Is Scarcity On Hold?

by Don Boudreaux on September 8, 2011

in State of Macro

Paul Krugman recently wrote that

As some of us keep trying to point out, the United States is in a liquidity trap: private spending is inadequate to achieve full employment, and with short-term interest rates close to zero, conventional monetary policy is exhausted.

This puts us in a world of topsy-turvy, in which many of the usual rules of economics cease to hold.  Thrift leads to lower investment; wage cuts reduce employment; even higher productivity can be a bad thing. And the broken windows fallacy ceases to be a fallacy: something that forces firms to replace capital, even if that something seemingly makes them poorer, can stimulate spending and raise employment.

Let’s accept here, for argument’s sake, Krugman’s insistence that a large-enough quantity of idle resources nullifies, or even reverses, “many of the usual rules of economics.”  (Unlike Krugman, I don’t believe that even significant unemployment of labor and resources in fact renders scarcity such a minor fact of reality that the laws of economics – nearly all of which are based on the prevalence of scarcity – are rendered null.  But I here grant him that assumption.)

My question here is this one: Is an unemployment rate of 9.1 percent – heck, let’s call it an unemployment rate of 15 percent – so large, especially compared with a natural rate of unemployment of, say 4.5 percent – to truly suspend the laws of economics to the degree that Krugman suggests these laws are suspended?  Does a (say) 10.5 percentage-point increase in the unemployment rate – as in, from 4.5% to 15% – work to make our world “topsy-turvy”?

Asked differently, at what rate of unemployment above the natural rate does the broken-window fallacy (start to) stop being fallacious?

I am not here attempting to be provacative so much as I’m seeking to understand how Keynesians evaluate the ‘conditional-ness’ of the laws of economics.  If Krugman’s general point is correct, how high must the unemployment rate rise above the natural rate in order to justify policies that make sense only in a world of widespread super-abundance of resources?

It’s certainly not clear that even a 10 or 12 percentage-point increase in the unemployment rate above the natural rate justifies the assumption of sufficiently widespread topsy-turviness – sufficient idleness of potentially productive resources – that policies meant to work only in a world of super-abundant resources are justified.

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{ 115 comments }

John Lynch September 8, 2011 at 5:11 pm

As complete non-economist, let me speculate that Krugman would say that the rate of unemployment is not what leads to the topsy-turvy world and thus that it is a bit of a mistake to focus on it. Rather, it is the zero lower bound, the exhaustion of conventional monetary policy options, that makes the world topsy-turvy. Thus, I would speculate that he would reply that *any* unemployment above the natural rate would cause the topsy-turvy world to exist, given that conventional monetary policy is at the zero lower bound.

Of course, I’m sure he would also argue that different magnitudes of policy response would be required for a given rate of unemployment in excess of the natural rate. If the unemployment rate were 0.1% above the natural rate and we were at the zero lower bound, this would require a small topsy-turvy policy response. At 4-5%, he clearly believes a large policy response is required.

Thus, the key issue is whether or not we are up against the zero lower bound of conventional monetary policy with the magnitude of the necessary unconventional response dictated by the degree to which unemployment exceeds its natural rate.

I stand ready to be corrected by all the actual economists out there.

Don Boudreaux September 8, 2011 at 5:36 pm

About your liquidity-trap point: You might be correct; Krugman might well reply in that way. But such a reply would reveal another, deeper problem with his analysis – namely, his failure to adequately distinguish between money and resources.

For the laws of economics to be suspended requires super-abundance of real resources. Widespread hoarding of monochrome portraits of dead statesmen – or hoarding of the electronic versions of such – is not itself the super-abundance of the sort that is required to make the laws of economics inapplicable.

Babinich September 9, 2011 at 5:54 am

“For the laws of economics to be suspended”…

Reminds me of one of my favorite Star Trek episodes…

http://www.youtube.com/watch?v=ZRKz6QS5UYI

Hey Fed: you made your examination under conditions we cannot trust.

L. F. File September 9, 2011 at 7:30 am

So what are real resources? Aren’t the “monochrome portraits of dead statesmen” equivalent to real resources to the extent someone is willing to exchange labor, food, etc. for them?

lff

Economic Freedom September 9, 2011 at 5:50 pm

Aren’t the “monochrome portraits of dead statesmen” equivalent to real resources

No.

to the extent someone is willing to exchange labor, food, etc. for them?

The only reason someone willingly exchanges land, labor, food, etc., for a piece of paper with monochrome portraits of dead statesmen is that he can re-exchange the latter for a real resource that he wants later (such as land, labor, food, etc.). Paper money is not itself a good or a resource (though a commodity money like gold or silver certainly is). Paper money, unbacked by any commodity, becomes a medium of exchange only by dint of governmental command, or fiat, which is the reason it’s called fiat currency.

Governments might declare fiat currency to be “legal tender”, i.e., a legally recognized claim on real resources; but paper with ink on it is not, by itself, a real resource. If it were, there would be no need for “legal tender” laws; the market would have voluntarily chosen paper with ink on it as the good with highest general acceptability in exchange and voluntarily made it the preferred medium of exchange.

L. F. File September 9, 2011 at 8:40 pm

Gold’s commodity value is based on both utility and fashion – the larger part belonging to fashion. Fashion would not seem to be any more reliable than mass confidence in the exchange value of “monochrome portraits of dead statesmen” due to the backing by a reliable government.

Gold, silver or baby sitting scrip we would be faced with the same failure of Say’s Law. If AD is insufficient AS won’t magically provoke it.

lff

Methinks1776 September 10, 2011 at 8:48 am

File,

Forget gold for a minute. Anything can be used as money. Money is not a resource. You accept it only because it can be turned into something else. If it can’t, then it’s worthless.

Money is a medium of exchange, a store of value and a unit of account, nothing more.

Economic Freedom September 11, 2011 at 1:22 am

@ L.F.File

Gold’s commodity value is based on both utility and fashion – the larger part belonging to fashion.

That’s a redundancy. “Utility” is simply “satisfaction of human wants”. Gold as fashion-ornament satisfies certain human wants; gold as malleable material for dental crowns satisfies certain human wants; gold as conducting metal for electrical contacts satisfies certain human wants; gold as irradiated element for treating cancer satisfies certain human wants; etc.

