## Thursday, December 15, 2011

### EPJ Commenters versus Krugmanites

Many, many times I have been asked by other economists, "How does Krugman get away with the stuff he writes?" We all then shrug and reach the conclusion that Paul Krugman is read by busy people, who don't have time to back check the many outrageous comments that he writes. But after Krugman has sent his merry Krugmanites over to EPJ, I am beginning to wonder about who Krugman's readers really are.

I have always seen pretty goofy comments under Krugman's columns, but I have always shrugged it off as passersby who aren't regular Krugman readers. But now that I have experienced a deluge of visits, emails and comments from Krugmanites, the theory I am developing is that the Krugmanites just aren't that bright.

I point to the comments they have left here at EPJ from the Krugmanites. There's this early gem:
Have you ever studied maths?
First: you need to learn to use FRED graphs and use "percent change from year ago"
Second:if you like indexes,put 1990-07-01 as 100 and you'll se that now CPI is something like 170
Third : try to do (1.7)^1/20 and you'll see that average inflation was 2.7%
Fourth: I'm a little bit scared....2.7% is a Weimar-like inflation!!
Well, I did a little "maths" and I went to the St Louis Fed and the index was at 40 in 1970 (based on 1982-4+100) and that the current CRB Index is at plus 220. Which means that if I set 1970 to 100, the adjusted current CRB would be 550 plus. Finally, I must point out because this is consistent charge through out most of the Krugmanite comments, I am not saying that hyper-inflation existed in the period 1980 to the present. I am saying that price inflation will accelerate in the months and years ahead. Most Krugmanites appear to be arguing: "Well inflation hasn't been that bad, so it won't be that bad in the future." As I point out in my argument, it is this type of thinking that helped blow up the subprime mortgage market and blew up the hedge fund Long Term Capital Management.

Then we have lots of these type comments:
You don't understand math. His graph is of inflation rates. Yours is of actual prices.
The first point that should be made is that Krugman is the one that moved the discussion from absolute numbers to inflation rates. I don't think there is a problem with this as far as math comprehension on Krugman's part. However, if the commenter thinks there is a problem with math comprehension, he should be addressing that to Krugman not me.

In truth, Krugman and I are looking at the same set of data from different perspectives. It's like someone watching a basketball game from the luxury seats versus someone looking at the same game from courtside. Same game, different perspective. I happen to believe that the absolute number when looking at the 30 year period provides important information that you don't get from a 3 to 4 year "smoothed" chart of the 30 year period.

Krugman's perspective provides a flatline appearance that gives the impression that the price inflation has not been a big deal, when in fact prices have nearly tripled over the 30 years. In other words, coffee that you can now find for a \$1.00 in a diner, would have been around 33 cents in 1980. Those Days Inn hotel rates that you see advertised on the highway for \$29.99, would have been \$10.00 30 years ago.

Then we have this comment:
Well, I'm a Krugmanite "troll". I, in fact, could approximate in my head that 3%-4% (not "4%") compounded over 30 (not "20") does indeed result in a tripling, but I did a spreadsheet to make sure.

I have to say, so what? Weren't we talking about dangerous, irresponsible hyper-inflation? We're not about to print \$1 trillion bills (as happened in 1920s-30s Germany) when inflation is STEADY at ~3.5%.

And while I recognize that you see any inflation at all as bad, you hopefully also know that we Keynesians don't - we see 2-4% as a responsible way to compensate for the experimentally observed and confirmed facts of human nature that humans are extraordinarily resistant to giving up something they perceive as possessing (like a salary of \$x as opposed to \$x * 97%) (see Behavorial Economics). Mild inflation ensures that those who deserve pay raises can still obtain them as always, while those that do not deserve them will see their real income fall, as it should....

First, nowhere do I mention that Krugman is using a 30 year chart. I do say that when price inflation increases, Krugman is going to have to choose a 20 year smoothed average versus a 3 to 4 year, so the self-proclaimed troll has a reading comprehension problem here.

Secondly, my question to the commenter would be, if the idea is to boost the nominal pay of wage earners, why is the money given to banksters instead of wage earners? I think all money printing is nuts, but this commenter isn't even putting the money in the pocket of the people he is claiming need it.

