There have been a number of articles lately about the efficacy of Keynesian theory. You see this discussed in the mainstream media because they, for the most part, have no real understanding of other economic theories so they have no larger frame of reference from which to compare Keynes.
Today’s Wall Street Journal has yet another article by reporter Jon Hilsenrath that attempts to raise the central question about whether or not Keynesian fiscal stimulus works. I discussed his last article on deflation in “Economists ‘Don’t Understand Deflation.’”
I suggest you read the Journal article to get an idea of what the controversy is. I have written about Keynesian economics many times and I do not wish to repeat myself again. But the main points are that: it has never been proven to work in any crisis, it fails as a theory under analysis, and it causes long-term harm to the economy. Hilsenrath makes many errors in his analysis. Further he fails to grasp what Keynesian theory is, what Monetarism really is, and he has no understanding of Austrian theory.
Whatever.
I recently read an article entitled, “The Self-Defeat of the Keynesian Cross” by Pedrag Raysic, a Ph.D candidate in economics. It is a devastating critique of Keynesian theory based on testing its internal logic. He concludes that if you take it to its logical conclusion, it is self-defeating. … Continue reading Why Keynesian Economics Is Internally Inconsistent
Q: Are we being harmed by a trade deficit?
A: We’ve run one since 1983 yet the economy still has grown. (See table, below.)
Q: Can we compete in foreign trade?
A: Yes. In 2009 we exported $1,554,718,000,000 of goods and services and imported $1,933,347,000,000.
Q: What will the appreciation of the yuan do to us?
A: It will make us poorer because consumer goods from China will be more expensive.
Q: Why are export jobs more important than import jobs?
A: They aren’t. But no one sees the loss of jobs and businesses related to imports.
Q: Won’t the balance of payment/deficits harm us?
A: The Chinese will have to use its hoard of dollars to buy stuff from us and finance our deficit.
 GDP scale on Right; Ex-Im on Left. Red=exports, blue=imports, green= balance of payments, tan=GDP * * * * *
I have been reading a lot about trade deficits, free trade, China’s renminbi (“the “People’s Currency”), and global recovery. Many economists and commentators have targeted the yuan (I like the reactionary term “yuan”) as the villain in this scenario. It’s because the yuan is pegged to the dollar.
Here is the first argument, as framed by Nobel laureate, Paul Krugman:
China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done. … China was manipulating its currency — selling renminbi and buying foreign currencies, so as to keep the renminbi weak and China’s exports artificially competitive …
Krugman says that arguing with the Chinese will no doubt be futile because they won’t revalue. His solution, referring to a policy of the Nixon Administration in 1971 to erect trade barriers against trade partners:
At this point, it’s hard to see China changing its policies unless faced with the threat of similar action [as in 1971]— except that this time the surcharge would have to be much larger, say 25 percent.
I’ve dealt with Krugman’s argument in another article, “Paul Smoot-Hawley Krugman.” He is dead wrong. It is sufficient to say that his advice would set off competitive devaluations and possibly a tariff war which would be the economic equivalent of WWW III. The net result that if you think we’ve got deflation now (we do), a trade war would significantly accelerate the trend, and kill international trade.
The second argument is that an artificially low yuan gives China an advantage in world trade. By keeping their currency cheap, the price of Chinese goods on foreign markets makes them cheaper to buy. Because of this U.S. exporters are at a disadvantage because U.S. goods are more expensive than Chinese goods because of currency manipulation, and not market factors. Thus we must force the Chinese to let the yuan appreciate to make American exports competitive.
These are false arguments, they are irresponsible and dangerous for Americans, and the end result will be a lower standard of living for Americans. These arguments never look at the unforeseen and unintended consequences of such a policy. They also court disaster.
But Secretary Geithner doesn’t see it that way. Nor does Professor Krugman.
They play a very dangerous high stakes game. … Continue reading Things I Worry About: China, Geithner, and Tariff Wars
A private jobs survey came out this morning from ADP which said the private economy lost another 23,000 in March. This was the smallest loss of jobs since February, 2008. Jobs in construction (-43,000) and goods manufacturing (-51,000) were hard hit. Gains came from the service sector (+28,000). ADP’s survey has a base of 22 million workers.
This contrasts with the Wall Street Journal’s survey of economists forecast of a 50,000 job gain. Bloomberg’s survey expects 184,000 jobs, including government jobs, with a big boost coming from temporary Census hiring. The Bureau of Labor Statistics report comes out this Friday. Stay tuned.
This made me think about jobs–what they are and how they can be increased.
I read an excellent op-ed piece on Real Clear Markets about the failure of the American Recovery and Reinvestment Act, the $787 billion orgy of Keynesian stimulus. It was written by econ professors, George Bittlingmayer (Kansas), Arthur Havenner (UC Davis), and Thomas Hazlett (GMU–econ and law). Their point is that the bill did nothing to stimulate employment, as advertised, and the new “Jobs Bill” is an admission of their failure.
