Recalculating

by Russ Roberts on October 5, 2009

in State of Macro, Stimulus

Krugman insults Arnold Kling (HT: THM)

But what none of the participants in the debate seem to realize is that Arnold is basically reinventing 1934 macroeconomics.

What could be more insulting? Arnold is going back to 1934!!!! Haven’t we learned anything in the last 75 years?

No doubt we have. It is also true that some of the things we knew in 1934 are still true. The hard question is figuring out what goes where. After quoting Schumpeter, Krugman continues:

It’s all there: mass unemployment is necessary, because you have to shift resources away from sectors that got too big, stimulus is a bad thing because it slows the necessary adjustment. And now as then, the whole notion falls apart when you ask why, say, a housing boom — which requires shifting resources into housing — doesn’t produce the same kind of unemployment as a housing bust that shifts resources out of housing.

Arnold defends himself here, pointing out that booms are slow and long and busts are sudden and short. So there is a fundamental asymmetry.

But there is another asymmetry. As the housing market expands in the 1990s through 2006, people are drawn into construction because they see the higher wages. They begin to invest in the skills of the construction business.

When it collapses, they have to decide what to do instead and how long to wait before doing it. There is a chance the construction industry will bounce back quickly. So you wait before taking a lower paying job. Then the question is which lower paying job. Which one is your next best alternative. This is not the same process as being attracted into an expanding industry that is signaling that it wants you by paying you a lot. This is harder and more difficult.

About a year ago, as the financial crisis was beginning, I  was picked up at the airport by a car service for a talk I was giving. I asked the driver how long he had been driving a limo. He said, if I remember correctly, six months. What had he been doing before that? Supervising the construction of extremely large luxurious homes, was his answer. He wasn’t a plain construction worker. He was in charge of the whole project. Why did you leave the field, I asked. He told me that when he saw how many houses had been built above and beyond the sales potential he realized that there wasn’t going to be a demand for his services for about five years. He didn’t want to do nothing for five years (and he was close to retirement, or so he hoped) so he looked around for something else. He chose driving a car, a skill he already had, a skill that was enhanced by a pleasant demeanor, which is part of being a good supervisor and part of being a pleasant person behind the wheel of a limo.

I didn’t ask, but I assume he took a big pay cut. That probably wasn’t easy. He might have been tempted to wait things out by convincing himself that it might take less than five years. But he didn’t. Most people have trouble coming to that conclusion. Unemployment insurance makes it harder to reach that conclusion. So it wouldn’t surprise me that the responses to a boom and bust are asymmetric.

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juandos October 5, 2009 at 10:15 pm

Arnold is basically reinventing 1934 macroeconomics“…

Considering who’s making this assessment I can’t help but wonder if Mr. Kling is actually reenforcing the macroeconomics that most everyone learned back in the thirties…

tw October 5, 2009 at 10:26 pm

Could this be a good sign because Krugman is finally paying some attention to his myriad critics????

David October 5, 2009 at 10:46 pm

I have to wonder if Krugman realizes how shallow and, honestly, idiotic his smarmy critique is.

“And now as then, the whole notion falls apart when you ask why, say, a housing boom — which requires shifting resources into housing — doesn’t produce the same kind of unemployment as a housing bust that shifts resources out of housing.”

That isn’t even an intuitive, yet stupid, critique. It’s an unintuitive and stupid critique.

Dave October 5, 2009 at 10:49 pm

Mish had an excellent rebuttal to Krugman’s Hangover Theorists post (linked to in the quote above). Highly recommended.

Anonymous October 5, 2009 at 11:22 pm

I suppose unemployment is not required to reorganize resources. We could employ people between jobs to look for work for example. More precisely, we could extend them credit to look for work.We routinely pay people to produce value realized only in the future. Practically all wage labor fits this description. The wage is really credit extended to the laborer until his produce meets the market, or it’s a bet that the employer places on the laborer’s productivity.But even if we paid people to look for work, production would fall when lots of people look simultaneously, because it’s just harder to find something useful to do when lots of other people are trying to do the same thing at the same time. So paying people to find work wouldn’t prevent recession. It would only prevent unemployment, which isn’t the same thing. States can outlaw unemployment. They can’t outlaw recessions, not if markets determine the value of goods.Since people are parasitic creatures by nature, a practical system of paid utility seeking, or credited utility seeking, might not be so to realize, for the same reason that unemployment insurance isn’t so easy to realize. Extending credit to entrepreneurial organizations to employ idle labor seems a better strategy in times of high unemployment than simply paying the unemployed to look for work. It’s basically the same thing, but it provides some direction for unemployed people who might need it after leaving a dissolving organization.On the other hand, if we extend credit too easily, wherever unemployment occurs, we risk impeding the most useful reorganization. To minimize unemployment naively, we’d simply extend credit to every failing organization with only the most superficial reorganization. You didn’t produce any value last year? That’s O.K. Just declare bankruptcy and start over with fresh credit this year, like the too big to fail banks. This approach to the problem doesn’t achieve much useful reorganization. We might as well all work for state agencies.I also agree that unemployment during a recession can create an aggregate demand problem, with unemployment spreading beyond the organizations that are unprofitable even with all resources fully employed.But I still think Krugman is a political hack and have no idea how he won a Nobel Prize.