Further, if there is a deflationary period, does this commenter think that if the going wage is \$x * 97% that people are going to just stop working and starve to death, if there aren't Keynesian unemployment paymnet options, which is what really keeps them from taking \$x * 97%?

Then we have commenter Rob, who writes:
wow. just wow. if inflation is 3.5% a year then prices will triple in 30 years, it's called exponential growth you morons! really, if you can't understand that, then you need to go back to high school.

zero per cent inflation doesn't work people. that's what our problem is at the moment!
I note his "zero percent inflation" claim was written just before the BLS announced today  that the annual year-over-year Producer Price Index is up by 5.7%.

There's this cute one from anonymous:
Ever notice with these GOP crazies that their predictions are always just that -- in the future ... never mind the record low interest rates, the negative real ten year interest rates on bonds, deleveraging shock after yet another financialized bubble-economy bubble burst, and the need for macroscale stimulus ...

Yes, we do in fact love the Krugman trolls in here -- because Krugman gets it and is totally right while you are living in some horsesh/t 19th Century dream-world. Get a clue.
Well crazy I may be, but not crazy enough to join the GOP, so this commenter is jumping to conclusions far beyond any that are warranted. I am a Ron Paul man, not a GOP man. Then there is this commenters complaint about predictions being made about the future. I guess he has a point. I don't brag much about my predictions about what has already happened, but I haven't missed yet. Let's see if I can do it again. I predict that the Dow Jones closed yesterday at 11823.48. Damn, I'm good.

And there you have it, very poorly argued comments from the Krugmanites. A really sad group. I'll match up the EPJ commenters over Krugmanites, any day. I'll take, Bob Murphy, Bob English, Richard Dale Fitzgerald, Botie, Joe Nelson, Taylor Conant, Hans Palmstierna, Michael Labeit,, Andre Grillon, Joesph Fetz, Melvin Megawitz, Iris Mack, Kaarel Tamm, Christopher Kozlowski, Lila Rajiva, Capn Mike, Vviresh Amin, Zach Bush, Jaison De Montalegre, deft, Skip Oliva, Adam Munter, JFF and many, many more, over the Krugmanites any day

1. Funny, that "19th century" nonsense produced the greatest expansion of wealth and standards of living in the history of human civilization.

But we're not supposed to remember that I guess...

2. There will be fireworks in these comments, that's for sure [grabs popcorn].

Wenzel- That should end the debate on 'who's been right.'

4. But Robert....where is the hyperinflation? At some point you should admit that you have it wrong. Actually there is NOT ENOUGH money in the economy.

5. Out of curiosity, when Krugmanites say that tripling of consumer prices over three decades is no big deal, is there any consideration for retirees? If someone retires on a fixed income at 70 and expects to live to a hundred, what do you guys say, tough shit, it's what's good for the economy?

6. That video of the keynesians like krugman and bernake not knowing if there was a housing bubble or if an economic recession would take place a year or two before it happened are just classic.

7. Where is the deflation as Krugman predicted?

8. Goods aren't moving, because people can't afford them like they could before. I know, let's just use leaves as currency. There's plenty of those and everybody will be able to get everything they want. Heaven on earth. People might be tempted to stay home and rake the yard rather than going to work, but they'll surely see the societal benefit in doing things right.

But, just to be safe, we should only let bankers rake their yard...

9. Let me see if I understand the Krugmanites correctly. The monetary base goes verticle, most of it on the sidelines as excess reserves, and yet Paul thinks not a single bit of it will filter down into the economy to the point where consumer prices will increase. Yet over the last 2.5 years, every month at work, all I do during price changes is increase pricing on most products. The only way any human could possibly conclude deflation over this time period is by removing themselves from the market completely.