Counter to the predictions put forward a year ago by the Administration, when it claimed that “more than 90 percent of the jobs created are likely to be in the private sector,” U.S. companies employed 3.9 million fewer workers in January 2010 than they did one year earlier. Public employment bucked the trend, staying constant even as governments contended with sharply reduced tax revenues. While the jobs held by those 22 million public workers helped support many families, the “stimulus” failed to trigger private sector employment growth. …
This implies a price tag, at the median estimate, of about $800,000 per job. These forecast job gains are not permanent, but temporary. The Administration’s January 2009 forecast was that the A.R.R.A. was needed to reduce the path of unemployment for five years, when the unemployment rate – if we did nothing – would decline to the level projected with the “stimulus.” Using this five-year time horizon projects annual costs of approximately $160,000 per job.
Nice work if you can get it.
 Dig a hole and fill it
One would think that the advocates of Keynesian stimulus would admit failure, but like most fundamentalists, they are more interested in doctrine than results. We now see that they are panicking because their policies aren’t working. Paul Krugman recently recommended that we erect a tariff wall against Chinese goods in order to force them to devalue to yuan and make U.S. exports more competitive in the world market. In effect, he is asking us to declare the economic equivalent of WW III. The devastation to the world’s economies would be catastrophic. Wow. But that’s another economic fallacy.
The bills to stimulate the economy are all based on a fundamental economic error and we, our children, and generations of grandchildren will have to pay for it.
Keynesians have a talent for giving a name to things that are often the opposite of what they mean. “Job” is a good example. To Keynes and his followers a job was something that you paid someone else to do. Simplistic and correct, until you think about it. It’s more complicated than that. Keynesian stimulus actually suppresses economic activity and thus employment. … Continue reading Jobs, Recovery, and the Barrista
 Dr. (Oh) No
I used to rail regularly against Paul Krugman, our “liberal conscience,” but I became bored. His ideas are so silly and wrong that it was like the proverbial shooting fish in a barrel. Or is it shooting monkeys? Whatever. But a column of his on March 14 really had me concerned because the fellow is so dangerous.
This will just amaze you: In the middle of the Great Recession he is calling for retaliatory trade tariffs against China to force them to revalue the yuan.
Here’s how he frames the question:
China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done. …
To give you a sense of the problem: Widespread complaints that China was manipulating its currency — selling renminbi and buying foreign currencies, so as to keep the renminbi weak and China’s exports artificially competitive …
And it’s a policy that seriously damages the rest of the world. Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.
The foundation of his idea is based on Keynesian fundamentalism. What Keynesians suggest as a cure-all of the world’s malinvestment created during the fake money credit boom is to inflate our way out of the problem. This hasn’t worked. The last thing they think we should do is to actually liquidate the bad debt and overvalued assets on the books of financial institutions which are tying up credit. Yet until that happens, we’ll be stuck in the “liquidity trap” that government policies created in the first place. (See my articles, “It’s Supposed To Work,” parts I and II.)
It boggles the mind.
Krugman says that arguing with the Chinese will no doubt be futile because they won’t revalue. His solution, referring to a policy of the Nixon Administration in 1971 to erect trade barriers against trade partners:
At this point, it’s hard to see China changing its policies unless faced with the threat of similar action [as in 1971]— except that this time the surcharge would have to be much larger, say 25 percent.
Yikes! What he is saying is that we should erect a trade barrier against Chinese goods.
Our government did this in 1930 and it was one of the causes of the Great Depression as international trade collapsed because of retaliation by other governments. … Continue reading Paul “Smoot Hawley” Krugman
March 1 (Bloomberg) — The U.S. Transportation Department will lay off 2,000 employees today, halting construction projects, reimbursements to state governments and highway safety programs, according to a statement.
Employees will be furloughed without pay because a funding measure stalled in Congress, the department said in a statement today. The affected workers are in [...]
By Jeff Harding.
As my readers know, every so often I get fed up with what comes out of Washington (Our Nation’s Capital) and feel the need to vent. My recent irritation is a letter Christina Romer, the president of Obama’s Council of Economic Advisers, published in the Wall Street Journal.
The letter is an apologia for [...]
By Jeff Harding.
In order to understand the present state of the U.S. economy you have to understand that there are two things happening at once. For the most part they are in conflict with each other, in that one track can negatively impact the other.
Lest I be accused of putting out conflicting information, there [...]
By Jeff Harding.
If I were Nelson Mandela, I would check to see if my medal were tarnished. When you think about it, this has got to be the ‘Thank God It’s Not George Bush” Peace Prize. This is up there with Jimmy Carter and Al Gore.
Poor President Obama. I can imagine his surprise [...]
*Since that event followed this one, that event must have been caused by this one.
Reprint from Thinkmarkets.
Mario Rizzo is an Austrian theory based professor of economics at NYU, and a member of the Colloquium on Market Institutions and Economic Processes at the Department of Economics at NYU.
