Friday, December 18, 2009

A Krugman Trifecta of Errors

There's always an error or two you can spot in a Paul Krugman NYT article. Today, he has three in the space of two paragraphs, so I must comment. Krugman writes:
Right now, real interest rates are too high, on a PPE basis (that’s Proof of Pudding is in the Eating): the economy is clearly operating far below capacity due to insufficient demand. The cost of that insufficient demand is enormous — not just in dollars of wasted output, but in severe social and psychological damage to the unemployed.

While real interest rates are too high, however, the short-term nominal rate is as low as it can go. So there are only two ways real rates can be reduced. Either the Fed has to buy long-term assets, driving down the wedge between short and long rates — the Gagnon proposal, which comes out of Ben Bernanke’s own work — or it needs to raise expected inflation. Or it could and probably should do both.
Let's start with the easiest and most glaring error:
the short-term nominal rate is as low as it can go
Ah, wrong Paulie. The current effective funds rate is 0.13%, and it has been roughly such for some time. Last I studied whole numbers, there are at least another twelve before you get to zero. Fed propaganda is about a Fed funds target rate between zero and 0.25%, but what the Fed has been maintaining is the approximate 0.13% rate.

Next let's look at real rates. Krugman writes:
real interest rates are too high
Actually the real rate appears likely very low. Three month T-Bill rates are at roughly 0.04%.

With the Fed Funds rate above this rate, we know that there is no pressure from the Fed pushing this rate down. It's down because real rates are low. Thus, strike two for Krugman.

Krugman then strikes out by taking his first two errors and compounding them by calling for inflation to push his imagined high real rate down. Since he is blaming Keynesian-type aggregate demand for the current unemployment situation, rather than understanding that the current high unemployment is the result of paying people not to work (unemployment insurance) and the mad monetary policy manipulations of the Fed which makes it difficult for entrepreneurs to understand the economy and make sound hiring decisions.

Krugman wants to add to the confusion by pumping out money and creating another false (money printing induced) distorted demand, instead of allowing the economy to settle down into an unmanipulated state.

In short, Krugman's errors lead him to policy prescriptions that will cause even more problems for the economy. Do we really need inflationary problems on top of the problems we have now?

But what can you expect from a guy that has publicly stated he prefers banana fungus to economic deductive theory?

1 comment:

  1. If banana fungus is what's responsible for the deliciosity of my favorite over-ripened banana bread recipe then I assume that means I prefer it to deductive economic logic as well!

    Now, the question is: is Krugman a fan of over-ripened banana bread?