Ike Pigott October 6, 2009 at 12:06 am

He won it for work that was based in actual statistics and analysis, something that he hasn’t done in twenty or so years.

Anonymous October 6, 2009 at 12:22 am

I don’t pretend to know his academic work, but I’m tempted to say that political pontification should disqualify him from consideration for the prize. At least, the pontificating should be as rigorous and original as the academic work. Most people will only know the pontificating and will associate the prize with it regardless of the Nobel committee’s motivation.

If a laureate wants to become a hack after winning the prize, the Nobel committee can’t do much about that, but Krugman’s PC pronouncements on everything from globalization to global warming will eventually make him appear foolish on any number of scores, and he’ll have this Nobel Prize to make the Nobel committee appear foolish as well, regardless of the merit of his academic work.

Ike Pigott October 6, 2009 at 12:44 am

His pre-political work is certainly noteworthy, and I would not begrudge him the prize.

However, I fear the Nobel committee rewarded Krugman for his “bold” political partisanship instead. I mean, how hard must it have been for a New York Times columnist to buck tradition and risk ridicule from his colleagues for daring to bash such a popular president!

Anonymous October 6, 2009 at 2:00 am

Well, it’s not my prize to give, but I’ll never think of it again without thinking “Krugman has one too.”

Anonymous October 5, 2009 at 11:27 pm

Shorter Krugman. Reinventing 1934 macroeconomics, bad. Reinventing 1936 macroeconomics, good.

Anonymous October 6, 2009 at 1:52 am

Wish I’d thought of that. Bravo.

Anonymous October 5, 2009 at 11:28 pm

Everyone else can comment on Krugman and Kling on levels that are above my head. I will comment on your limo driver.

What do you want to bet that if the man has the energy left for one more go around and has no faith in the housing industry that in a short time he will own his own limo service and his own vehicles.

A man like that will rise to the top every time.

Ask not what your country can do for you, ask what you can do for yourself.

Anonymous October 5, 2009 at 11:40 pm

Not to be denigrating to anyone but to simply make my point more pointed.

While Krugman is talking about Kling, and Russ is commenting on Krugman talking on Kling, and Kling rebutting Krugman; and an Obamaczar spending your money like a madman….the limo driver is ignoring all the theoretical stuff while taking care of business and making a new life.

As long as the et.als. above don’t get in his way, he will do fine…..as would all the rest of America if they just don’t sit on their ass and wait for corporation handouts.

Just had a conversation with my stepson (live in K.C.), who thinks stupid and gets paid stupid. He complained about big corporations, big business, sending “jobs” overseas, and how the American economy will continue to tank as long as “we” let this happen.

I used Don’s and Russ’s intelligent rebuttal with a little flair of my own.
First I asked him whose job it was, his or the company’s. He hated to have to answer that one.

Then I asked him what would change in his life if the company he worked for sent the work to Dallas instead of Malaysia. He hated having to answer that one as well.

Well, he said, “I could move to Dallas”. And, I replied, “Yeah, and you can move to Malaysia as well, couldn’t you. But, either way, would the company want you and would they pay you what they are paying you now? No. Why the hell do you think they are moving that part of their operation?”

My stepson doesn’t like me, but that is okay, he and muirduck would get along just fine.

BoscoH October 6, 2009 at 1:55 am

Amen, brother!

Justin P October 6, 2009 at 5:08 am

It took me a long time to finally see the light…I’m sure your stepson will too, once he starts seeing his taxes go up.

Anonymous October 6, 2009 at 10:04 am

I’ll just say that I have no such hopes for him, and let it go at that.

Anonymous October 5, 2009 at 11:50 pm

I think you’re right, and maybe this guy owned his limo already, but he doesn’t need a fleet of vehicles and many employees to be a success. If he wants to go that route, more power to him, but administering a fleet of limos seems no more independent or entrepreneurial or successful to me.

Anonymous October 6, 2009 at 10:12 am

I agree that the limo driver’s definition of success is his own personal decision, is it comfortable, is it being a man of significant means, is it very wealthy, but regardless he will be okay.