This is a fabulous piece on the logical fallacy [...]
By Jeff Harding
New York Times columnist and Nobel prize winning economist Paul Krugman says (“The Joys of Sachs”) that record profits are good for Goldman Sachs and bad for the country.
Professor Krugman’s view is that the economy has been “financialized” since the “deregulation” of the Reagan Administration. That is, more and [...]
By Jeff Harding
[Corrected version]
This article comes under the category of “who do you listen to and why?” I ask this question frequently, especially when I read something by Paul Krugman.
Nobel laureate Paul Krugman is one of America’s best known economists through his commentary in theNew York Times. Yesterday he declared we won’t have inflation.
The sign of a good social scientist, and especially economists, is that they should have a healthy sense of skepticism about what they think they know. After all, as we know, economists have a terrible record of predicting things. You would think they would be a bit humble. But they’re not. I don’t get the feeling that Professor Krugman is a particularly humble man.
His recent Op-Ed piece, “The Big Inflation Scare,” said that, although the Fed is pumping up the money supply and is monetizing Treasury debt, banks are just sitting on the money, thus no inflation. Besides, he says, Japan didn’t have any inflation during their recession between 1990 and 2003 when their central bank monetized their debt, as the Fed is doing now. Also, because governments run up huge deficits doesn’t mean there will be inflation. He points to the experience of Belgium, Canada, and Japan.
Banks “Hoarding” Money:
Professor Krugman is correct about the current state of our credit system. The Fed has pumped credit into the system, but because of bad loans and unstable balance sheets banks have been reluctant to lend and many businesses are reluctant to borrow. So, banks have been building up reserves on their balance sheets to offset potential losses and this credit is not hitting the economy—yet.
To observe that since we don’t have inflation now and then conclude that we won’t have inflation in the future is simply a leap of faith by him and is not borne out by history or economics. Is he saying that when the government injects massive amounts of money into a system that inflation will never occur?
Krugman points to the experience of Japan from 1990 to 2003 when the Bank of Japan injected a lot of credit into the system in various ways and no inflation resulted. He is mostly correct on that. Their banks were in terrible shape because of the fallout of the inflationary binge on real estate caused by BOJ money pumping in the 1980s. What he doesn’t say is that when the crash occurred, the Japanese tried every Keynesian trick in the book to revive their economy and they all failed.
Many banks and financial institutions were propped up by the government and weren’t allowed to fail, and the banks added the new credit to their reserves to offset bad loans. The money didn’t hit the economy and they went into a recession.
Professor Krugman wrote about this problem quite a bit during that period and everything he recommended the Japanese government to do had been tried. His recommendations failed. For example, he thought government sponsored infrastructure projects, though wasteful, were fine. In other words, the Keynesian bromide of paying one man to dig a hole and paying another man to fill it was good because money was being injected into the economy to defeat the dreaded Keynesian “liquidity trap.” … Continue reading The Big Inflation Scare is Real v2.0
Paul Krugman is already setting us up for the failure of Obama’s Keynesian stimulus.
For once I agree with Paul Krugman. We both believe that the stimulus bill won’t work, but for much different reasons.
Prof. Krugman is one of my favorite liberals because he is held out to be a paragon of liberal intellectual thought. He got his Ph.D. at MIT and won a Nobel prize in economics for his work on international trade. He’s an economics professor at Princeton and is a very bright man. His NY Times columns regularly support Keynesian economics and government economic intervention.
Lately Prof. Krugman has been preparing his Keynesian followers for the failure of the Obama stimulus plan.
He’s a big believer in Keynesian stimulus, but he’s saying that there is not enough stimulus to revive consumer spending and thus get the economy going again. When the government creates jobs, he says, consumers will have additional funds, they will spend, and the economy will get better.
In his NY Times column on March 9, he said “many economists, myself included, actually argued that the plan was too small and too cautious. The latest data confirm those worries — and suggest that the Obama administration’s economic policies are already falling behind the curve.” … Continue reading Professor Krugman and Professor Keynes
The Liberal New Deal Fantasy
I don’t know why Amity Shlaes stirs such a vicious response to her articles about FDR’s New Deal. Well, actually I think I do. The New Deal is the foundation of the liberal world. If it were determined that control, experimentation, and manipulation of business by the government were really harmful to our well being, that would undermine everything they stood for.
Readers of this blog know well that Shlaes wrote the very successful book about the Great Depression, The Forgotten Man. She wrote an article entitled “FDR Was a Great Leader, But His Economic Plan Isn’t One to Follow” in the Sunday Washington Post. In my opinion this is a worthy sentiment, though I disagree with her proposed remedies. Since Obama has been called upon to emulate FDR, she pointed out the failures of FDR’s administration which included the prolongation of the Great Depression.
I understand that D.C. is a company town. But the responses to her article were mean spirited. Here are some typical responses form the Post’s web site: … Continue reading Amity Shlaes and the New New Deal
|
