Sunday, April 28, 2013

Recent Krugman Out of Paradigm Tidbits


Krugman still doesn't "get it".

Quote from a recent Bush-bash post of Krugman's:
From what I’ve read, most of the pushback against revisionism focuses on just how bad Bush’s policies were, from the disaster in Iraq to the way he destroyed FEMA, from the way he squandered a budget surplus to the way he drove up Medicare’s costs. And all of that is fair.
Here is another one from a post where he was bashing the intolerable (and hence frequent CNBC guest) Ken Langone :
Now, I don’t know if Langone is really as dumb as he sounds [Ed: ???]; my guess is, probably not — the attempt to sound like a regular guy, while actually sounding like an actor in a 1950s B-movie, is a giveaway. Still, maybe this is an occasion to restate what is really going on in the economy, and why I advocate the things I do.
So, in order:
1. The economy isn’t like an individual family that earns a certain amount and spends some other amount, with no relationship between the two. My spending is your income and your spending is my income. If we both slash spending, both of our incomes fall.
2. We are now in a situation in which many people have cut spending, either because they chose to or because their creditors forced them to, while relatively few people are willing to spend more. The result is depressed incomes and a depressed economy, with millions of willing workers unable to find jobs.
3. Things aren’t always this way, but when they are, the government is not in competition with the private sector. Government purchases don’t use resources that would otherwise be producing private goods, they put unemployed resources to work. Government borrowing doesn’t crowd out private borrowing, it puts idle funds to work. As a result, now is a time when the government should be spending more, not less. If we ignore this insight and cut government spending instead, the economy will shrink and unemployment will rise. In fact, even private spending will shrink, because of falling incomes.
4. This view of our problems has made correct predictions over the past four years, while alternative views have gotten it all wrong. Budget deficits haven’t led to soaring interest rates (and the Fed’s “money-printing” hasn’t led to inflation); austerity policies have greatly deepened economic slumps almost everywhere they have been tried.
5. Yes, the government must pay its bills in the long run. But spending cuts and/or tax increases should wait until the economy is no longer depressed, and the private sector is willing to spend enough to produce full employment.
This last one where he writes in his Point 5:  "Yes, the government must pay its bills in the long run.." is reeeeeaaally bad.

Krugman in many ways still doesn't see how our current economic system operates, very similar at core to the basis of Reinhart and Rogoff's work itself; and hence apparently very much "at home" at the New York Times.

37 comments:

paul said...

Yeah these kinds of logical errors drive me nuts too...when I read what they write it's like a game of charades and they just aren't quite getting it.

What I think is going on is the logic of their new-found understanding is unmistakeable...then they try to integrate it with what they already (think they) know.

When I started thinking about these things a few years ago I threw everything I thought I knew out the window and started over...but then my income didn't depend on it.

Matt Franko said...

Right Paul someone else here has pointed out this is how the academe is "self-corrupting" as even if you are outside orthodoxy, you still have to use the same terms and widely recognized norms within the academe and cite others work, etc...

Then you get caught up in it ultimately...

Like being made to answer the question "do you still beat your wife?" ... trapped either way...

btw, I have a major problem with this term "G-T" lately... how it is being used even within MMT...

rsp,

paul said...

"btw, I have a major problem with this term "G-T" lately... how it is being used even within MMT…"

Matt, how so?

It does seem to me the two terms (G and T) are unrelated…they are parts of independent processes.

Are you saying that (G-T) is an artificial construct?

Ignacio said...

"you still have to use the same terms and widely recognized norms"

Classic, who controls the frame (the language, so to speak) where discussions take place is the one who already has won any argument.

I've said before, for example, all the current situation is not going to change until we stop calling public "debt" that way, and we start calling it something else.


A change in a scientific paradigm is exactly when that framework changes, the language changes, and the fundamental understanding of the relationships at work change. This HASN'T happened yet in economics, or at least, monetary economics (which is the one which has been occupying us the last years).

