt levels - creditors are usually less cash constrained than borrowers (that's why they're creditors, after all!). So when debt contracts experience unexpected deflation, demand takes a greater hit than when debt contracts experience unexpected inflation. This asymmetrical response to price level changes reminds me of an observation Keynes made in The General Theory. He wrote in the chapter on The Employment Function:
"There is, perhaps, something a little perplexing in the apparent asymmetry between Inflation and Deflation. For whilst a deflation of effective demand below the level required for full employment will diminish employment as well as prices, an inflation of it above this level will merely affect prices. This asymmetry is, however, merely a reflection of the fact that, whilst labour is always in a position to refuse to work on a scale involving a real wage which is less than the marginal disutility of that amount of employment, it is not in a position to insist on being offered work on a scale involving a real wage which is not greater than the marginal disutility of that amount of employment."
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In one hundred years Paul Krugman's name will be responded to with the following interrogative: "Who?"
ReplyDeleteDon't you think it's a little early to say that?
ReplyDelete- He's a Nobel laureate, which helps a lot - these are high profile guys that remain high profile. Then again, we haven't had the econ Nobel for a 100 years so the staying power of it is still an open question.
- He's leaving quite a digital trail, which will be very important for being remembered in the future.
- If he is remembered it will probably be as the lead American Keynesian voice in the Great Recession - the Alvin Hansen of our generation, if you will. It might not be for the trade theory, economic geography, or increasing returns.
- He is definitely going to be remembered with Hicks, Hansen, and Modigliani as another chapter in the liquidity trap saga.
To early to say I think - far too early. I think he will certainly be remembered by academic economists in 100 years. As for students or non-academic economists? That's harder to say, but I think there's a decent chance.
Anyway - who cares about 100 years from now? The point is he has good things to say today. Legacy is nice, but probably overrated.
"Krugman argues basic externality logic about infrastructure and then suggests that it might be good to... ummm... spend money on it."
ReplyDeleteThe basic issue underlying all of the talk about infrastructure these days we have some sort of infrastructure problem in the U.S. Indeed, I have a long enough memory to realize that we have been in a so-called "infrastructure crisis" since the 1970s.
Of course, what lots of advocates of infrastructure really mean is that we aren't spending lots of money on boondoggle "High Speed Rail" projects (never mind that they aren't remotely "high speed" - I can generally drive faster in my car than most of these proposed projects) and other such feel good boondoggles.
Anyway, when I start thinking about all of this all I need to do is remind myself of this: http://findarticles.com/p/articles/mi_m0377/is_n110/ai_13394523/
"Anyway - who cares about 100 years from now?"
ReplyDeleteI do. Thus illustrating the basic difference in our worldviews.
"The basic issue underlying all of the talk about infrastructure these days we have some sort of infrastructure problem in the U.S."
ReplyDeleteReally? I was under the impression it was because we have a massive depression.
You might be reading different sources, though - the media, for example, tends to trade in "the sky is falling" stories.
My view is we certainly underinvest in infrastructure, but there is no "crisis" to speak of, and if we're going to spend money it's a good place to spend it.
Anyway - when you say "the basic issue underlying all of the talk about..." you might want to specify whose talk.
"I do. Thus illustrating the basic difference in our worldviews."
ReplyDeleteSays the guy that repeatedly rebukes my low-social-discount-rate attitude?!?!? Do you expect me to take this seriously?
You seem to care about the long-term when it comes to a Princeton professor's popularity, but not when it comes to major social investments.
Or private investments for that matter.
ReplyDeleteAs low as I think the social discount rate is, I still think that the private discount rate is artificially high as well.
Daniel,
ReplyDeleteObama and nearly every other politician is constantly harping on the "crisis" in infrastructure. It is a constant refrain in the political sphere. Since they are the ones actually making the decisions re: this issue, they are ones I pay attention to. You are dramatically overestimating the importance of economists in other words.
We do not underinvest at all; indeed, what we tend to do is waste a lot of money and thus get poor value for it because government funding of infrastructure has little to do with the price mechanism.
"...but not when it comes to major social investments."
ReplyDeleteWasteful so-called social investments.
Xenophon -
ReplyDeleteThat's why I say you should have clarified who you were talking about.
