Tuesday, October 11, 2011

Does Paul Krugman Suffer From Alzheimer's?

Paul Krugman attempts to justify Keynesian economics with this statement:

First, we’re talking about a model, not just a prediction about the impact of spending increases. So you can ask about the ancillary predictions of that model as opposed to rival models. Anti-Keynesians assured us that budget deficits would send interest rates soaring; Keynesian analysis said they’d stay low as long as the economy remained far from full employment. Guess who was right?
Say what? You can't have high interest rates and high unemployment?

In March 1975, industrial production fell by nearly 13% while the yearly rate of growth of the consumer price index jumped to around 12% and unemployment was at 8.6%, a 68% increase in the unemployment rate from the year earlier, March 1974 rate of 5.1%.

One helluva a model Krugman has there. Did he forget about the 1970s?

He goes on with some other outrageous justifications for Keynesian models, but he comes back to the above "first point":

Mainly I’d stress the first point. We have a model of the way the world works, and the world does indeed seem to work that way. And an implication of that model is that fiscal stimulus will work under conditions like those we face now. If interest rates had soared, if the rise in base money had led to rising GDP and/or soaring prices despite the zero lower bound, I would have sat down to reconsider what I thought I knew about macroeconomics. In fact, however, my preferred model has passed the test of events with flying colors, while the other guys’ models have been totally wrong.
Why he is not reconsidering the 1970s and the failure of his model during that period he does not say. But, notice of late how he is throwing in his argument, "base money," to discredit those who hold that money growth has an influence on economic activity. "Base money" includes excess reserves, which I have long pointed out, are reserves that are not in the economic system and do not influence the economy. They are not part of the money supply, Only now are these reserves leaking into the system and becoming part of the money supply and the price inflation and false boom ramifications of that will soon be clear for all to see. Maybe even Paul Krugman.


  1. "Anti-Keynesians assured us that budget deficits would send interest rates soaring; Keynesian analysis said they’d stay low as long as the economy remained far from full employment. Guess who was right?"

    Who was right? The one and only reason interest rates aren't soaring is because the Fed is sopping up all the treasuries - DUH!

  2. Did he forget about the 70s? I ask the question constantly to left wingers and the response is always the same...a blank stare. See the problem with the 70s is that it destroys the idea of the evil "Reagan effect" that the left believes is the root of all that ails us today. Many of the negative trends that they like to point out such as declining real wages, declining middle class wealth, unequal income gain distribution, etc all started in the 70s and long before Reagan.

    What they fail to understand is that supply side economics didn't come along becuase things were workings so well, it came along becuase the Keynesian demand side economics had failed. There are more parallels between today and the late 70s then any other time in the last 30years.

  3. It seems to me that all Keynesian claims for Keynesianism working is based on a faulty economic indicator -- GDP. As long as GDP includes government spending, it's a bogus indicator of real economic growth. Even using GDP, there are times, like in the 70's when they couldn't inflate fast enough for their phony numbers to make it look like GDP was increasing.

    When you can print money, spend that money, and then count that spent money toward GDP, faking prosperity will work most of the time. However, it's just that -- fake prosperity.

    The thing that Keynesians forget -- and sometimes I think Austrians forget this as well -- is that economic transactions are about individuals increasing their perceived benefit from interacting with other individuals. It doesn't even require money in the transaction for that to happen. All the graphs and tracking of monetary numbers can give you some picture, but not a complete picture. That said, the picture would be better in a hard-money environment, but in the fiat-money environment, prosperity is very easy to fake. In the fiat environment, GDP doesn't correlate necessarily with people actually perceiving increases in their own benefit.

  4. The interest rates aren't soaring because the FED is buying Treasuries. begs the question...Is Krugman an idiot or just a lying statist pig?

  5. Ummm, did you forget about oil prices in 1970?

    Go learn something at http://www.moslereconomics.com

  6. It is unfair to alzheimer's patients to compare to PK. They, at least, have moments of clarity.

  7. The real question is the mental capacity of writers and supporters of this thinking which is devoid of a knowledge of economics, science and history

  8. I have to second a couple of the posts here and would like some elucidation on one point. Krugman says that interest rates aren't soaring, and thus he is correct, but isn't that because of the fed buying up the treasuries and purposely setting the rate so low? This seems like a very obvious point, but Bob doesn't make it, so I'm a bit confused. Thanks in advance for any clarification.

  9. A real account about the seventies ,in my mind , would have to reckon the fact that it turned clear to a an attentive one the difference on the quality and directions of the effects on the private and public economy under ripple effect from a single disruptive factor(oil in the seventies or recently the tsunami- quake-nuclear disaster in Japan) ..It is fair to conclude that the State economy is virtually un-dynamic or worst, anti-dynamic by its nature(which could be defined by its main source as an artificial economy sucking ALL its oxygen from the private economy) since it tries to keep the status quo of the state players leading in worst cases as in a recession to distortions by turning in a overweighted NEGATIVE economy on the shoulders of the private economy and distorting prices and aggregate demand by forcing their increased machine costs on the aggregate demand of the private sector thus dragging down and distorting the private economy which is by definition the only real and natural entity ,one that is dynamic and fluid environment,because after all is OPEN so the calculations in this extreme case scenario demonstrates that the GDP is actually being disrupted under two antagonic forces and not merely complementary and sum-game equation..the one producing welath and the one destroying wealth..so the real GDP would be fairly calculated as a SUBTRACTION ...private sector less the dragging activity of public sector...I know that it sounds too extreme....but I think that the reality of a GDP growth negative is a symptom of an inverted correlation between the two main forces ...private and public aggregate demand and suply...

  10. Interest rates are low right now not because "the economy remains far from full employment", they are low because the market expects it to remain that way for some time. In other words, current Keynesian policy has failed to create expectations of growth.

  11. What is the point where the Fed's decisions can no longer influence the interest rate? Is the Fed's ability buoyed by our reserve currency status?