Fashion is just one of many subsets of “utility.”

Fashion would not seem to be any more reliable than mass confidence in the exchange value of “monochrome portraits of dead statesmen” due to the backing by a reliable government.

Obviously, there is no such mass confidence in a reliable government, else why would such “confidence” need to be maintained by force of law?

The reason “fashion” — and other utilities for gold that you might find frivolous and unworthy by some sort of objective standard of value — is reliable is that it is voluntarily chosen by participants in the market — as opposed to paper fiat currency, which is imposed on them. I know of no examples in economic history in which people have voluntarily chosen to value paper with ink slapped on it as their medium of exchange.

Gold, silver or baby sitting scrip we would be faced with the same failure of Say’s Law. If AD is insufficient AS won’t magically provoke it.

“Insufficient” for what?

The only failure here is your understanding of Say’s Law, not the law itself, which cannot fail any more than an axiom of geometry can fail. Say’s Law asserts that you can only exchange something you’ve produced. The things I’ve produced — my “supply” — enable me to make exchanges for something someone else has produced — his “supply.” Thus, my supply, in the act of exchange, also constitutes my “demand.” At root, therefore, one’s supply IS one’s demand, because we can only exchange something we’ve produced. There can never be such a thing as a “shortage of demand” unless we also mean by that a “shortage of supply” — such as might exist after a major war, natural disaster, or other massively destructive occurrence. North Korea has a shortage of demand because it doesn’t produce very much, so it doesn’t have much to offer in exchange.

Unfortunately, Say’s Law is often misrepresented and misstated by textbooks, which cite it as saying “Supply creates its own demand.” This is usually followed by a silly example, invented for the purposes of trying to debunk the law, such as “If a maker of sunlamps travels to the Sahara, the mere existence of the supply of sunlamps will stimulate a demand for them on the part of Bedouins riding their camels through the desert.” But what Say’s Law really says is this: the supply of sunlamps is the only thing the sunlamp manufacturer has to trade to Bedouins for something he might want; therefore, the manufacturer’s supply of sunlamps is also his demand. The Bedouins’ camels might be their supply, in which case, they also represent their demand.

Finally: gold, silver, and baby-scrip (a la Krugman’s silly article on it) differ amongst themselves because gold and silver have been freely chosen by markets throughout history to be media of exchange, whereas no economy has ever freely chosen baby-scrip.

Martin Brock September 11, 2011 at 7:50 am

Gold’s commodity value is based on both utility and expectations, based upon historical usage, that gold will become a fiat currency again.

Stone Glasgow September 11, 2011 at 10:37 pm

“I know of no examples in economic history in which people have voluntarily chosen to value paper with ink slapped on it as their medium of exchange.”

What about colonial scrip? It was backed by land put up as collateral and was not redeemable for anything. It was very successful and circulated in tandem with gold and silver coins.

Stone Glasgow September 11, 2011 at 10:41 pm

Considering the vast amount of intellectual prowess displayed in the commentary section at Cafe Hayek, I am saddened by how little thought has been applied to the history of money or the reasons that we value currency today.

Stone Glasgow September 11, 2011 at 10:43 pm

@ Economic Freedom:

Please define “real resource.” Money in its current manifestation fits any definition I have ever considered.

Stone Glasgow September 11, 2011 at 10:47 pm

@Methinks:

Money is real material wealth in exactly the same way as wine stored in a teetotaler’s vault. The wine won’t be used or consumed by the man but still holds value to him because he knows others want to consume the wine.

In the same way, dollars are valued by people with bank loans demanding that they repay in dollars (and only dollars) in order to take possession of the title to their car or full ownership of their home. People without such a contract value dollars in the same way that a non-drinker values wine.

Rick Hull September 8, 2011 at 5:36 pm

The link between unemployment and ZIRP is the Central Bank. Presumably, once unemployment gets out of hand, the Central Bank has a mandate to respond with policies approaching or equivalent to ZIRP. One we’re at or near ZIRP — bam! Liquidity trap!

Martin Brock September 11, 2011 at 8:07 am

The Fed does not control all interest rates. The Fed may control Treasury rates and interbank lending rates, for example, but it doesn’t control the rate at which you extend credit directly to me.

If I am “unemployed” (by definition), I want entrepreneurial credit but can’t find anyone willing to extend it to me. “Entrepreneurial credit” provides me productive resources with which I can produce goods more valuable to the market than their cost of production (including the cost of my own labor). When you employ me, you extend me this credit.

Ideally when unemployment is too high, the Fed lowers other interest rates to encourage you to extend credit to me rather than extending credit otherwise, to the Treasury for example or to people borrowing to mortgage houses.

vikingvista September 12, 2011 at 12:46 am

“The Fed does not control all interest rates.”

This is such an important and rarely made point.

vikingvista September 8, 2011 at 5:47 pm

The economy is heterogeneous. Some investments and activities are always unproductive and wasteful. In a recession, as in its preceding bubble, such activities are in abundance. In such an environment, stimulating investment and business activity *in general* is self-defeating. It subsidizes the abundant uneconomic activities at the expense of the economic ones. The trap is a consequence of monetary policy, rather than a problem beyond its control.

Of course, such policy temporarily feels good to those involved in such pathologic activities, just like a morning whiskey feels good to an alcoholic.

SweetLiberty September 8, 2011 at 6:28 pm

With Keynesianism and whiskey we can postpone the hang-over indefinitely! Now if we can just figure a way around that damn liver disease.

vikingvista September 8, 2011 at 6:36 pm

A healthy body can tolerate a little whiskey now and then even though it is by no means healthy to drink it. If he could get away with it, a keynesiac would try to get you off the stuff by pouring bottle after bottle down your throat. Then when a sane person stops them, the patient starts in with a hangover, and the keynesiac says, “See what your austerity is doing to the patient!”

SweetLiberty September 8, 2011 at 6:41 pm

I thought a Keynesian would look at a patient dying of alcohol poisoning and say, “See, I told you we should have given him MORE whiskey!”

vikingvista September 8, 2011 at 7:32 pm

Yep. You know them well.