10. The Fed has a widely known to have an implicit inflation target of around 2% (since the "great moderation") so this is why is why showing the inflation rate is the more relevant graph than the rising price level. It's extremely difficult to tell if the Fed is failing or succeeding in what's it sets out to do by just looking at the price level. Any deviations from the 2% inflation target is what people should be surprised about. And as you can see from Krugman's graph, the story of the great recession has been below target inflation, not above. Seeing how Wenzel has been talking about double digit inflation all through out the recession (2008, 2009, 2010, 2011 ), Krugman has been closer to the what has actually happened than Wenzel. As far as your prediction of worsening inflation in the second half of the year (you predicted accelerating inflation in commodities, finished goods, CPI, and nominal interest rates), it makes no sense to use the year to year change if you want to

11. @Desolation Jones

Your post ended up in the spam filter, as it often does. Likely because you have multiple links, it is too long or you have been identified as a spammer at other sites. Blogger does not allow me to edit comments. I can only publish or delete.

Perhaps, you could make your points briefer.

12. Well, I'm pretty sure that the EPJ:ers beat Anonymous, anonymous, anonymous and anonymous at least. Whats the deal with not wanting your name associated with your comments? At least come up with a nickname....

13. [continued from my above post that was cutoff)

...if you want to look at what actually happened in the second half. Year to year is too long of a time period. It's better to look at the individual month to month changes of the second half of the year and compare them to the first half.

Looking at these graphs, are you seriously going to say that inflation was worst in the second half of the year than than in the first half?

CPI: http://research.stlouisfed.org/fredgraph.png?g=3S0

More to come...

14. Commodities: http://research.stlouisfed.org/fredgraph.png?g=3S1

15. Finished Goods: http://research.stlouisfed.org/fredgraph.png?g=3S2

16. Interest rates: http://research.stlouisfed.org/fred2/graph/?id=DGS10

17. This is such an awesome blog post!

18. This comment has been removed by the author.

19. One parting comment before I let y'all carry on as usual: Krugman's blog has been my introduction to economics. It's been very helpful. But I've been realising lately that getting all my knowledge from one source means I can't evaluate it properly. So an opportunity like today was great for me - a chance to see a robust alternative viewpoint presented.

I feel disappointed by the result. I'm genuinely interested to know about the features in the Austrian model. But what you've served up today is snide, snark and sycophancy. You're missing an opportunity to genuinely educate by instead preferring to show how right you are.

I mean, you could have selected any of the less hysterical comments to respond to above. You could have dealt with the thrust of the arguments rather than their form - which I take it is to do with inflation being a bug or a feature. That would have been really helpful for folks like me. Would you consider it for next time?

20. Anon @ 1:08 PM

"Out of curiosity, when Krugmanites say that tripling of consumer prices over three decades is no big deal, is there any consideration for retirees? If someone retires on a fixed income at 70 and expects to live to a hundred, what do you guys say, tough shit, it's what's good for the economy?"

Exactly my thoughts. I think inflationist and their dupes must console themselves with the notion that they have done or tried "something." However, that "something" (essentially printing more money) is the easiest of things to do. The tricky part for an inflationist seems to come when they have to justify robbing those on the lower economic strata in the name of giving to them.

In the end I think that some people never learned the lesson that there's just no such thing as a free lunch.

21. "Krugman's perspective provides a flatline appearance that gives the impression that the price inflation has not been a big deal, when in fact prices have nearly tripled over the 30 years."

You know that Krugman's point wasn't that there hasn't been any inflation in the last 30 years, but there has been no recent increase due to Fed policy as your crowd has been predicting would happen for years. You then post another chart which shows exactly the same thing in a different way and promptly declare victory for yourself and the half wits who read your column.

No one has all the answers Krugman included, but despite the fact that he is bit of an ass he does know what he is talking about. His biggest problem is his tendency to focus on buffoons and hacks like you rather than opponents who actually have something interesting to say.

22. Weren't there recessions before the central bank? Wasn't the gold standard a major contributing factor in preventing the world from fighting the great depression? Don't interest rates depend also on the level of national income? Aren't inflationistas considered mainly about (currently non-existent) wage-inflation spirals? Wasn't the ARRA multiplier >1? Wasn't the multiplier during WWII ~1.8? Didn't Real GDP increase as a result of ARRA? Are there any predictions that won't eventually come true if you just keep predicting them, even if you're prediction has been incredibly long for a sustained period of time?

23. @Anonymous
Krugman ought to be ashamed of himself.
Fixed income recipients are by and large grandma and grandpa. That's whom he's robbing.