Ralph Musgrave said...

Matt, I agree with you in that point No 5 was the one that rang alarm bells in my brain. But I would’nt accuse Krugman of being plain wrong: it’s just that he didn’t set out the point very well. I’d have set it out as follows. (But as you’ll see, being 100% accurate requires a large number of words.)


Given a rise in savings desires, government will have to net spend, and it could allocate the money to public spending stuff: law enforcement, defence or whatever. As long as those elevated savings desires remain, government will not need to raise taxes to pay for that extra net spending. But if savings desires return to some long term average level (a process that involves the private sector doing some net spending), then government would have to “net save”, i.e. collect taxes to control the inflation that would otherwise occur. In the latter sense, governemnt is “paying its bills”.

But that’s a heck of mouthful isn’t it? I don’t blame Krugman for putting it in simpler language.

Tom Hickey said...

But that’s a heck of mouthful isn’t it? I don’t blame Krugman for putting it in simpler language.

In his defense, he is limited to the number of words he can use, since this stuff also has to fit in the print edition.

paul said...

"As long as those elevated savings desires remain"

I think framing it this way is a mistake...all government spending flows to saving as a consequence of the topology of the circuit (the S/B circuit).

As Matt likes to say "priming the pump" analogies misunderstand the dynamic completely,

Government-induced flow is the basis of the system. It is not possible for the private sector...a closed system...to net spend over any non-trivial time period.

Anonymous said...

For the sake of argument, I would like to propose a slightly different interpretation.

Now, I don't think Krugman necessarily the following interpretation, but his choice of words makes for an interesting discussion.

When Krugman says "Yes, the government must pay its bills in the long run.", an important distinction is implied.

He could not write "Yes, the private sector must pay its bills in the long run.", because everyone knows that to be false - private debt gets renegotiated, private entities go bankrupt, etc.

So, this property of government always paying its bills gives government bills a unique character among financial assets - forming the basis of risk-free assets.

This also implies that government can spend at whatever level it chooses - as it "must pay" its bills.

What we interpret as a constraint is actually an inherent capability.

Krugman used certain phrasing here, adding "in the long run", referring to government debt (as government expenses are usually paid current). But he is still correct, government debt is paid in the long run - redeemed in the government's currency and/or rolled over with government paper.

I am not defending Krugman here - I had the same initial reaction as Mr. Norman - then I thought about it. The value of this exercise is a way to talk to people unfamiliar with MMT using a different approach - if I can gain agreement on "government must pay its bills", I can easily make the distinction between government and the private sector and start to chip away at the stupid "government is a household" analogy. Thanks, Dr. Krugman.

Dan Kervick said...

Matt, I can't tell which Krugman views you are criticizing and which ones you aren't.

Matt Franko said...

Sorry Dan I put some in bold ... here are the ones where I believe he is missing the mark as it were:

"from the way he squandered a budget surplus to the way he drove up Medicare’s costs"

"The economy isn’t like an individual family"

"Things aren’t always this way"

"Government borrowing"

"it puts idle funds to work"

"the Fed’s “money-printing”"

"Yes, the government must pay its bills in the long run."

"spending cuts and/or tax increases should wait "

"the private sector is willing to spend enough to produce full employment."

These from him indicate to me that he doesnt quite see what is going on as we do...

An observation from your appearance on Arnie's show this week: She thought of a question she had related to "economics" (in this case bitcoin) and thought of calling YOU immediately and you are not "an economist" per se if I am correct? Arnie realizes that to get good information related to economic issues/policy she has to go outside the academe of economics... smart gal that Arnie....

rsp,

Matt Franko said...

Paul,

"It does seem to me the two terms (G and T) are unrelated…they are parts of independent processes."

Right maybe... well I dont see "G" as representative of what the govt is really doing in entirety... from the wiki on "G":

"G (government spending) is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits."

So "G" is not fully descriptive of what the govt is doing wrt the non-govt sector... a lot is left out...

