For the record

by Russ Roberts on May 5, 2009

Paul Krugman notes that nominal wages are falling for some workers. He worries that this is akin to a paradox of thrift where lower wages lead to less spending and the economy struggles and so on. He then notes that the economy seems to be doing better. BUT:

But the unemployment rate is almost certainly still rising. And all
signs point to a terrible job market for many months if not years to
come — which is a recipe for continuing wage cuts, which will in turn
keep the economy weak.

To break that vicious circle, we basically need more: more stimulus, more decisive action on the banks, more job creation.

Credit
where credit is due: President Obama and his economic advisers seem to
have steered the economy away from the abyss. But the risk that America
will turn into Japan — that we’ll face years of deflation and
stagnation — seems, if anything, to be rising.

I want to focus on the first two lines of he last paragraph in this excerpt:

Credit
where credit is due: President Obama and his economic advisers seem to
have steered the economy away from the abyss.

Tell your children (so that when they grow up and hear this ridiculous story repeated) that the President and his advisers don't steer the economy and that the so-called stimulus package has barely gotten started at the time that the most recent Nobel Laureate was ready to give the administration credit for saving us from the abyss.

I would add that it's a little too early to be optimistic about the future. I hope it's true. But if it is, what does Krugman have in mind when he says, "steering?" What policy can he point to that is keeping us from the abyss?

BTW, if you go here and click on the frame number 3 you'll see a chart of funds allocated and spent by the federal government in the "stimulus" package. As of the end of April the total spent was still under $100 billion of the $787 billion to be spent. Is this what has kept us from the abyss? Or maybe he means the masterfull steering of the financial sector. I'd sure like to know.

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Jacob Oost

Okay, my theory is that Krugman is simply experiencing the early onset of dementia.
John Papola

But I thought sticky prices and wages are at the heart of Krugman's keynesian prescription for stimulus. The complete lack of irony in Krugman's lament of wages falling given that is interesting... or maybe that only applies in the keynesian vacuum where equilibrium starts at full employment and we weren't there... or maybe I don't yet fully understand the keynesian model... or maybe the model is incomprehensible.
Kevin

I took a screenshot.
Methinks

Michael Smith,

Everything you say is true. However, the bottom 95% and particularly the bottom 50% have been engaging in magical thinking ever since The One came on the scene. They won't be convinced of the error until either inflation or high unemployment whacks them directly because human beings are obviously incapable of learning from history (particularly those human beings educated in American public schools).
Michael Smith

What the Obama administration is doing to the economy isn't "steering" it -- it's stealing from it; and it hasn't brought us back from an "abyss" -- it's taken a multi-trillion dollar bite out of our ASSets.

How long will it take the taxpayers of this country to realize that when government spends, it is spending THEIR money -- and that when government increases its expenditures, it does so only at THEIR expense?

The notion that only the richest 5% will pay for all this spending is a fantasy -- just like Obama's crazed fantasy that he can pass economy-killing "green" cap-and-trade legislation that will become a net economic benefit. Obama is like a cannibal chief telling his nervous tribe that they can all feed themselves merely by eating only the fattest 5% -- the smarter among the tribe wonders what will happen when they once again grow hungry and the fattest 5% are gone.

The naked truth is this: Obama is the power-lusting cannibal/looter-in-chief of an administration that is stealing us blind for purposes of granting ever-more unearned economic benefits to the undeserving coalition of parasites -- namely, today's Democratic party -- that voted this particular gang into office. Krugman is merely a useful-idiot lap dog who, on cue, barks out the intellectual clap-trap that provides a transparent veneer of rationalization for this orgy of looting.

We can only hope that the mid-term elections deal a knee-capping backlash against this massive money-and-power grab. That might buy us some time -- and slow down this tidal wave of fascism on which Obama is surfing his way through all of our life savings as well as those of our children.
LowcountryJoe

>>He worries that this is akin to a paradox of thrift where lower wages lead to less spending and the economy struggles and so on.<<

So, it seemingly looks as though Krugman does not understand the second paradox -- the paradox of theft. That's right, theft! As the federal government attempts to spend the economy out of the down leg of this business cycle [one which it very much helped to create] and then will later tax more to pay for it, is it any wonder that the private sector's forecasts and adjustments of their economic activity will show up as economic crowd out? Any good kleptocrat would recognize this for what it is but it seems as though Krugman has long ago forgot about the concept of tradeoffs.
Ray G

A Nobel winning economist who relies on something as simple as the "just imagine how bad it would have been" type of argument.

The upside to this debacle is that the clowns running the GOP are looking pretty silly too, so maybe we'll get some new thinkers in the public light out of this.

Jeff Flake is too much for the national mainstream, but divisions between the party men on the Right, and those who have genuine classical liberal convictions could produce a sellable version of Flake for national consumption.

Or not, and we all just go John Galt somehow in a weird, Rand-like version of the apocalypse.
Froggy

I've been wondering how much of the stimulus package had been spent. Thanks for the link, Dr. Roberts. Although, according to the link, only $15 billion has been paid out. Does anyone seriously think that $15 billion has neutralized the recession?

I guess it would be acceptable to believe that the expectation of $700 billion could spur growth. Does anyone else wish that there was a stipulation in the stimulus bill that would break up the money into segments, and only if the economy remained bad would more money be released?

I think that's the kind of "new idea" that the Republicans need to promote.
vidyohs

Sir ThomasL,

Most excellent.

