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Paul Krugman: Fighting off depression

20 points by ardit33 18y ago

sarvesh 18y ago
"Friedman's claim that monetary policy could have prevented the Great Depression was an attempt to refute the analysis of John Maynard Keynes, who argued that monetary policy is ineffective under depression conditions and that fiscal policy - large-scale deficit spending by the government - is needed to fight mass unemployment. The failure of monetary policy in the current crisis shows that Keynes had it right the first time. And Keynesian thinking lies behind Obama's plans to rescue the economy." -- From the article Just because Keynes wasn't proven wrong doesn't mean he is right. I don't think he has put enough thought into this. The fact of the matter is our financial system pretended there was whole lot more wealth than there really was and not mention the fact they continued to trade based on that. Niether trickling down money top down nor spending can solve this core issue in my opinion.
mhartl 18y ago
I've long had a hobby interest in economics, but it's only in the past couple months that I've really dug into macroeconomics and monetary theory (motivated, of course, by current events). It's weird: there's bizarreness at every turn---it's like studying astronomy for the first time, only to discover that the astrologers are in charge. The inmates are running the asylum. To wit: take a look at "Baby-Sitting the Economy" (http://www.slate.com/id/1937/ http://www.slate.com/id/1937/), an article Paul Krugman wrote in 1998. It describes a simple example: a co-op with a coupon or "scrip" currency redeemable for baby-sitting. By Krugman's own admission, this example inspired his understanding of monetary policy, recessions, and Keynesian economics. In the story, a "recession" occurs when co-op members start hoarding scrip in anticipation of future outings; the result is that the whole system freezes up; and the solution was an injection of liquidity through scrip inflation. Exercise: discover the flaw in Krugman's analysis. Hint: consider what would happen in a real economy with hard currency by allowing the price of baby-sitting to fluctuate and by replacing "scrip" with gold. Contrast this situation with the long-run effects of the inflationary "solution" on savings and business investment incentives. I have two predictions: the economy will continue to tank despite (or because of) attempts to "stimulate" it, and Krugman will blame the resulting depression on the stimulus being insufficiently bold---i.e., on not being Keynesian enough.
- curiousgeorge 18y ago
  >> the economy will continue to tank despite (or because of) attempts to "stimulate" it Perhaps you should make up your mind about basic economic causality before hectoring Krugman for having actually read the original texts. The General Theory is a difficult and dense book and Krugman offers a decent summary of Keynes' paradox of thrift. If you are interested in economics, the problem with your suggestion is that by the time he gets around to discussing the paradox of thrift, Keynes has already broken claims that Say's Law forces supply and demand into equilibrium through changes to the wage level. If I remember correctly, he did this with the empirical observation that while additional wages may induce labor to enter the workforce, declines in real wages don't generally cause a decline in demand for employment.
  - mhartl 18y ago
    I do know about the paradox of thrift, and it seems not only not paradoxical but actually false. Increased saving both lowers prices (increasing quantity demanded) and lowers interest rates (increasing investment), so the dynamical behavior is self-correcting. In Krugman's example, inflation solved the liquidity problem, but it introduces new disincentives to saving and distorts long-term financial planning. The hard-currency/free-market solution not only avoids these problems, it also doesn't count on an enlightened central banker making the right decision at the right time. My analysis could be mistaken, though, and I'll definitely take a look at Keynes's argument more carefully some time.
- deleted 18y ago
  [deleted]
- barbie17 18y ago
  "Hint: consider what would happen in a real economy with hard currency by allowing the price of baby-sitting to fluctuate..." You are confusing two different types of analysis. If you had taken a (more rigorous) macroeconomics course you would have learned that there are two types of analysis: long-run and short-run. In the short-run prices are inflexible due to unions, preexisting contracts, menu costs, etc. In the long-run prices can fluctuate and recessions are impossible (we don't worry about some recession that happened in 120 A.D. for example). Keynesian economics only deals with the short run, and only in the short run can the economy be trapped in a temporary disequilibrium. Even though the economy should eventually recover on its own in the long run it can cause a lot of pain in the process, which is why Keynesian economics advocates government intervention. "I've long had a hobby interest in economics... The inmates are running the asylum." Maybe a hobbyist shouldn't be suggesting that Nobel prize winners be put in an asylum ;).
scudco 18y ago
Krugman shilling for Keynesian get-rich-quick schemes and insisting that what Obama(read The Executive Branch) needs is simply more power to spend our way out of The Greater Depression? Say it ain't so! All kidding aside Krugman accurately points out that the Republicans are simply posturing themselves as "champions of careful Congressional deliberation." The big problem I find with his line of thinking, however, is that he assumes Obama is not posturing himself as the "champion of quick and decisive action." Krugman further magnifies his blind-spot in the following excerpt: "The biggest problem facing the Obama plan, however, is likely to be the demand of many politicians for proof that the benefits of the proposed public spending justify its costs — a burden of proof never imposed on proposals for tax cuts." That is, we are likely going to be unable to spend our way out of this mess because people are unsure about this whole magical plan that spending and printing money will actually be a viable plan toward recovery. Secondly he firmly plants his flag in statist territory by insisting that tax cuts are never held to this same standard. By this he seems to be suggesting that when government spends money what rulers need is nearly carte-blanche ability to spend as they see fit; but when we want to steal less from citizens then we had better have some careful deliberation that this tax cut is going to positively effect them!
gleb 18y ago
Anna Schwartz - Bernanke Is Fighting the Last War http://online.wsj.com/article/SB122428279231046053.html?mod=special_page_campaign2008_mostpop http://online.wsj.com/article/SB122428279231046053.html?mod=... "The Fed," she argues, "has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible." Reading NY Times for their business/economics opinion is like reading Playboy for the articles -- curiously unsatisfying.