But I guess Keynesians don't consider it robbing, because hey, they don't believe in inheritance...so why let the oldsters hang onto what they earned.

People power! Give it to the people...any people...just so long as it's not the people who earned it.

And meanwhile keep hyping up malnutrition and poverty, when as far as the eye can see, it's obesity, excess, and addiction that are the killers in the west.

24. Forgive me if I'm missing something but did you just respond to Krugman's arguments by attacking/responding to the comments of his readers? After publishing one week's worth of employment data as evidence that you are right and he is wrong? Perhaps it's not just Krugmanites that "aren't that bright," because I too must be missing the way in which either of those posts sheds any substantive light on, well, anything really. I don't really care, but it's kind of an interesting way to engage in a debate with a colleague - attacking the opinions (and math skills) of "his" readers.

25. Robert touched on one thing that has always bugged me about the Keynesian Krugmanites: Why should the increases go to the Wall Street/Bankster crowd.

I have an old college friend who is a Krugmanite. He's a very smart guy. We were both majors in physics with lots of math. My friend argues that you have to have the "right" amount of currency inflation -- presumably for the monetarist notion that money supply increases should follow GDP increases. Since the Wall Street/Bankster crowd (and the government, but I get why he likes that) gets first access to the newly-printed money first, that's like saying that any increase in national productivity should just belong to the Wall Street crowd. The government and Wall Street suck up the benefits that should belong to everyone, and it's all a byproduct of Krugmanite thinking.

26. Krugman wants to pretend that there's been relatively smooth inflation for 30 years by smoothing out his chart.

It's arguable that the rate of change of inflation is more damaging than the inflation itself, and Krugman's smoothing would hide that.

If inflation were constant, contracts and future predictions could account for it accurately and adjust accordingly. However, when the first derivative of inflation relative to time is non-zero, it sends false demand signals through the economy and distorts the perspective of those using prices to understand supply vs. demand.

Just another reason why Fed manipulations are so damaging.

27. sibusisodan,

Try and take it with a grain of salt for the moment and do consider returning, even if only occasionally.

Maybe even consider checking out the Mises Institutes website....

28. Why do you care what Krugman says? You consider Keynesian economists in general and Paul Krugman in particular to be deluded so why waste your time responding to and attacking them? You must see them as a threat. You are afraid that people will find merit in their approach and stray from the righteous path you have laid out. Stop being so petty. Make your case on its own merits and let the market place decide which is right. Have faith in your argument and don't resort to name calling in an attempt to bolster it. If inflation goes up in the next couple of months you'll be vindicated and that should be all the reward you need.

29. @ PM

I think Krugman's arguments have already been put to rest. The point of this post was to show that reasonable people, for the most part, realize his ideas hold no weight. Hence, his blog attracts people of a lower intellect, or those who simply refuse to acknowledge the facts of the matter.

30. "Try and take it with a grain of salt for the moment and do consider returning, even if only occasionally."
--
Hey, a reply! And a civil one to boot! Many thanks to you Larry.

It does sound like there's a fundamental issue worth discussing here - whether inflation is a bug or a feature - but it's getting drowned out in the chorus of 'my followers are better than X's followers' and attempts at point scoring. And more frustratingly, the point scoring isn't even scoring points. Proper academic discussion may not be any more good natured, but at least the retorts are classier and couched in more politeness...

Anyway: could you answer a fairly obvious question so I can get my bearings a bit?

From recent posts and comments it seems the Austrian view is that inflation is bad, since it erodes the value of money. Which it most certainly does.

But the obvious question to my mind is this: in the case [not currently operative] when the majority of people are receiving money in approximately todays prices for spending (via salaries etc), why does it matter that todays prices are higher than last year?

31. Two points:

1) "Maths" is the British English short form of "mathematics". I'm very surprised you didn't know that.

2) Making fun of posters does not make your earlier prediction correct. You predicted prices would "heat up" strongly, and they did not.

32. Reasonable person here who arrived from Krugman's blog. I don't know enough about economics to really defend one viewpoint over the other.