"I have to admit, as tragic as it would be, I've flopped over into hoping that we hit the abyss anyway. I think any economic depression is better than an entire society that believes we were only saved from disaster by fascism and the strong, caring activity of an increasingly capricious and diverse government.

Better hungry and free than perpetual servants. At least the former has an eventual solution.

Posted by: ThomasL | May 5, 2009 2:02:36 PM"

And, Ms. Methinks,

You too are right on, and as for this:

"Krugman and Bernanke seem to be suffering from the same misunderstanding - that the stock market is the economy.

Posted by: Methinks | May 5, 2009 2:49:29 PM"

Do you think that those stupid bastards will ever learn that I am the economy?

No, I am sorry....you are the economy, well....maybe not....perhaps Lee Kelly is the economy, or K. Ackerman, Martin Brock, Brotio, gosh, maybe it is we who are the economy.....oh hell, the stupid bastards have their heads way too far up their butts to understand what I just said anyway.
DAVE

Oh and one more thing Prof K.

Government can no more create a job than a magician creates the rabbit in his hat.

It was always there, just in a place where the audience wasn't looking and with a sleight of hand you merely made it visible to the audience.

While it's wholesome and clean entertainment, It makes for poor and often disastrous economic policy.
DAVE

"To break that vicious circle, we basically need more...job creation"

Note to Mr. Krugman:

Any job that you would "create" would have to come at the expense of at least one other existing job somewhere. You redirected the resources that were supporting that job.

The tragedy is that there are also other future jobs that don't even exist today, Mr. K., that may now never be because you took away the resources and incentives that would have (truly) created them.
MnM

But the unemployment rate is almost certainly still rising.

To break that vicious circle, we basically need more...job creation.

When we're losing jobs what we need is more jobs?! Thanks, Professor Obvious.
BoscoH

Ed Leamer's EconTalk session this week sheds light on everything. The way I see Krugman is that he realizes the same thing -- that barring things getting too terribly out of hand, we'll generally grow at 3% per year. So he can use the economic gravitas to endorse Obama Administration policies, that, if they don't put things too terribly out of kilter, will likely result in the same 3% annual growth given a suitable time horizon. Can anyone come up with a better explanation of Krugman?
yetanotherdave

The company needs to get back to its core business of providing the things the free market doesn't.

The company (govt) needs to get back inside its constitutionally defined limits. Then it wouldn't have the power that attracts the special interests and corporatist forces.

But how do we go about reigning them in?
Mr. Winston

Mark my words, a marketing campaign from the Obama administration will be forthcoming. Credit will be given where none is due.

Just a couple of weeks ago, Krugman was preaching that Friedman and Schwartz were wrong. So seeing how really we've only seen monetary stimulus at this point, does his most recent admission prove that they are "less wrong?"

I've said it before and I'll say it again, there is too much career risk for Krugman to admit that the data do not support his ideas.
Superheater

Paul Krugman is living proof intellect is a morally neutral attribute, as easily used for evil as well as good.

We should also be repeating intelligence isn't wisdom.
K Ackermann

ThomasL - I am in agreement.

Since the government is incapable of getting even a single thing correct anymore, I figured whatever they did would blow up and finally cause the system to be purged.

I never really considered it would attempt to restore the economy by increasing the very things that caused the problem to begin with.

The government is attempting to shift the fight from us to our children, but it overestimates the time until the even-larger problems manifest.

It's not even the deficits that bother me. It's the pathological monetary policies, and the fact that there has been zero willingness to even debate the policies which are obviously pathological.

As long as special interest is allowed to infest government, and as long as special interest finances elections, then the government will extend its streak of being wrong in 100% of the descisions it makes.

Government is operating in an inverted roll. It is supposed to be the one place that is market-neutral as it manages public interest. Instead, it has become the market maker for legislation. The share price of legislation is beyond the reach of the average investor.

We occasionally oust board members, but that is about the extent of our lawful power. The problem is the new board still presides over a company that sells legislation.

The company needs to get back to its core business of providing the things the free market doesn't.
SymbolicalHead

"... and diverse government."

Thought I'd broaden that item a bit with the specific, but broad ranging examples of a:

1) National government that not only builds (directly or indirectly via payments to states) every road you take, but also builds and warranties the car you drive on them.

2) National government that lends you the money (at negative real interest) to buy a house, go to school, to buy the aforementioned car, or simply to guarantee your credit card debt for whatever else you'd like.

3) National government that decides, based on its own feeling, who should, and should not work at each company, and what each employee should make.

4) National government that decides which contracts should be, and should not be honored, individually, based on its own better judgment.

5) National government that decides which companies should, and should not, receive its favors and funding based on the relative influence of its members.

etc. etc.
Methinks

Krugman and Bernanke seem to be suffering from the same misunderstanding - that the stock market is the economy. The steering experiment has already taken place in the 20th century and the finding was that you can't steer clear of the laws of economics, one of the most elementary of which is incentives, and that messes up your ability to steer anywhere but toward Hell.

Lee Kelly said it best (as usual).
SymbolicalHead

I have to admit, as tragic as it would be, I've flopped over into hoping that we hit the abyss anyway. I think any economic depression is better than an entire society that believes we were only saved from disaster by fascism and the strong, caring activity of an increasingly capricious and diverse government.

Better hungry and free than perpetual servants. At least the former has an eventual solution.
Lee Kelly

Useful idiot.