Saturday, December 11, 2010

Krugman Disses Nobel Prize Winners to Get at Austrians

Paul Krugman thinks he has smashed the Austrian theory of the business cycle. He needs to take out some fellow Nobel Prize winning economists as collateral damage, but in his eyes it's the dirty work that needs to be done to get at ABCT. He does all this in a post where he proclaims "Keynes roolz". Think of this "Keynes roolz" proclamation as you would GW's Iraq "Mission Accomplished" speech back in 2003. 

In the post, Krugman writes:
If you believe that we’ve suffered an overall fall in demand, you’d expect to see hiring plunge and firing rise; it’s ambiguous what should happen to overall job separations, because you’d also expect fewer people to quit, given the lack of available jobs.

If, on the other hand, you believe that there’s a reallocation story — workers are shifting from old to new industries — you’d expect both job separations and hiring to rise, as workers move, one way or another, to the rising sectors.
You see what Krugman is doing here is attacking Austrian Business Cycle Theory, without naming it. The "reallocation story fails" is code talk for ABCT. The Austrians believe that the downside of a business cycle is the reallocation period that follows the misallocations caused by Fed money printing during the boom period . Keynesians believe that a sudden fall in general demand causes the downturn.

What Krugman writes above is true, if you ignore facts like the world spins on its axis.

First, as far as the job separations are concerned, workers in general aren't looking at the entire economy when they change jobs. It's not as much a macro decision as it is a personal decision: I am working at A, I can get a better deal at B, therefore I will leave A.

During a downturn, when viewed from the Austrian perspective, there may not be better deals out there, given that the demand to hold cash is climbing and employers are thus not bidding up wages. Thus, the situation may be one of: I am working at A, and there aren't any better deals out there so I am going to hang on at A until I get booted.

This completely explains the separation data without contradicting ABCT.

As for the fall in hiring, this is where he needs to kill off fellow Nobel Prize winners to "prove" his point. He basically takes the fall in hirings and says, "Ah ha, employers aren't hiring, therefore it's a demand problem!"

He ignores the fact that it may be that potential employees have another option: sitting at home collecting  unemployment checks. As the  Nobel Prize prize committee put it about the three recently named Nobel winners and one of their conclusions:
One conclusion is that more generous unemployment benefits give rise to higher unemployment and longer search times.

In other words, you ain't hiring anyone if they have gone fishin'. Which makes the employment problem a supply/government meddling problem, rather than a demand problem and which causes Krugman's
Denial of ABCT attack to fail once again.

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