OneTrickPony September 9, 2011 at 9:52 am

Don, how come a non economist has to explain this to you?

Your post proves to me that you completely miss the point of the discussion going on. This post is in no way a contribution – it is two steps behind.

I really find this amazing…

Michael Mace September 8, 2011 at 5:19 pm

After we suspend the laws of economics, I’m sure that Krugman will happily play the role of central planner. What could possibly go wrong?

SweetLiberty September 8, 2011 at 6:31 pm

Don’t mess with Krugman, man. Any guy that can suspend the laws of economics can probably f__k with gravity too, and I for one am attached to the planet (pun intended).

morganovich September 8, 2011 at 5:33 pm

krugman is a scary statist.

his answer to people wanting to deleverage based on that they think is right for them is to force them to lever up because he knows better than every individual what choices they should make.

his assumption and arrogance are breathtaking, but not as breathtaking as his ability to ignore evidence.

this is just bigger hammer theory.

hey, that stimulus didn’t work, so the answer must be BIGGER stimulus.

this is exactly how arrogant and misinformed doctors used to bleed people to death. not better yet? more bleeding and maybe some purging.

still sick?

bleed them again.

dead?

well, i guess he was just too sick to be helped by medical science.

Seth September 8, 2011 at 6:09 pm

“his answer to people wanting to deleverage based on that they think is right for them is to force them to lever up because he knows better than every individual what choices they should make.”

How would you explain this to a guy on the bus?

Methinks1776 September 8, 2011 at 6:27 pm

Leverage is debt. Deleveraging means to reduce debt.

Imagine you have a huge credit card bill. You decide that it’s just too much debt for you carry. It’s not prudent and you want to reduce your spending in order to have more money to pay off the purchases you’ve already made on your credit card. Suddenly, the government grabs your credit card from you and starts swiping it in the credit card reader at the nearest store.

Unfortunately, for some reason, the nearest store is usually selling manure so you’re stuck paying for all the stuff you bought earlier plus piles of government purchased crap. Insult to injury.

Seth September 8, 2011 at 11:40 pm

That’s good.

My version is: “We [the gov't] notice that you’re not spending as much money as we’d like you to. We’re not really sure why, and we don’t really care to ask you, but we don’t like it because it’s killing the buzz on our re-election campaigns, so we are going to take your money and spend it for you. Trust us, it’s all for the greater good. JMK said that will get you to want to spend more money.”

“And, even it doesn’t work, we can at least say we tried. Please remember to thank us.”

The guy on the bus might say: “Well, if you’d like to know why I’m not spending more money, it’s because I spent too much and borrowed beyond my means. It seemed like a good idea at the time, but now I’m cutting back and getting my financial house in order. You taking my money and spending it for me will not help matters. Why not let me keep more of it so I can pay my debt off quicker?”

Guy from the govt: “Did we ask you? JMK told us all we need to know.”

To me this point seems like the key failure of stimulus thinking: it ignores what is actually causing the problem (why people aren’t spending as much as we’d like them to) and causes them to spend even less.

What would a Keynesian say that I’m missing? If this is a valid point? If so, why don’t we hear it more often or why do we cloak it in hard to understand language?

Methinks1776 September 8, 2011 at 6:28 pm

Should be huge credit card balance.

kyle8 September 8, 2011 at 5:53 pm

Wait a minute, If we are now in topsy turvy world where the normal economic rules do not apply, then doesn’t that mean we should immediately stop all stimulus spending and slash taxes and regulations? After all, Keynsianism is the business as usual approach we are now under.

Brandoch Daha September 8, 2011 at 5:57 pm

May I suggest the term “turviety” as more scientific-sounding than “topsy-turviness”.

It is in conditions of turviety that we presently find ourselves. But it’s no use asking Krugman to define the precise location of the Turviety Horizon, which separates conditions of turviety from quotidian reality. He knows it when he sees it, but as for you, all you can do is wait patiently for him to let you know.

Richard Stands September 8, 2011 at 8:36 pm

Topsy Turviety does add a certain scientism and truthiness.

Methinks1776 September 8, 2011 at 6:14 pm

Not the point you’re trying to make, Don, but…

Krugman is a disaster. The cost of capital is not my only cost. Legal and compliance costs have risen dramatically. Looming Dodd-Frank and Obamacare are (believe it or not) just the tip of the iceberg.

My firm does actually borrow at the short end of the curve, so my rates are pretty close to zero. However, every other cost has risen dramatically. New regulations have increased costs so much that my carry is now higher than it was when interest rates where much higher, pre-2008. This has happened to every single firm in my industry and we’ve responded by reducing headcount and relying more on algos and getting out of certain businesses entirely.

I can only imagine what Dodd-Frank and Obamacare are going to do to costs and risk. Failure to comply perfectly with any regulation (even ones the regulator understands are impossible to comply with because the technology to do so is either prohibitively expensive or does not exist) results in fines and the possibility of being shut down. Fines and shut-downs and worse are a constant risk. Every new regulation increases the risk of both.

Of course, Krugman doesn’t think any of this is happening because it turns out in his world the laws of economics are suspended. Apparently, artificially increasing costs to the point that they more than offset any reduction in the cost of capital is not a reason to not invest. No wonder he’s such a fan of fiscal stimulus. Not only is he, in his own words, no longer an economist, but he is a big advocate of the of government investment math where the more negative the return, the bigger the investment allocation should be.

Greece, here we come.

SweetLiberty September 8, 2011 at 6:37 pm

You’re being too optimistic, unless you mean the fall of ancient Greece – then you’re spot on!

muirgeo September 8, 2011 at 6:56 pm

“New regulations have increased costs so much that my carry is now higher than it was when interest rates where much higher, pre-2008.”

Name the specific most costly new regulation and how much it has added to your cost.

Methinks1776 September 9, 2011 at 6:56 am

You can relax, Morongeo. I’m not complaining about Obama per se. The most expensive rule was a hastily written piece of political stupidity that happened during the reign of Evil Bush. I’m betting you’ll find that much more believable.

muirgeo September 9, 2011 at 10:02 am

And what was THAT rule?