But I do know enough about graphs to say that your arguments aren't really saying much, and are simply restating Krugman's point (that inflation over the last thirty years hasn't been "hyper" and there haven't been any recent signs of it being so).

Your accusations of "smoothing" don't really implicate Krugman in any way. Again, you're both showing effectively the same data. What's clear is that you just really dislike the concept of inflation (at any rate) and probably expected inflation to be occurring at a much higher rate by now.

It seems like you're still predicting that, and Krugman keeps saying the opposite. You're technically not wrong yet, but I guess I'll check back in a year and see what's up.

33. I consider them Keynesians. That one quote from Krugman about Greenspan needing to create a housing bubble to replace the NASDAQ bubble back in 2002 should've been enough to scare any rational person away from him. How'd that work out for ya guys? PS, inflation is just wealth transfer, aka stealing.

34. While I don't believe that approaching the topic with ire is necessarily the best way to gain new followers or whatnot, I do think it's defensible in that, as has been stated, Krugmanites are de facto advocating THEFT, no matter what good it does for the economy.

35. @sibusisodan:

If we presume that everyone's income increases year over year then we can say inflation doesn't hurt anyone. This isn't what happens though.

Wage inflation doesn't hit all consumers at the same time, and some not at all. Those who are able to get ahold of "fresh currency" first, such as banks and the politically connected, get to spend the inflated dollars at this year's prices. As those extra dollars start to circulate prices for everyone else rise. They then pay more and hope their "merit" increase is enough to cover the increase.

The people on fixed incomes (retirees for example) do not get to increase their wage rate. Their buying power for each dollar they own is decreased. Eventually, people figure this out and spend, spend, spend. Why hold something that loses value year over year? Why save?

I have seen moneytarists literally say "who cares about people on fixed incomes" because they put themselves there. How very utilitarian of you.

Bottom line, if you work or produce a product or service you deserve the pay you get for it. Eroding the value of your production year over year makes it an awful lot harder for you to increase your standard of living.

36. I also wanted to say that "price increases" are a way of hiding actual inflation. Many companies know that consumers hate rising prices, so they'll alter the amount of product you receive and repackage it. Similar to "30% less fat!" on your favorite cookies, when really you're getting 30% less everything.

You also have to take into account technological innovations that would make goods cheaper. The benefits of these to each consumers standard of living is eroded with inflation.

37. @sibusisodan,

Glad to see you were open-minded enough to not be discouraged by todays exchanges as there are many reasonable, intelligent people on here.

At any rate, I see Kyle has already responded to your inquiry very well. I have posted a link below basically stating the same thing.

Do consider visiting again.

http://mises.org/money/3s2.asp

38. Besides the fact that the author is very pretentious, he must not know much about Ron Paul. He states he is not a GOP man but a Ron Paul man. Well, Ron Paul votes with the GOP about 70-80% of the time. Hence, if you support Ron Paul, then you at least partial support the GOP some of the time(probably support most of the time).

While he is fallible, Krugman's Keynesian predictions are consistently on the mark. Austrian/Libertarian predictions are usually not. Anyone who understands the IS-LM model knows that we will not see significant inflation until we reach full employment (about 4-5% unemployment rate). Instead of crowding out, monetary measures and fiscal stimulus in a time of a recessionary gap where real GDP is below potential actually lead to crowding in. The best thing for the economy in the long term is to boost GDP back up to potential in the short term by any means necessary. Government investment will pay for itself (through the multiplier). When we reach full employment, we then should turn our efforts towards reducing the deficit (this will be much easier when unemployment insurance and other welfare is no longer needed and falls) but only after we get the economy going again. Otherwise the tax increases and spending cuts, which are always contractionary in the short term, will hinder economic growth.

39. Krugman's begging for his own reputational demise. I'm surprised it hasn't come sooner.

40. @ Anonymous 3:42 PM. We care what Krugman says because unfortunately people like him and policy makers are all following his advice. So we try to rebuff what we consider to be his nonsense. Krugman is more of a political hack then an economist in my opinion. He has held so many contradicting stances that he should be discredited. Bob Murphy, Peter Schiff and Rob Wenzel point it out on almost a weekly basis. Krugman made one post saying he wasnt sure why gold price were rising and that it was all propaganda and fear peddled by fox news (again you see how he makes it political). Fortunate for us (investors and traders) living in the real word, not in the academic world, we discover if we are right or wrong because the price tells us if we are right or wrong. It would be interesting to see what Krugman investment profile is and see how it has fared over the past 10 years compared to Ron Pauls, peter schiffs and Wenzels.