And then there can be no "T" without "G" (or not really G but more than G) first... ie "govt injects $NFA first and THEN collects the taxes" so T is dependent on lets call it "G+" or something... which economists dont even follow this number to my knowledge..

Like Dan talks about "Public Enterprise" for instance... where is this being tracked/accounted for? No one follows this if all we have is "G"....

"Are you saying that (G-T) is an artificial construct?"

No not 'artificial' per se but perhaps just of use to someone who is interested in studying the ex post "product" results of our domestic economy... which I guess has value to some people but is not fully descriptive of what the govt is fully doing related to the non-govt sector...

Like on the left side of your diagram you have the flow coming in as "G-T" but Ive been thinking of it as some sort of "G+" going in and T coming out, identified as two separate flows.... not locked in to the standard academe of economics "G-T" terminology which is not fully descriptive of the actual $NFA flow from the govt to the non-govt sector...

This diagram you did:

http://neweconomicperspectives.org/2012/10/sectoral-balances-within-the-domestic-non-government.html

"G-T" over on the left according to wiki does not include social security or medicare or the interest income channel and many other things .... those are very key flows...

rsp,

dilbertgeg said...

Matt,
I think we all agree, Krugman is pushing for the right things to be done, but within a false paradigm that BEGS the opposite outcome, that thwarts his own agenda.

He's stepping on his own d__k.

The biggest hole Krugman falls into is the austerity argument that THE GRANDCHILDREN will be paying INCOMPREHENSIBLY HIGH TAXES for economic foolishness in the present, when Govt finally has to "pay back" this sum that it has "borrowed" --- or else Govt will just outright COLLAPSE when it taxpayers and creditors say "no more".

I can envision how this becomes a self-fulfilling prophesy.

Raising taxes to "plug the gap" as pressure for revolt grows.
Spending cuts leading to social unrest.

Investors that usually gladly purchase safe T-Bills see insane political instability and buy foreign bonds instead. Not that govt needs the bond market. More capital flight ensues - the IMF's typical "structural adjustments" leading to pre-planned "IMF riots" in the Third World, imposed on America ... like right now all over Europe.

(Greg Palast breaking down for da masses Joe Stiglitz' writings on the perverse economics of IMF and neoliberalism - "Golden Straightjacket" of privatization and austerity.)

Given Stiglitz' writings, "Globalization and It's Discontents", why would anyone expect Ken Rogoff to suggest anything other than "structural adjustments" he imposed on the Third World being imposed on western economies.

The "public borrowing" vs "private borrowing" explanation works ok in Krugman's narrow frame, but ultimately paints the same nightmare scenario that austerity freaks are selling.

I get some of the other points highlighted by Matt, and I think some are relatively minor (putting idle funds to work) compared to the vision of a crisis of profligate govt spending. Mosler has explained that the term "money-printing" is no longer applicable, but he has also used it at times as a colloquialism.

Bush DID require Medicare to pay more, by barring it from negotiating bulk pricing as private insurance does, granting a huge windfall to Pharma. But now I understand that Bush isn't "bankrupting" Medicare and SS, though in the current paradigm the math says Bush intentionally looted the "Trust Fund".

dilbertgeg said...
This comment has been removed by the author.
dilbertgeg said...

ya, people don't get that Govt must tax only a PORTION of deficit spending, this spending that amounts to an advance TAX CREDIT that is used for genuine economic activity (and savings), and also to pay future tax obligations.

How the tax credit of Deficit Spending funds the economy and growth of Net Worth, while tax collection on a small portion of that creates a broad Demand for the State-issued currency.

I'm hardly well-versed in this, as I have stated, just some online cribbing. But these points have become obvious.

Tom Hickey said...

Matt, wrt G-T in GPD, GPD is defined as only counting money transaction. The informal economy of non-monetary "transactions" and money-transactions in the form of grants don't appear in GDP. But these are important aspects of a national economy. Disregarding them is a methodological choice that I have argued is not representative of the facts and skews the data.