Methinks1776 September 9, 2011 at 10:23 am

Because if I gave you the rule you have enough specific knowledge of the operations of market makers to be able to figure out the effects on costs? It was a change to Reg Sho.

muirgeo September 9, 2011 at 10:03 am

Oh and can you explain “….. borrow(ing) at the short end of the curve.

Methinks1776 September 9, 2011 at 11:07 am

Sure. It means we borrow on a short term basis. For financial companies that generally means that the terms of the loan are renegotiated on a daily basis. However, technically, any loan with a maturity shorter than one year is considered short term.

This contrasts with long term loans which are loans with maturities of more than one year. For example, a 30 year mortgage is a very long maturity loan and people who take out such loans are “borrowing at the long end of the curve”.

As a rule, short term rates are lower than long term rates because the longer the time horizon, the greater the uncertainty and because there are more borrowers and fewer lenders at the long end. Thus, the rate for long maturity loans are not zero. As a general rule, the longer the maturity, the higher the interest rate.

Most businesses and home buyers don’t want the uncertainty of renegotiating their loans on a daily basis or every year. They prefer to lock in rates and terms for the longer term. Makes planning investment easier. long-term borrowing rates are not zero. So, most businesses are not borrowing at the that near zero rate Krugman is talking about. They are not at the lower bound (which makes you question the whole liquidity trap thing, but I digress). Their borrowing rates are percentage points higher than zero.

carlsoane September 9, 2011 at 11:21 am

This graph doesn’t name specific regulations but it shows the increased costs of compliance: http://3.bp.blogspot.com/-MMcG6-PqGew/TmoaJ2zcN7I/AAAAAAAAPsg/845hAZumOZo/s1600/DoddFrankNYT.jpg

Here’s a study that estimates the cost of compliance with Sarbanes-Oxley at $1.4 trillion: http://w4.stern.nyu.edu/accounting/docs/speaker_papers/spring2005/Zhang_Ivy_Economic_Consequences_of_S_O.pdf

muirgeo September 8, 2011 at 7:00 pm

“My firm does actually borrow at the short end of the curve…”

How much has borrowing at the short end of the curve saved you compared to your increased cost from regulation? Oh and just how do you earn your money and add to the productivity of the economy.

HaywoodU September 8, 2011 at 7:54 pm

IOW…..DUR DUR DUR. I’m better than you.

I_am_a_lead_pencil September 8, 2011 at 8:51 pm

“Oh and just how do you earn your money and add to the productivity of the economy.”

Is this at all germane to her point?

muirgeo September 8, 2011 at 9:36 pm

It’s germane to her poin tbecause I’m guessing she lying and won’t be able to point to a new regulation that’s effecting her and has passed during the Obama administration.

Methinks1776 September 9, 2011 at 12:09 am

See, Lead Pencil? It’ll all be perfectly logical and totally germane…. after you consume enough of a controlled substance of your choice to temporarily drop your IQ by 110 points.

brotio September 9, 2011 at 3:06 am

Yasafi,

When are you going to open that (mal)practice clinic where the staff works 32-hours for 40-hours of pay? You claim this would help the economy. Why aren’t you leading by example – with your own money?

muirgeo September 9, 2011 at 10:06 am

Let’s not change the subject… we are now focused on methinks mis-representstion of reality.

Brotio… do you know what it means to borrow at the low end of the curve. Are YOU able to do that? When a welfare person gets a check is it at all the same thing… I really don’t know but I think I might be on to something.

Methinks1776 September 9, 2011 at 11:29 am

Is this the “we” the same drooling moron afflicted with insurmountable ignorance who doesn’t know finance 101 stuff like what borrowing at the short end of the curve means, calls it the “low end of the curve”?

muirgeo September 9, 2011 at 1:03 pm

I have a feeling she doesn’t want to educate me or the board on just what is… “borrowing at the short end of the curve” means.

Rugby1 September 9, 2011 at 2:55 pm

@ Muriego

muirgeo September 9, 2011 at 10:03 am
Oh and can you explain “….. borrow(ing) at the short end of the curve.

Methinks1776 September 9, 2011 at 11:07 am

Rugby1 September 9, 2011 at 2:59 pm

@ Muriego

muirgeo September 9, 2011 at 10:03 am
Oh and can you explain “….. borrow(ing) at the short end of the curve.

Methinks1776 September 9, 2011 at 11:07 am

Sure. It means we borrow on a short term basis. For financial companies that generally …….

muirgeo September 9, 2011 at 1:03 pm
I have a feeling she doesn’t want to educate me or the board on just what is… “borrowing at the short end of the curve” means.

Do you always do that? A poster answers your question and then you fail to acknowedge the answer.

Also if you are really interested in something then you can try this neat piece of technology. It’s called Google. I literally typed in “borrowing on the short end of the curve” and this is where it lead me.

http://en.wikipedia.org/wiki/Yield_curve

Wikipedia is not a trusted source of information but it often provides a good primer.

It scares me that you are a doctor but cannot figure out how to do basic research.

brotio September 10, 2011 at 2:06 am

I have a feeling she doesn’t want to educate me – Yasafi Muirduck

And just how does one go about educating a man with the IQ of a stump?

Methinks1776 September 10, 2011 at 9:59 am

ain’t that the truth.

Stone Glasgow September 11, 2011 at 10:54 pm

Perhaps you should pontificate on the benefits that professional traders provide for society and get back to use when you figure it out.

Stone Glasgow September 8, 2011 at 9:23 pm

When did he say he was no longer an economist?

Methinks1776 September 9, 2011 at 12:19 am

When an economist is advocating fallacies because he thinks he can suspend the laws of economics, he is pretty much telling you he is not an economist. Economists don’t have such powers. He thinks he’s a wizard.

kyle8 September 9, 2011 at 10:00 am

I was going to go with “evil left wing political hack” but whatever.

Methinks1776 September 9, 2011 at 11:30 am

meh. Tomato, tomah-to.

