by Tyler Cowen
on November 29, 2008 at 7:46 am
1. Good French meals: not in France
2. Color pies of movies
3. Markets in everything: a tunnel complex in central London
4. Video of giant squid
5. Paul Krugman: What to Do
6. Amity Shlaes on the Depression
L’m curious: why does Krugman’s prescription appear in a book review periodical, rather than an econ journal? Serious question.
“Depression economics, however, is the study of situations where there is a free lunch, if we can only figure out how to get our hands on it, because there are unemployed resources that could be put to work. The true scarcity in Keynes’s world—and ours—was therefore not of resources, or even of virtue, but of understanding.”
Very nice rhetoric, but it presupposes the existence of congruent physical and human capital to which the labor can be effectively applied. Without more information, it’s equally plausible that creating work for a vast army unemployed will squander resources and make us poorer. I think I can agree that there is a scarcity of understanding.
Typical Tyler, linking to a screed by Krugman, but ignoring a critic of his, this time Amity Shlaes in today’s WSJ, “The Krugman Recipe for Depression.”
Krugman calls for “good old Keynesian stimilus” and says 4% of GDP would be about right. Funny that he recently said that Keynesianism wasn’t actually tried in the Great Depression, citing the work of E. Cary Brown. Well, government spending was about 9% of GNP in 1936, more than double what Krugman thinks is the magic number now, and which would constitute Keynesian stimulis. Except that it wasn’t tried in the 1930s. Oh well.
Krugman also quotes Keynes: “We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand.” He endorses this statement. If he actually believes it, then he’s in the position of a doctor who doesn’t know what he’s doing, but who goes ahead and performs surgery on a patient anyway.
He wants more regulation and more lending. Yesterday’s WSJ had a very good article, “Bank Examiners Are Told to Step Up Sanctions on Lenders,” that made the point that there is “this poison atmosphere,” because bankers think the government’s examiners are trying to find something wrong with their business at a time when they are having more pressure put on them to lend.
The article also points out that in the runup to the crunch, there were very few cease-and-desist orders by either the Fed of the Office of Thrift Supervision, whereas they are proliferating now in what must be bureaucratic overkill.
He also claimed, preposterously, in his most recent NYT column that deregulation was the cause of the recent market decline and dislocation of capital flows. Actually what happened was that the Fed’s lowering interest rates to submarket levels for several years caused capital to flow into investments that were unsustainable and could not be completed. When rates rose to reflect economic reality, many of the investments were revealed to be malinvestments, and had to be liquidated or restructured. The misdirected malinvestments were reversed, resulting in the unemployment of capital and labor that had entered those lines of business.
Ecoonomics is a coordination problem, as O’Driscoll put it in his book on Hayek. What Keynes didn’t understand (and Krugman doesn’t) is the crucial role of the rate of interest in coordinating economic activity. When the Fed causes rates to be too low, malinvestment and discoordination arises, which must reverse when rates rise.
As David Felix put it in his book _Biography of an Idea: John Maynard Keynes and The General Theory of Employment, Interest and Money_, when Keynes reformulated neoclassical interest theory, he vanquished the “entrepreneur-borrower,” and the only coordinating mechanism is the supply and demand for money balances, a weak reed if ever there were one.
Of course, getting rid of capitalists and entrepreneurst makes it all the easier for planners and quack doctors from Greenspan to Krugman to impose their interventionist and semi-socialist schemes on the catallaxy.
I’d rather have Fidel doing the planning. At least you’d get a good cigar in the bargain.
The NYRB is scarcely “a book review periodical.” Rather, it is one of the country’s leading intellectual lights. You cannot travel the 1,2,3 (IRT) subway lines without noticing that nearly everyone — even students — has it peeking out their laptop bag. I suspect it will become indispensable reading under the Obama administration for the rest of the planet as well.
Every time I read Krugman in the NY Times or other left-wing publication, I get the sense that he is doing reverse research, from the conclusion backwards to seek out explanations or cherry picked data to support the predetermined conclusion.
We’ve had three really fine French meals in our lives, one in Paris, one in Hampshire and one in Queensland. Come to that, by far the best steak meals we’ve ever had have been in France and Italy, but I must admit we’ve never been to Argentina.
I haven’t read Goldberg’s book, but have read other sources about that era. What about Goodman’s statement is wrong?
What about Shlaes’ article makes it incredible?
And after you’ve finished that first one, Krugman’s reply to her latest is also in the NY Times. I think this will pretty much bring you up on the back-n-forth for now.
I provided several specific criticisms of Shlaes’ article in my 11:19:57 comment.
I disagree with Shlaes re: Wagner and unions; it benefited corporate unions, even required them, but did nothing to strengthen — and arguably even weakened — the position of the workers.
However, while Shlaes pounds some factoids (the spending did not restore the economy: if a slight rise in unemployment followed a drop in federal spending, it doesn’t look as if the spending has done anything except create an addiction to it, but has not restored the private sector to anything like full output), Krugman pounds the theory (they should have done the same thing, only more). Only Shlaes is noting that there were other changes — notably in the regulatory environment — that should be considered. And we’ve only begun touching on those changes.
It also looks like Krugman leaves himself some wiggle room with “But to a first approximation, prices would also have been 20 percent lower.” But to a second order approximation, maybe not. What workers are affected matters, too. When people stop buying durables like autos and use the one they already have, or later when they go back to buying new ones, that doesn’t really affect prices on things like food, clothing, or shelter at the margin. And when capital-intensive industry hires back highly productive workers at the higher wages, the price level doesn’t rise accordingly.
I know you didn’t use the word “deficit, and were explicitly talking about the total level of spending during the Depression. But to me,at least, it seemed as if you were comparing over spending in the 30’s – 9% or so of GDP – to Krugman’s proposed stimulus, which will increase spending, already in deficit, by 4% of GDP.
To say, as you did, that the 9% budget was “double what Krugman thinks is the magic number now,” is not even comparing apples and oranges, but more like apples and lamb chops. One number is total government spending as a % of GDP. The other is an increase in the deficit as a % of GDP. These are not comparable.
The Keynesian point you’re making is wrong.
Government spending was a disaster in the New Deal, and it’s a disaster now. It will be an even bigger disaster in a few years if it’s ramped up under the Obamaramadrama regime-junta.
What we need is less government spending, and to kill off the Fed, and replace it with a sound free banking system and a gold standard.
Then Bernanke can get a job as a real helicopter pilot, not a pretend one.
Also, Shlaes’ article is good, and far better than Krugman’s Keynesianism.
I would love to see Ms.Shales debate someone like Krugman or Delong. She has made a living as a journalist in conservative circles-safely outside the purview of peer review.
Would it be wrong in this heated debate to say that I consider getting “The General Theory of Employment, Interest and Money† by J.M. Keynes, but will I be able to read and _enjoy_ it being not economist, but sociologist?
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