Saturday, June 13, 2009

The Curious Paul Krugman's Selection of Data

As I have stated before, Paul Krugman is pretty good at watching the data. But, he is clueless as far as business cycle theory. And, he also appears to have agendas which cause him to distort facts he must be aware of.

In a recent post, he accurately takes Arthur Laffer to task for using the monetary base as an indicator of future inflation.

I made pretty much the same case.

But then he critiques Milton Friedman's M2 focus during the 1930 period:

Notice, in this case, that a Friedman-style focus on a broad monetary aggregate [RW: Krugman means M2] gives the false impression that Fed policy wasn’t very expansionary. But it was; the problem was that since banks weren’t lending out their reserves and people were keeping cash in mattresses, the Fed couldn’t expand M2.
This is an odd focus, his claim is that M2 can't grow during a "liquidity crisis". But this doesn't fit the facts. In the current crisis, for example, M2 grew from September 2008 to early 2009 at an annualized rate as high as 15%. It didn't grow as fast as the monetary base, but it sure did grow at a record rate.

In the post, Krugman provides two charts to make his case about monetary base [He says he is using the charts in recent lectures]. He posts a chart of Japan's monetary base at the very start of the current decade, and a chart of M2 and the monetary base in the U.S. during the 1930's. However, what he doesn't do is show the double digit M2 annualized growth that started in September 2008. I can't believe this data hound isn't aware of it. It just doesn't fit his theory. In fact, it would blow up his theory that money supply can't grow during a "liquidity crisis" and it would blow up his theory that Friedman's focus was on the wrong aggregate, so he simply ignores the current data.

1 comment:

  1. Wow, I read Krugman's post first, then yours. I didn't notice the glaring flaw in his analysis that you caught. (I am so glad when I find someone else who admits the Fed was trying to inflate during the 1930s, that I didn't think through the logic of what he was saying.)