Pom-Pom September 8, 2011 at 6:18 pm

I would like to suspend the laws of physics so he weightlessly floats away, back to whatever galaxy is his home, replete with pink ponies, rainbows, and unicorns. Wish upon a star.

He is a lightweight, after all, so he’ll be one of the first to go.

Sats September 8, 2011 at 6:18 pm
Krishnan September 8, 2011 at 6:18 pm

There is a simpler explanation …

People like Krugman (and Obama and Geithner and Summers and …) are all furious at banks that are sitting on money, at corporations that refuse to bring their profits from abroad, at corporations that can borrow at very low rates but refuse to expand and create jobs, at people that refuse to take on even more debt (if they can) and spend – so they want to FORCE THEM TO DO WHAT THEY WANT …

Just watch – sooner or later the Union Thugs will organize protests outside some CEO’s house (like they did with AIG) and demand that they spend money to create jobs – and Obama will continue to bash millionaires and billionaires and those that have jets and those that contribute to Republican politicians (Gibson Guitars) and so on …

Krugman and others are just furious that the economy is not doing what THEY WANT and NOW.

They just refuse to accept the message being sent by consumers, producers, corporations, entrepreneurs, small business owners … They are just so set in their ideas and philosophy that there is nothing anyone can say or write about to change their thinking.

Wait – … One small change. They do listen – to their union thugs – and are now so desperate that they are talking about “taking out sons of b*&cHes” and so on …

So, yea, as Russ noted, this is going to be one nasty political season because the economy is not doing what these thugs want.

Brandoch Daha September 8, 2011 at 10:01 pm

You’re absolutely correct: A orders B to do something in A’s interest but not in B’s interest (coincidentally, A passed the law that made it not in B’s interest). B perfidiously does what’s in his interest, instead of what’s in A’s interest. A throws a screeching fit.

A could, of course, have passed a law which made the desired action as beneficial to B as it is to A. But A feels that would be stooping, and A chooses never to stoop.

Liberals hate incentives, at least for others, because they feel it demeans them to have to persuade us rather than simply order us. It’s not enough for a liberal that we both win; they don’t feel they’ve won until somebody loses.

dsylexic September 9, 2011 at 1:41 am

if they are furious,why not start with removing the 0.25% paid on the rserves? .let that leak out.it will create the inflation they need.though it might inflation in emerging markets.the fed has no control where thatmoney will go.

muirgeo September 9, 2011 at 10:12 am

Krishnan September 8, 2011 at 6:18 pm
There is a simpler explanation …

“People like Krugman (and Obama and Geithner and Summers and …) are all furious at banks that are sitting on money, …”

And you are NOT furious at them… Dude you should go listen to Russ’s econtalk ;

http://www.econtalk.org/archives/2011/08/admati_on_finan.html

Here the Standford Professor explains how YOU are paying the banks with YOUR tax dollars to have and sit on all that money.

You guys THINK you are all about free markets but you consistently end up supporting and protecting the biggest rent seeing anti-market monopolies there are.

Rob September 9, 2011 at 2:16 pm

Your comment implicitly acknowledges that there is a free market position, which could work if tried. Come to think of it, isn’t that really what Russ and Don say time and time again?

Invisible Backhand September 8, 2011 at 6:50 pm

It was clear to me that Krugman is talking about the interest rate close to zero. He’s spoken before about how impractical it is to have interest rates less than zero.

Don seems to be claiming that Krugman is claiming that it’s the unemployment rate that is suspending the laws of economics.

I made a drawing to help explain:

http://i.imgur.com/JpBFf.png

Methinks1776 September 8, 2011 at 8:46 pm

So, basically, this is a graphic of you understanding neither Krugman nor Boudreaux, despite your slavish devotion to both blogs. You actually drew it out to ensure that we all understand that you are, without a shadow of a doubt, totally clueless.

Expansionary monetary policy isn’t just for the Fed governors’ amusement. It’s meant to spur investment and bring the economy back to full employment. Since monetary policy ain’t doing the trick, Krugman wants to suspend the laws of economics to justify the unjustifiable to bring the economy to full employment. As Krugman says here: “something that forces firms to replace capital, even if that something seemingly makes them poorer, can stimulate spending and raise employment.“. In the Keynesian world, toiling is the goal.

Now, digging ditches and filling them in again or burning down factories so that people can be “employed” to rebuild them redefines employment, but we are apparently in Krugman’s fantasy land, so anything goes. It seems that in this wonderland poverty is the new prosperity.

Of course, if you agree with him, my offer to take a sledge hammer to your belongings still stands.

Methinks1776 September 8, 2011 at 8:47 pm

hopefully this closes the tag. I do wish we could get the edit function back.

Brandoch Daha September 8, 2011 at 10:05 pm

Ahhh, you appear to believe that since “unemployment rate” and “interest rate” both have the word “rate” in them, that Don must think they’re the same thing.

It’s very kind of you to set him straight, but I’m going to go out on a limb here and guess that at least two out of three economists understand both concepts reasonably well, and probably don’t mix the two up very often.

Invisible Backhand September 9, 2011 at 11:51 am

No, exhausted conventional monetary policy makes the world topsy turvy, not high unemployment. Capice?

tdp September 9, 2011 at 3:26 pm

Agreed, for once. Keynesian monetary policy is exhausted by the liquidity trap Obama and the Looney Left created with their regulations that were ostensibly to fix the crisis caused by the exact kind of government intervention in the money supply that Keynes advocated (although this time it was to help people with bad credit own houses, not to achieve full employment). The Central Planner Overlords have stomped on their own balls.

indianajim September 8, 2011 at 8:13 pm

Krug says “This puts us in a world of topsy-turvy, in which many of the usual rules of economics cease to hold. ”

This reminds me most of the following quote from Roger Garrison’s book Time and Money: “To the extent that nationalized industries dominate our analysis, our subject matter shifts away from the macroeconomic relationships that govern a market economy to the economics and politics of resource allocation in a non-market setting. The issues of economic growth, business cycles, and deficit spending give way to the issue of economic calculation in a socialist society.”