As for your entire comment, there is an all day conversation wrapped up in that brief comment, I understand exactly what you’re saying, so my short version will be that yes running a large fleet of limos as an independent business owner can be as demanding as being a construction supervisor for a large successful builder.

But, what I missed as a kid in central Texas growing up and looking at all those “old” ranchers of 40 years of age, was yes they worked hard, yes they were 40 and just really starting to see the results of their labors pay off, but they all were doing what they “wanted” to do, what they dreamed of, and the restrictions demanded by their life style were of personal choice. That is the kind of situation that can get you out of bed each morning ready to go at it one more day, and another day, etc. because it is yours. That is freedom in my book.

Ike Pigott October 6, 2009 at 12:11 am

Russ — allow me to ask a related question:

Can you think of another example of how researchers/professors/experts have committed the similar fallacy of assuming there must be symmetry; when in fact the existence of symmetry has not been properly established?

Anonymous October 6, 2009 at 6:44 am

Chemists and physicists prior to recognizing the second law of thermodynamics.

Anonymous October 6, 2009 at 12:13 am

Wow… Krugman is either clueless or evil.

Blarney October 6, 2009 at 5:39 am

You’re on to something. I think Krugman is the Devil.

foodist October 7, 2009 at 11:07 pm

Krugman is become Death, Destroyer of Worlds

Anonymous October 6, 2009 at 2:04 am

But Krugman’s idea of progress is to revert to 1936 economics. What a tool. Might want to get that beam in thine eye checked out there, Paul.

Sam Grove October 6, 2009 at 3:17 am

why, say, a housing boom — which requires shifting resources into housing — doesn’t produce the same kind of unemployment as a housing bust that shifts resources out of housing.

Cascade events are usually asymmetrical.
Think earthquakes, volcanoes, landslides, and sinkholes.

Is he really so dumb as to assume it should be symmetrical, or has somebody shown that to be the case?

Anonymous October 6, 2009 at 7:05 am

Remember, he’s the same one who thinks that when faced with the loss of a customer, a businessman’s first and second (and maybe only) choices are to draw from savings and cut consumption. He places “adapting the structure of production” in quotes, not to give credit, but because he can’t comprehend what it means. And he can comprehend no cost to government spending beyond the obvious transfer of wealth.I don’t know if he’s dumb. I think it is entirely possible that he just doesn’t care about what is true. He didn’t develop the “conscience of a liberal” from his economic understanding. He pursued economics to further the goals of his liberal conscience.

Sam Grove October 6, 2009 at 4:34 pm

He pursued economics to further the goals of his liberal authoritarian conscience.OK, I was being generous, you can read “authoritarian” as “fascistic”. Given that, I wouldn’t claim he has much of a conscience. There are all kinds of sociopaths.

Anonymous October 6, 2009 at 4:58 pm

Of course, I was referring to his use of “liberal”, not ours. “Authoritarian” and “fascistic” are much more accurate, and “sociopath” does seem to fit the actions he proposes.

Anonymous October 6, 2009 at 3:28 am

Jesus, man. Krugman just keeps recycling his old material. This is a lame re-hash of his 1998 baloney “take-down” of the “Hangover Theory” (aka Austrian business cycle theory and its credit-drive corollaries).

This “why wasn’t there a period of unemployment as workers got INTO THE BOOM” is, as Russ points out so well, a silly criticism. If new money is flowing into a booming industry, and factor prices and wages are rising as a result, why… people are LEAVING CURRENT JOBS for the HIGHER PAY.

How many Microsoft employees jumped ship to startups in the late nineties? How many people jumped ship into real estate during this boom?

This is the most ridiculous rhetorical anti-logic. But then, it’s Krugman. For him, economics started and ended in 1935 with the “General Theory”.

Name October 6, 2009 at 5:40 am

I wish he were here so I could throw my drink in his face.

Anonymous October 6, 2009 at 3:37 am

BTW, I didin’t realize Arnold had some Austrian in him. Awesome. “Recalculation” is indeed a capital-based macro type of thinking.

Santtu October 6, 2009 at 3:45 am

Krugman always surprises.

There’s no hole too deep that his answer would not be – keep digging.

Anonymous October 6, 2009 at 6:36 am

Of course. Digging holes is how keynesiacs stimulate the economy.

Anonymous October 6, 2009 at 3:54 am

In my opinion, a sudden tightening of monetary policy [i]revealed[/i] an ongoing miscalculation that had previously been hidden by inflation. There would have been a recession without the housing bubble, but it was exacerbated and deepened by it. In other words, an important recalculation is underway, and attempts to stifle it are merely preventing relative prices from adjusting. However, I think even without this problem the Fed’s tightening of monetary policy would have caused problems itself.