There are all sorts of choices like this that make academic economics unsuitable as a policy science and not very useful in the management of private firms. Add to that the neoliberal bias of so-called orthodox economics, as well as general ignorance of monetary economics among mainstream economists.

JK said...

Matt or Paul,

Paul said: "s Matt likes to say "priming the pump" analogies misunderstand the dynamic completely."

Can either of you elaborate on this?

thanks.

Matt Franko said...

d,

"but ultimately paints the same nightmare scenario that austerity freaks are selling."

Right Mike has blogged about this often... the "conservatives" just (by their "conservative" nature) just assert that this should be addressed sooner rather than later, "we can't put this off!", so Ks argument fails with them...

While for us Ks assertions here are just mathematically false... as "govt has already PAID" ie there is no more "paying" required once the bill is PAID...

Here:

https://www.fms.treas.gov/fmsweb/viewDTSFiles?dir=w&fname=13042500.pdf

We can see that thru last Thursday, govt has PAID almost $44B to Medicare providers this month... ie THEY ARE PAID!

There is NO MORE "PAYING" REQUIRED... earth to Krugman!

rsp,

Matt Franko said...

Tom,

"Disregarding them is a methodological choice that I have argued is not representative of the facts and skews the data."

FD: I'm operating in no small part under your teachings on this...

rsp,

Matt Franko said...

jk,

Paul talks about "no perpetual motion machine"...

There always exists what Paul has termed a "net liability cohort" (Ken Langone is NOT in this cohort) in the non-govt that has to be provisioned with positive flow of $NFA balances (ultimately from govt $NFA injection) or the system shuts down...

rsp,

paul said...

JK,

The way I see the system, priming the pump is pointless if the pump isn't in the water...government spending gives the economy...the "pump"...something to work with.

Like a poker game...one can only win what's on the table or in the game. Savings (most of the money that has been created, either by government spending or private debt) isn't on the table, or at least it isn't available to win because the winners already hold it.

Government spending recapitalizes the game. So imagine if the game is financed by private borrowing and the same group keeps winning...there is no chance of the losers to repay the debt...what happens to the bank?

At least the way I see it businesses don't "create jobs"...they fish for the dollars the government spends and they need workers to do the fishing for them if the goal is to accumulate a lot of wealth. One can only do so much with his own hands.

The government creates the demand that leads to jobs.

At least that's how it worked before the economy became financialized. Now it seems capitalism is consuming itself and we should expect steadily declining demand from the 99%.

paul said...

"...does not include social security"

This is a big deal...40+ million people at an average of about $1500/mo. ==> around $700B plus per year.

Tom Hickey said...

Plus, if a person is not working for money, then they are at leisure. This totally disregards all the unpaid work that transpires in the informal economy that is as significant as paid work or more significant that a whole lot of paid work occupied with trivia.

Matt Franko said...

Paul,

Recent trend is that govt is injecting over $350B per month ... which is over $4T annual...

So the S&P earnings are about $1T annual now also about 50/50 foreign and domestic... now you have to really get into it for accuracy on the actual currencies used, but lets say S&P domestic earnings are 50% of this $1T total so that is $500B...

So at the end of the year the S&P cohort is left with 500B after taxes or about 1/8th of total current US $NFA injection if they are to "make their domestic numbers".... this does not seem unreasonable...

The S&Ps "go fishing" and end up with about 12 or 13% of the year's $NFA injection after taxes from domestic operations... doesnt seem unreasonable to see this happening...

And if the govt would inject more $NFA, the S&Ps would just end up with more...

rsp,

paul said...

"And if the govt would inject more $NFA, the S&Ps would just end up with more…"

Which leads to why inequality has ballooned since we lowered tax rates on the richest cohort while leaving the rest of us more or less unchanged…

(more) Progressive taxation tends to make the capitalist system more stable, because it reduces excess savings at the high end.