Of course this is not what Krug has in mind at all; he is thinking Keynesianism. While Krug’s ideas are dumb (as usual), Garrisons are entirely sensible: If resources are not being allocated in free competitive marketplaces, analyses of free market allocations are without application.

Methinks1776 September 8, 2011 at 8:51 pm

And even the socialist planners couldn’t suspend the laws of economics.

Craig September 8, 2011 at 8:19 pm

Humans must work to survive. We cannot exercise any demand until we have made something to sell or to trade. The question should be, why are so many unwilling to work now?. Mr. Krugman, et. al., have it backwards. That is, of course, the trademark of Keynesians.

Stone Glasgow September 8, 2011 at 9:32 pm

Indeed. Unemployment payments and minimum wage may have something to do with it, but obviously the real problem is that we are not breaking enough windows.

House of Cards September 8, 2011 at 11:59 pm

“The question should be, why are so many unwilling to work now?”

For most positions that are opened, there are dozens of qualified applicants. You are insulting and don’t know what the hell you are talking about.

Bob September 8, 2011 at 9:34 pm

Give Krugman a break. I think he’s gone mad. Last I heard he was conjuring up a fictional fight with interplanetary aliens to stimulate economic growth.

Methinks1776 September 8, 2011 at 9:43 pm

And further down in his column:

And now you can see why tighter ozone regulation would actually have created jobs: it would have forced firms to spend on upgrading or replacing equipment, helping to boost demand. Yes, it would have cost money — but that’s the point! And with corporations sitting on lots of idle cash, the money spent would not, to any significant extent, come at the expense of other investment.

Why wouldn’t the company simply divest of the business subject to these regulations and distribute the “idle” cash to investors as dividends instead of losing its shareholders and tanking its stock price by willingly destroying its profit margin? If the company can’t divest, then why wouldn’t it seek to offset the additional cost of regulation by reducing its largest expense – labour – contributing to unemployment? Why would any industry with returns lowered by regulatory costs attract new investment?

Why does Krugman never wonder about this?

Brandoch Daha September 8, 2011 at 10:07 pm

Krugman wonders about nothing. He understands everything already. Just ask him.

brotio September 9, 2011 at 3:07 am

And if Krugman doesn’t understand it, Daniel Kuehn will be right there to tell him what he really meant.

HaywoodU September 9, 2011 at 9:19 pm

Or us.

kyle8 September 9, 2011 at 10:09 am

so krugman thinks that companies just sit on cash, Where is all of this cash? I suppose that putting it in government bonds, bank deposits, or buying the stock of other companies is not investment?

Rugby1 September 9, 2011 at 3:03 pm

“Why does Krugman never wonder about this?”

Why would he?

He makes no effort to understand what business owners actually have to deal with. I am sure he has never actually owned a business, worried about return on investment, capital costs, complying with the myriad of local, state and federal regulations.

If the assumptions underpinning his models say they don’t matter then they surely must not!

Invisible Backhand September 8, 2011 at 10:10 pm

Since monetary policy ain’t doing the trick,

Yes love, that’s the world of topsy-turvy* world part. Interest rates can’t go lower than zero**.

After that you wander away from Boudreux’s point, but I’m surprised you had the attention pan to stay that far.

And lots of people work at useless jobs, to support their family for instance. So?

*topsy-turvy is a diminutive for ‘upside-down’.
**Yes, I know some do get less than zero, but that’s immaterial.

Methinks1776 September 9, 2011 at 12:14 am

So, basically, what you’re saying (thankfully sans creepy graphic this time) is that not only do you not understand what they’re saying, but you have no capacity to understand anything. Explaining anything to you is a waste of time because you are an idiot.

I see your point and I agree.

Invisible Backhand September 9, 2011 at 10:40 am

Yes, underlined text can be quite creepy. You can’t follow the bit about conventional monetary policy. Whatever. I think your firms problems are more ‘you’ than ‘regulations’.

Stone Glasgow September 11, 2011 at 11:02 pm

Holy shit. It’s not often that such a short work of staggering genius convinces me so quickly that its author possesses a room temperature IQ.

House of Cards September 8, 2011 at 10:29 pm

Boudreaux hit the nail on the head when he suggested a world with a superabundance of resources that turns the “laws of economics” on their head. There is, indeed, superabundance for a small percentage of the population, and abysmal, grinding poverty for the many (worldwide).

Austrians accuse Keynesians of advocating fiscal stimulative policies that are in effect good money chasing bad. Keynesians, on the other hand, accuse Austrians of pursuing policies that increase mass poverty and simultaneously insanely enrich the already beyond-rich rich.

One would have to admit that the Keynesians are indeed beating a dead horse with attempts to revive a dysfunctional, moribund economy that was destroyed by Austrian policies in the first instance. If capitalism is to survive it must become more humanitarian. Buffett knows that he is too rich. I’m not sure when he came to that conclusion though. Was it after he made his first billion?

The concern for the unemployed or lack of it is an interesting sociological topic. If you happen to be one of the gainlessly unemployed, you are naturally concerned due to self-interest. If you are one of the Koch billionaire brothers, you show no obvious concern for the well-being of your fellow man. This topsy-turvy world would right itself if only those unemployed human capital simply died of starvation and their children were put into an orphanage. The natural rate of unemployment would return, and the world probably be better off any with fewer humans afoot anyway. Austrians and Ebenezer Scrooge are truly indistinguishable from one another.

tdp September 9, 2011 at 3:42 pm

First of all, I suggest reading something by an Austrian economist before you go running your mouth. Second, there is not a shred of evidence to support any of your claims. Not a single shred. The ideas that markets are inhumane and rapacious, that the rich get richer and the poor get poorer, that the poor can’t compete in a free economy, and that Austrian economics did anything other than predict the financial crisis before it happened, are laughably and ludicrously unsupportable. Furthermore, Warren Buffet is the world’s biggest hypocrite. He whines that he’s too rich and instead of giving away everything he owns (he still has $61 billion to his name despite all his philanthropy) he
1) doesn’t have an “income” so he can get out of paying income taxes, which he wants to increase (apparently its our fault the government is so badly in debt- we only give it $2 trillion a year)
2) dumps all his money into bonds and tax shelters so his effective marginal tax rate is 19% instead of 35%
3) lobbies for a higher death tax, from which he would profit since he cleans up buying up people’s estates
4) refuses to send the government a check (a charitable donation) to help pay down the debt, instead preferring the government tax other people (“who need to play their part in reducing the deficit”).