Justin P October 6, 2009 at 5:10 am

Got to love the Fed!
Fed’s one and only answer….print more money!!!

Anonymous October 6, 2009 at 5:50 am

Well, I am holding out hope that the Fed’s decision to pay interest on bank reserves reflects a concern for inflation down the road; they may have trouble “mopping up the liquidity”, but hopefully they can dam it in instead.

Greg Ransom October 6, 2009 at 4:29 am

Krugman admits he’s read almost no “prose” economics published prior to his graduate education years.

This is more evidence of that.

What part of Krugman’s vulgar Keynesianism isn’t contained in 1934 economics? Almost nothing. At least nothing that is actually true.

Similarly, what part of Krugman’s absurd “explication” of 1934 economist is actually accurate? Almost nothing.

Krugman is a disgrace, and an embarrassment to economic science.

Name October 6, 2009 at 5:42 am

Well said, Ransomizer!

Anonymous October 6, 2009 at 5:12 am

“It doesn’t explain why there isn’t mass unemployment when bubbles are growing as well as shrinking”

Is this Ivy League economist, and Nobel laureate, actually confused about the different implications of a positive demand shift versus a negative one?

D.G. Lesvic October 6, 2009 at 7:30 am

“Krugman insults Arnold Kling.”

That is so unnecessary. I don’t know why anyone has to do that.

Anonymous October 6, 2009 at 10:39 am

The response to Krugman is much simpler than all that. Booms and bust are mirror images of each other. In booms, new jobs are created. In busts, jobs are destroyed.

To ask why there’s not unemployment during a time when new jobs are created is an idiotic question, not even worthy of an Economics 101 freshman. Really, Krugman should be ashamed to have even thought it.

Diego October 6, 2009 at 3:27 pm

Here in Spain there was a probably even larger housing bubble than in the US. And at least for the Spanish case, another source of asymmetry could be related to immigration. There was a large inflow of immigrants during the boom, many of whom came to work in the construction sector. However after the bust these immigrants are reluctant to return to their countries. They would much rather first enjoy the unemployment benefits to which they are entitled, and wait for the crisis to pass, since life in their home countries has at best not gotten any easier in the meantime. They are also reluctant to move to other European countries where they would have to adapt to a different language and culture and build up new social networks. So now you have a bunch of people in the labor force that weren’t here before the boom, exacerbating the unemployment problem. (I hope this rant does not sound like I am against immigration, I just think that a lot of the recent immigration to Spain was misallocated to a fairy tale sector).

Greg_Ransom October 6, 2009 at 9:52 pm

This really isn’t so much different than the situation in California …

Anonymous October 6, 2009 at 3:30 pm

The economy is not a see-saw with investment in housing up and investment and employment in consumer industries down. In a growing economy with immigration, replacement of workers by machines, and housewives taking up paid work out of the home, both output and employment will not fall -and may even rise- in consumer industries even as the building industry expands steadily.If China supplies the loan money for materials and Mexico etc. supplies the building workers then both industries can expand at once. However, the Austrian cycle theory implies that when nearer to natural interest rates, that is, higher ones, arrive as arrive they must and combine with the inflationary effect of the credit expansion required to keep rates down in the first place then much investment will be revealed as malinvestment. The cost of inputs now outweigh the likely selling prices of many capital ventures and these are not worth bringing to market save to cut losses.

SymbolicalHead October 6, 2009 at 7:43 pm

In this particular context, one also has to remember the stock market bust shortly before the housing boom. That left a lot of idle, financially-trained people around. I’m sure most found employment in the asset bubble that followed, so you were drawing up a lot of slack as well.

I wouldn’t agree with him anyway, but in this case it is particularly horrible, because it totally ignores that there was a tremendous pool of idle, trained people to draw into an activity very similar to their previous employment.

Anonymous October 7, 2009 at 2:26 am

I think it is great for Arnold that Krugman has attacked him. Think about it this way: Krugman is an anti-economist and if he is attacking Arnold, then Arnold represents a great threat to anti-economics.

Personally, I’m looking for Arnold to walk on the water in the near future.

:>)

Spaceman Lesvic October 7, 2009 at 4:54 am

JimmyCrackCornfield,

That’s how I feel when you attack me, like I’m walkin’ on air.

Keep it up, and I’ll be Moonwalkin’ with Michael.

indianajim October 8, 2009 at 1:21 am

If you do any “Moonwalkin’ with Michael” you’ll be dead; I don’t wish that on anyone who posts at the Cafe.

Mark October 6, 2009 at 5:37 am

Exactly. He’s diminished the value of it.

Anonymous October 6, 2009 at 6:46 am

No, the Nobel Committee did that. And it didn’t start with Krugman’s award.

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