These folks have so much excess wealth it makes it easy to buy influence and game the system. That and a million dollar investement returns 100 times that in gains through a lack of competition.

Small business is a completely different story…no real political influence and the competition can be crushing.

Small business is pretty much in the same boat as middle-class households…Hell, they are mainly middle-class households.

paul said...

"Plus, if a person is not working for money, then they are at leisure. This totally disregards all the unpaid work that transpires in the informal economy that is as significant as paid work or more significant that a whole lot of paid work occupied with trivia."

Yes this informal economy (including illegal activity) seems to be taken for granted or waved away…let's give all the credit to the big boyz for making stuff happen.

Tom Hickey said...

To make the system work the govt has to keep shoveling currency into it to support saving desire, which then gets funneled up in an unending cycle unless govt institutes a progressive tax policy that recycles the input. Of course, govt doesn't need to get the taxes for funding purposes, or even to manage inflation in most cases. It's required to keep the system in balance so it doesn't become top-heavy and collapse politically of its own weight. Capitalism is not compatible with liberal democracy without a suitably progressive tax policy that keeps wealth in balance more or less.

dilbertgeg said...

[Paul: businesses don't "create jobs"...they fish for the dollars the government spends and they need workers to do the fishing for them if the goal is to accumulate a lot of wealth. One can only do so much with his own hands.]

What a socialistic viewpoint! ;)

(Michael Parenti, non-economist socialist, replied to critics that his writings are radical because reality is radical.)

YES. In an economy with a FIXED non-expanding volume of money (kinda like the EU), one company's surplus (profits) can only come from another company's deficit (loss), one person's positive net worth can only come from another person's negative net worth.

This is the "freedom" of a deflationary spiral proposed by Austrian types who rage at an expanding money supply. Yes, in theory, if there's no cartels and no demand leakage, then family expenses ought to decline over time, or prices would remain stagnant as *some* items become more valuable ... like computer hard drives and memory.

But for one, the entire economy is not the computer biz.

Two, the COST IMPOSED ON SOCIETY by such a scheme is a continuous wave of bankruptcies and debt spiral as future earnings are NEVER big enough to cover past debt service and investments, regardless of tangible non-financial "wealth" improvements such as technological advances ... likely not happening, capital investment choked off.

But at least we would have FREEDOM!!!

None of that government stealing from us with the "printing press" and banksters stealing from us with "an inherently dishonest system" - F. Beard.

Sarcasm is for debating with dumkopfs. I know you folks can explain this with much more accuracy.

paul said...

"a deflationary spiral"

In my view of the world this is the path of an ordinary entropic process. It isn't a shocking anomaly.

Those that think otherwise should demonstrate a self-sustaining process for us.

Governments, one way or the other, have to actively push economies in the other direction via policy (towards activity) otherwise economies will always wind down. Stuff doesn't just happen.

Neoclassical economics has managed to convince us the Sun orbits the earth.

Chewitup said...

I thought I might add that Krugman is not ready to give up his IS/LM binky.

dilbertgeg said...
This comment has been removed by the author.
dilbertgeg said...

Paul,
the libertarian types say "government can't create wealth, people and business does".

With a few qualifiers, let's concede they are mostly or partly right.

Technical innovation has in some cases come from an individual "genius" inventor, but usually a team of researchers and developers.

These are often working for Govt directly or on Govt contracts.

Rarely is this a "mad scientist" in his basement laboratory ... or Steve Jobs in his garage. Steve Jobs was improving and applying technology that was previously created by/for the military and the census program, and by LARGE corporations like Xerox, presumably with a slice of the Pentagon budget.

That's one definition of wealth, the kind that ideologues imagine in their stories.

That's a separate issue from the monetary issues you guys are discussing, though they are inter-related.

The monetary phenomenon is dependent on the tangible wealth to give the money a purpose and meaning. Money can only purchase stuff that's for sale. If stuff hasn't been invented, developed, produced, or grown, money can't buy it. You can't eat money.