Finally, a reading list:

1) Bastiat, Frederic. “What is Seen and What is Not Seen”, “The Balance of Trade”, “The Petition of the Candlemakers”, “A Negative Railroad”.
2) Norberg, Johan. “In Defense of Global Capitalism”.
3) Palmer, Tom G. “Twenty Myths About Markets”.
4) Sowell, Thomas, and Williams, Walter E.- anything and everything either of them has written
5) Lindsey, Brink, “Krugman’s Nostalgianomics”.
6)Wilkinson, Will. “Thinking Clearly About Income Inequality”.
7) Callahan, Gene. “Economics for Real People”.

After that, consider reading the Austrians, especially von Mises and Hayek, (Human Action, Road to Serfdom, The Fatal Conceit, etc.), and some Milton Friedman (Free to Choose, Capitalism and Freedom, etc.). You can also find a bevy of studies showing the effects of free markets versus the effects of markets in which the government intervened to make them less “cruel” at places like CATO, the Fraser Institute, the Manhattan Institute, AEI, The Heritage Foundation, the von Mises Institute, etc.

Ken Royall September 9, 2011 at 12:31 am

If investors are on the sidelines there are reasons for it. We should address the reasons (the root cause) in order to create incentives to invest. The government spending borrowed money is the last thing that should be done as their “investments” wouldn’t pay off in a good economy much less a bad one.

Their track record in this regard is horrible for at least 2 reasons. 1) They don’t care if the money is lost (it isn’t their money) so they don’t perform any due diligence and 2) the funds are being distributed based on political c connections, not sound business practices. They get their photo ops and it gives the public the impression they are “doing something” about the economy. Solyndra being the latest example.

Finally at some point results have to matter to Krugman. We have been on a government spending binge for 10 years and the numbers are horrible. Krugman says war spending primes the pump, well we had 2 wars and over a trillion spent. Gobs of money have gone out the door and all we have left is the debt to show for it.

This is scaring the hell out of the private sector and rightfully so. They know that a government that is that activist and wasteful is coming to get them at some point. Obama is targeting businesses he doesn’t like and pretty much sees the private market as a piggy bank for his socialist agenda. Of course investors and consumers are hunkering down, they fear the worst.

Methinks1776 September 9, 2011 at 1:19 am

We should address the reasons (the root cause) in order to create incentives to invest.

Click on the link and read the entire short but painful column which Don excerpted. Krugman has come up with a reason – increased regulation. See, if you increase regulation, companies are forced to spend money to comply. They have to hire compliance officers or buy some product from some company that will bring its equipment in compliance with the whims of the politicians. All of this is simply costs with no benefits (apart from keeping the state from shutting them down) to the companies and Krugman thinks they’ll go for it.

Finally at some point results have to matter to Krugman.

They do, of course. But, it’s pretty clear that the “results” you’re talking about are not the “results” Krugman has in mind.

L. F. File September 10, 2011 at 9:50 am

Krugman’s conclusions follow from his premise (i.e. they make sense if you accept his premise.) Unless you accept his premise attacking his conclusions is not very logical.

If you disagree with his premise you need to tell us why or provide alternatives otherwise you are just throwing your slop into the wind.

lff

Methinks1776 September 10, 2011 at 10:05 am

If you could read and if your feeble intellect could process what your eyes transported into your itty bitty brain, you would realize that I’ve already done that, along with may other commenters.

L. F. File September 10, 2011 at 11:04 am

Well, this little rant may give you “street cred” but I think it is just more evidence that your real name must be Oxymoron.

lff

Chucklehead September 9, 2011 at 2:00 am

Krugman has gone from just being wrong, to crazy, to pathetic, to irrelevant, to just a bore. The scarcest thing in this debt riddled economy is savings, which he finds evil.

andy September 9, 2011 at 2:18 am

I loved the point from the previous post: why should the company replace the capital, when it doesn’t want to invest in the first place? What if the company decides not to fix the broken window?

Methinks1776 September 9, 2011 at 4:45 am

That’s a darn good question.

Methinks1776 September 9, 2011 at 6:39 am

And why would a company invest at all if it knows that its capital can be destroyed at any moment by a malevolent government on the advice of a lunatic?

indianajim September 10, 2011 at 6:49 am

Is your real name Dagny Taggart? :)

Stone Glasgow September 11, 2011 at 10:24 pm

*Like*

Captain Profit September 9, 2011 at 9:23 am

The reason nobody can answer Don’s question is that you can’t trace the path to a psychotic delusion through rational thought.

muirgeo September 9, 2011 at 10:27 am

Don wrote, “Asked differently, at what rate of unemployment above the natural rate does the broken-window fallacy (start to) stop being fallacious?”

I don’t think unemployment is the primary cause. Krugman says, “private spending is inadequate to achieve full employment…” . It’s a problem of inadequate demend that leads to unemployment. Unemployment is an effect that feeds back negatively.

I would ask the doubters at what point of inequality do you think that just maybe the overall economy can suffer. Certainly in the old feudal days inequality was sufficient to collapse productivity. I’m guessing there’s a break point somewhere in the spectrum of inequality where things start becoming less effecient.

cmprostreet September 9, 2011 at 12:36 pm

I think everyone is overlooking the biggest takeaway from Krugman’s point. By recognizing that the usual laws of economics (including the broken window fallacy) cease to hold in a world of zero interest rates, he has single-handedly changed the nature of war.

Any time one nation prepares to attack another, the victim nation need only lay people off and start printing enough money to drop their interest rate to zero. At that point, bombing them would only help their economy!

Put more simply: A fake alien invasion would be great for the economy, unless interest rates are near zero. In that case, a real invasion would be preferable.

cmprostreet September 9, 2011 at 12:37 pm

Ideally, we could live in an optimal world where all nations band together for economic growth by printing money and bombing each other. (I know, we’ll need high savings too, but we can force that through rationing consumption goods). Sounds a lot like WWI and WWII. Hey, maybe muirgeo has been onto something this whole time with wanting FDR back!