20 points by ardit33 18y ago

"Friedman's claim that monetary policy could have prevented the Great Depression was an attempt to refute the analysis of John Maynard Keynes, who argued that monetary policy is ineffective under depression conditions and that fiscal policy - large-scale deficit spending by the government - is needed to fight mass unemployment. The failure of monetary policy in the current crisis shows that Keynes had it right the first time. And Keynesian thinking lies behind Obama's plans to rescue the economy." -- From the article Just because Keynes wasn't proven wrong doesn't mean he is right. I don't think he has put enough thought into this. The fact of the matter is our financial system pretended there was whole lot more wealth than there really was and not mention the fact they continued to trade based on that. Niether trickling down money top down nor spending can solve this core issue in my opinion.

mhartl 18y ago

I've long had a hobby interest in economics, but it's only in the past couple months that I've really dug into macroeconomics and monetary theory (motivated, of course, by current events). It's weird: there's bizarreness at every turn---it's like studying astronomy for the first time, only to discover that the astrologers are in charge. The inmates are running the asylum. To wit: take a look at "Baby-Sitting the Economy" (http://www.slate.com/id/1937/ http://www.slate.com/id/1937/), an article Paul Krugman wrote in 1998. It describes a simple example: a co-op with a coupon or "scrip" currency redeemable for baby-sitting. By Krugman's own admission, this example inspired his understanding of monetary policy, recessions, and Keynesian economics. In the story, a "recession" occurs when co-op members start hoarding scrip in anticipation of future outings; the result is that the whole system freezes up; and the solution was an injection of liquidity through scrip inflation. Exercise: discover the flaw in Krugman's analysis. Hint: consider what would happen in a real economy with hard currency by allowing the price of baby-sitting to fluctuate and by replacing "scrip" with gold. Contrast this situation with the long-run effects of the inflationary "solution" on savings and business investment incentives. I have two predictions: the economy will continue to tank despite (or because of) attempts to "stimulate" it, and Krugman will blame the resulting depression on the stimulus being insufficiently bold---i.e., on not being Keynesian enough.

curiousgeorge 18y ago
>> the economy will continue to tank despite (or because of) attempts to "stimulate" it Perhaps you should make up your mind about basic economic causality before hectoring Krugman for having actually read the original texts. The General Theory is a difficult and dense book and Krugman offers a decent summary of Keynes' paradox of thrift. If you are interested in economics, the problem with your suggestion is that by the time he gets around to discussing the paradox of thrift, Keynes has already broken claims that Say's Law forces supply and demand into equilibrium through changes to the wage level. If I remember correctly, he did this with the empirical observation that while additional wages may induce labor to enter the workforce, declines in real wages don't generally cause a decline in demand for employment.
- mhartl 18y ago
  I do know about the paradox of thrift, and it seems not only not paradoxical but actually false. Increased saving both lowers prices (increasing quantity demanded) and lowers interest rates (increasing investment), so the dynamical behavior is self-correcting. In Krugman's example, inflation solved the liquidity problem, but it introduces new disincentives to saving and distorts long-term financial planning. The hard-currency/free-market solution not only avoids these problems, it also doesn't count on an enlightened central banker making the right decision at the right time. My analysis could be mistaken, though, and I'll definitely take a look at Keynes's argument more carefully some time.
deleted 18y ago
[deleted]
barbie17 18y ago
"Hint: consider what would happen in a real economy with hard currency by allowing the price of baby-sitting to fluctuate..." You are confusing two different types of analysis. If you had taken a (more rigorous) macroeconomics course you would have learned that there are two types of analysis: long-run and short-run. In the short-run prices are inflexible due to unions, preexisting contracts, menu costs, etc. In the long-run prices can fluctuate and recessions are impossible (we don't worry about some recession that happened in 120 A.D. for example). Keynesian economics only deals with the short run, and only in the short run can the economy be trapped in a temporary disequilibrium. Even though the economy should eventually recover on its own in the long run it can cause a lot of pain in the process, which is why Keynesian economics advocates government intervention. "I've long had a hobby interest in economics... The inmates are running the asylum." Maybe a hobbyist shouldn't be suggesting that Nobel prize winners be put in an asylum ;).

scudco 18y ago

Krugman shilling for Keynesian get-rich-quick schemes and insisting that what Obama(read The Executive Branch) needs is simply more power to spend our way out of The Greater Depression? Say it ain't so! All kidding aside Krugman accurately points out that the Republicans are simply posturing themselves as "champions of careful Congressional deliberation." The big problem I find with his line of thinking, however, is that he assumes Obama is not posturing himself as the "champion of quick and decisive action." Krugman further magnifies his blind-spot in the following excerpt: "The biggest problem facing the Obama plan, however, is likely to be the demand of many politicians for proof that the benefits of the proposed public spending justify its costs — a burden of proof never imposed on proposals for tax cuts." That is, we are likely going to be unable to spend our way out of this mess because people are unsure about this whole magical plan that spending and printing money will actually be a viable plan toward recovery. Secondly he firmly plants his flag in statist territory by insisting that tax cuts are never held to this same standard. By this he seems to be suggesting that when government spends money what rulers need is nearly carte-blanche ability to spend as they see fit; but when we want to steal less from citizens then we had better have some careful deliberation that this tax cut is going to positively effect them!

gleb 18y ago

Anna Schwartz - Bernanke Is Fighting the Last War http://online.wsj.com/article/SB122428279231046053.html?mod=special_page_campaign2008_mostpop http://online.wsj.com/article/SB122428279231046053.html?mod=... "The Fed," she argues, "has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible." Reading NY Times for their business/economics opinion is like reading Playboy for the articles -- curiously unsatisfying.