But without a functional monetary system, one that doesn't lead to cascading bankruptcies and kleptocracy-style wealth disparity, the system that produces and sells the tangible wealth doesn't function. Businesses fail as often from insufficient capital as lack of inventiveness and work.

The "austerians" are TRYING to describe this symbiosis, in the most charitable explanation, assuming very sincere arguments, but they FAIL at doing so. Sincerity does not substitute for accuracy and clarity.

A businessman should grasp this much, FACTS matter, unless his business is mostly applying marketing and "spin" to commodity products.

I guess because they are familiar with the tangible wealth side of the story, the creativity and "noble businessman" story, and obsess about their own limited budgets and cash flow, but not how the macro-monetary story operates. They can hire accountants to manage their money flows or do their own figures, but Macro must be strongly counter-intuitive.

I've talked to a few non-economists in business that seem to understand it quickly.

paul said...

"the libertarian types say "government can't create wealth, people and business does".

Yes and I agree as far as that goes...people and businesses are competing for the dollars spent into the system by the government. The cream rises normally although many actors are able to game the outcome.

We would expect the best ideas to "win" so in this respect "the market" is responsible for the outcome.

What I'm saying is that this dynamic won't take place at the necessary scale if the government doesn't provide the capital by purchasing a significant level of output.

The John Galts of the world would be shocked to learn that their vacuum could easily be filled by a nearly limitless number of willing entrepreneurs if they choose to sit it out because we don't deserve their abilities.

Matt Franko said...

d,

I think state currency systems (we have found a quote from Aristotle on what the Greeks termed 'nomisma') re-published this here:

http://mikenormaneconomics.blogspot.com/2012/08/aristotle-on-nomisma.html

Aristotle termed it a "device" or what we may call a "tool" today...

this "device" had to have been developed for the purpose of 'calibrating' or being made able to quantify the economic performance of their "Public Enterprise" or other provisioning systems in their society...

A 'device' similar to "weights and measures" but in this case to facilitate the true sciences of financial accounting and MICRO-economic analysis.

So right govt cant 'create wealth' or "real wealth" but one important thing we (humans) are trying to do with this 'device' termed 'nomisma' by the Greeks is operate the system, under law, so that we can do valid quantitative analysis of our economy and gauge economic performance...

Looks like we went off this system and under metals for quite a while, opposite of what Aristotle asserts here... but now somehow we find ourselves back on it after almost 2,000 years at the end of the 20th century... dont ask me how but we find ourselves there again...

So these 'austerians' and the academe of economics are still stuck in what Warren describes as "the gold standard mentality" where they are not able to see that we have been able to get back to this 'nomisma' system again and all the potential good opportunities ("policy space") this opens up for us...

As to your point, now the only constraints are the real ones again not financial... this should be "good news" for everybody... but many remain blind to what is really going on...

rsp,

paul said...

Now that Matt has made the case I'm going to revise and extend my previous remarks...

The government does...literally...create wealth...financial wealth.

Workers and businesses in turn create real wealth and commerce in the pursuit of that financial wealth.

The U.S. is a hybrid system of socialism and capitalism...it relies on the preferences of the public to make some of the decisions about how resources are allocated but the government funds all activity, public or private.

The MOU want to make ALL of those decisions while using the people's money...I wonder which group will end up on the short end?

Roger Erickson said...

A fiat currency issuer must pay it's fiat in the long run? WTF?

Literally translating, the "public" must pay it's "public initiative" back some day?

Krugman's not only semantically sloppy, he's plain out of paradigm, still looking at a human culture as a closed spreadsheet - instead of as the entity that constantly creates and enlarges spreadsheets.

Tom Hickey said...

Right, they seem to think that the spreadsheet is in charge ex ante instead of being an ex post record.

Matt Franko said...

right Tom,

and i would add that "G-T" is ex post like this too, and "GDP" ... so I dont know if these are the best financial metrics to look at to figure out what govt is doing... or what is really going on in the economy for that matter....

Rsp,