LAD September 9, 2011 at 6:33 pm

I get the paradox of thrift reference, but how, exactly, could wage cuts reduce employment and improved productivity be bad?

Let’s suppose that unemployment is 50% and interest rates are 0%. How do those variables make it more attractive to hire an employee for a high wage rather than a low wage? Is Krugman actually arguing that that an employer would choose to give employees a $1 raise in hopes that more than a dollar in profit would come back to his business indirectly when the employee spends the money?

As for productivity, how are we better off with three workers producing $30 worth of goods rather than one worker producing $30 worth of goods?

L. F. File September 9, 2011 at 8:03 pm

I think the reasoning is something like this:

Wage cuts and increased productivity are bad because they reduce aggregate demand and result in more idle resources. An increase in productivity will just mean lower prices not increased profits. The increased output raises the level of supply but without increased demand the price will have to fall to clear the market.

Essentially the Paradox of Thrift means that Say’s Law does not operate in a liquidity trap.

lff

Methinks1776 September 9, 2011 at 9:02 pm

Does this really make sense to you?

An increase in productivity will just mean lower prices not increased profits.

Demand curves are downward sloping. When the price of a good declines, the quantity demanded increases. So, how does a lower price reduce demand for the good and contribute to lower aggregate demand?

If productivity gains reduce production costs, price can be lowered without affecting profit margins. Why would increased demand resulting from a lower price and stable profit margins result in more idle resources?

Stone Glasgow September 9, 2011 at 9:37 pm

If I discover a method for converting water into gasoline at a total cost of one cent per gallon, would the world be richer or not? Demand rises as the price falls.

Humans have an infinite demand for a better life, and increased productivity makes it easier (cheaper) to acquire the things that make our lives better.

L. F. File September 10, 2011 at 8:05 am

All of my comments are referring to Krugman’s ideas and my interpretation of those ideas.

He makes clear that he is speaking about the situation in a “liquidity trap” and I believe standard Keynesian economics theorizes that Say’s Law does not operate in a “liquidity trap” and so supply does not create demand. Savings do not equal Investment due to the “paradox of thrift”. That is our current economic situation. In spite of very low interest rates investment is not expanding. If Say’s Law were operating such a large supply of money would create a great demand for investment. It is not happening.

There is very little sense in beating up on Krugman because you don’t agree with his economics. You can laugh all you want about his “topsy-turvy” viewpoint of the current state of the economy. However, unless you explain how classical theory – especially I think – Say’s Law – still applies when no demand for investment is forthcoming when there is a glut of savings you are just tilting and wind mills.

When I studied economics in the 60′s we were taught Keynesian theory. It has always made pretty good sense to me but i am certainly willing to listen to alternative ideas.

lff

Methinks1776 September 10, 2011 at 9:03 am

You’re a real deep thinker, File. You don’t understand either Krugman or your own “interpretation” well enough to answer basic questions about either.

Drones like you are the target audience for Krugman’s NYT column.

Stone Glasgow September 11, 2011 at 11:06 pm

Jesus man, answer the question. Stop drooling and mumbling big words that you don’t understand, taught to you by a moron fifty years ago. Your mind seems so full of convoluted bullshit that I am beginning to lose hope for humanity’s continued existence beyond next week.

LAD September 10, 2011 at 4:57 pm

Thanks for the response File.

I guess I understand the cause of recessions differently. Recessions occur when people no longer want to buy what they are producing. In the case of the current downturn, people stopped demanding houses and related goods and services. It takes a while for people to transition into other industries that are supported by consumer demand.

Note that my understanding is different than Say’s or Krugman’s. The remedy for a recession isn’t to goose demand or supply. The remedy is to do nothing and allow prices to adjust downward until prices find the floor. Efforts by government to boost supply and/or demand extend the duration of recessions by misallocating resources in much the same way the original misallocation of resources caused the recession. I’m defining “misallocation of resources” as an allocation not demanded by consumers.

L. F. File September 11, 2011 at 6:15 am

Reinhart and Rogoff”s recent book “This time is different – 800 years of financial folly” is a thorough survey of financial crises from about 1300 to the present.

It doesn’t specifically address recessions but the crises – bank runs, sovereign debt crises, etc. – it covers certainly played a role in many severe downturns. If you are interested in recessions and their causes it really is a must read.

lff

lamp3 September 12, 2011 at 4:16 pm

Methinks has it right – if you are worried about idle resources, or capital and labor that isn’t being utilized – reducing the cost of both will increase the quantity demanded by employers/capitalists.

The aggregate quantity demanded at each price level (“aggregate demand curve”?) would not change for workers if you decrease their price (wage), just the quantity demanded.

Increases in productivity simultaneously are capable of lowering prices and increasing profits. The quantity supplied at each price level would increase and at the market clearing point, supplier’s surplus could be larger than in the initial state. Increased productivity would move the supply curve to the right, and as you said, the price per unit supplied could go down. Nothing is wrong with this case where demand curves do not shift to the right with changes in the supply curve. Indeed, I would expect that most of the time, our demand curves don’t change so much as we change the quantity demanded of stuff.

The formation of natural monopolies seems to ride on pushing their supply curves to the right as hard as possible to win the market.

Also, the way you interpret Say’s Law doesn’t really seem to be what it is about. Say’s Law does not say production of X creates demand for X, rather that any consumption of goods/services must ultimately be matched with production of goods/services for exchange within the economy. Demand exists from the outset because individuals have marginal value schedules of demand, and therefore supply, already. The only way to facilitate trade though would be to offer mutually valuable goods/services for trade, which is what Say’s Law is getting at – in my very junior, undergraduate view.

In order for employers to hire at higher wages than lower wages, not only must you suspend Say’s Law, but the laws of demand and supply.

As for the absence of investment currently, I like the view that interventions in the market are making would-be participants disincentivized to do anything. Uncertain regulatory burden, unknowable actions to “fix the economy” from government and so on.

Ikvl

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