Yes - politicians take liberties with the rhetoric they use. I don't go to Obama speeches for an understanding of the issues and the discussion around American infrastructure. And this discussion wasn't about politicians up until this point, which is why you confused me.
Xenophon,
ReplyDeleteI don't need to clarify. I am talking about the only important people with regards to the issue.
To be honest I can't even recall the last time I heard Obama deliver a speech or extended public remark - it may very well have been his state of the union, although I'm sure there was something more recent than that.
ReplyDelete"government funding of infrastructure has little to do with the price mechanism."
The question is - can the price mechanism optimize social investment decisions where positive externalities are present. If you think know than you have rewritten or misunderstood basic economics.
"I don't need to clarify. I am talking about the only important people with regards to the issue."
ReplyDeleteDude - when I'm talking about the thoughts of me, Krugman, and Jonathan and then you come in with an unspecified comment on what politicians think it's confusing because it seems like you're arguing that's the case that we're discussing.
Let me put it this way - your comments come across as very confusing to other commenters (namely me) when you bring other issues into the discussion like that. So I'm letting you know how to clarify so that it is less confusing.
ReplyDeleteIf you had said "politicians think X", I would have said "yes they do - I'm not particularly concerned about what politicians would say, nor am I defending their position".
That would be a lot easier, wouldn't it?
He just made one the other day in Milwaukee - you know, his 50 billion for infrastructure speech.
ReplyDelete"The question is - can the price mechanism optimize social investment decisions where positive externalities are present."
Yes. At one time it was claimed that without public funding of lighthouses that they would be funded sub-optimally - Adam Smith made this claim. Turns out that was not the case. That's the problem with the positive externality narrative (and that's all that it is - a story) - it is merely an unsubstantiated prediction.
"Let me put it this way - your comments come across as very confusing to other commenters (namely me) when you bring other issues into the discussion like that."
ReplyDeleteWhen I write something like "at base" or "the basic issue" that's an unsubtle clue.
"At one time it was claimed that without public funding of lighthouses that they would be funded sub-optimally - Adam Smith made this claim. Turns out that was not the case."
ReplyDeleteCould you clarify? The lighthouse ace in the whole always strikes me as comparable to the private roads ace in the whole... namely, a misunderstanding of the argument.
See Cowen on it (search on "lighthouse") - not a very convincing treatment or understanding of the argument: http://www.econlib.org/library/Enc1/PublicGoodsandExternalities.html
"When I write something like "at base" or "the basic issue" that's an unsubtle clue."
ReplyDeleteWhat - is "at base" supposed to be a clue about a party base? I just assumed it meant "the basic point" or "the foundation" of the argument.
You may be a little too cryptic here.
Anyway, there are plenty of economists talking about the "infrastructure crisis" as if it were some sort of existential threat.
ReplyDelete"He just made one the other day in Milwaukee"
ReplyDeleteHaha - yes, I'm aware he makes speeches. I'm saying I rarely listen to them.
Daniel,
ReplyDeleteI am in no way cryptic.
It is actually a very convincing treatment. See James Buchanan's article on the subject in Economica (1962).
Anyway, you have a pleasant day. :)
ReplyDeleteRight - good. Some people make the Coase argument, which is decent but hardly proof that the externality doesn't exist. Some people, like Cowen here, simply point to the existence of private lighthouses and say that's evidence alone. That's obviously a bad argument. The Buchanan argument revolves around excludability, and that is also a legitimate case. Clearly, if exclusion is possible, there's no externality to speak of.
ReplyDeleteIf more people made the Buchanan and Coase argument talking about these things would be far less frustrating.
That still leaves two problems:
1. Buchanan's solution still introduces transaction costs - so the question turns to how high those are and whether they are a significant impediment, and
2. Is exclusion possible? That, of course, is an empirical question.
Oh, and I forgot to pass this on: http://american.com/archive/2010/september/artists-and-the-market
ReplyDeleteFrom the piece:
~He is not troubled by the fact that the market determines the value of art: “I’m one of the few people in the world who can say, ‘I know what everything is worth.’... Everything in the whole world is worth what anyone else is prepared to pay for it. And that’s it. Simple.”~
*I was thinking of the Coase argument about ranchers - the Coase lighthouse argument is actually largely similar to Buchanan's
ReplyDelete