41. Kreepy Krugmanites always focus on the elements of the Austrian prediction that haven't materialized YET, while ignoring everything foretold by Austrians that has already come to pass. Just because inflation hasn't shot through the roof yet (though a trip to the grocery store or any other store demonstrates a significant rise in prices over the last few years) doesn't mean that it won't happen. These same Kreepy Krugmanites were claiming throughout the bubble years that the economy was just fine. Yes, I realize that Lord Krugman himself called the popping of the housing bubble, but he laughably believed that the bubble could inflate forever.

Meanwhile, the Krugmanites ignore that throughout the bubble years, the Austrians constantly predicted the popping. While for the past three years, Krugman has, nearly every week, claimed that happy times are here again, the Austrians have repeatedly said that the bailouts and stimulus would only make things worse and slow or reverse the recovery.

As for the uneducated ignoramus who asks, "What about pre-Fed depressions?" guess what? The Austrian theory is not that the central bank alone causes the business cycle. The Austrian theory argues that government-enforced and endorsed fractional-reserve banking causes the business cycle. Thus, any government manipulation of the money supply will cause the business cycle. Of course, if the Kreepy Krugmanites bothered to study Austrian theory, they would know this, but they prefer to wallow in an ignorant fantasy of false superiority because, like witch doctors of old, they can weave incomprehensible, meaningless magic spells -- I mean, mathematical formulas -- intended to intimidate anyone who questions their surprisingly simplistic philosophy.

All their complicated and useless math enshrouds the truth about Keynesianism -- it is nothing more than a rationalization for governments to print money.

42. The Krugman nonsense of having inflation really does hurt the elderly on fixed incomes and the poor far more than everyone else.

43. "It seems like you're still predicting that, and Krugman keeps saying the opposite."

Right -- Krugman predicted deflation, which is not going to happen whatsoever. Just like he predicted the stimulus would work, just like he predicted QE2 would not increase commodity prices, just like Krugman kept calling for the Fed to lower interest rates in 2003 to make the housing bubble far bigger, just like he said in 2007 that he wasn't sure if a recession would happen.

If you want to go by track records

44. Kyle, good point. I made another post earlier today making that exact same observation. Go into ANY restaurant these days and you will see a drastic difference in the quality and/or quantity of food. This includes nicer places, as well as fast food. Big Macs and Subway sandwiches are noticeably smaller, with Subway having far, far less meat.

Of course, the government and krugman say that inflation isn't taking place. Who do we believe? The same keynesian types who insisted that there was a link between unemployment and inflation in inverse proportion, and many of whom STILL teach that after the 1970s disproved it, or what anyone who actually eats out or shops at grocery stores notices?

45. @Anonymous 9:25 PM,

You know, I was wondering the same thing re: Krugman's portfolio. It may be very telling indeed...

46. As I beat the same dead horse for the 1,158th time, it appears to me that the Krugmanites still do not have the slightest familiarity with any of the basic Austrian School concepts such as economic calculation or Cantillon Effects. As such, it is really pointless to engage in “debate” with them other than for the purpose of drawing out their latest talking points.

47. "To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."

- Paul Krugman, Dubya's Double Dip, August 2nd, 2002

Compare to:

"Congress should act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors who were misled by foolish government interference in the market. I therefore hope this committee will soon stand up for American taxpayers and investors by acting on my Free Housing Market Enhancement Act."

- Ron Paul in the House Financial Services Committee, September 10, 2003

48. Nathan @10:35pm
"While for the past three years, Krugman has, nearly every week, claimed that happy times are here again, the Austrians have repeatedly said that the bailouts and stimulus would only make things worse and slow or reverse the recovery."

I understand that you probably do not read Krugman's blog. I have never encountered EPJ before, myself...

But Krugman has not been claiming "happy times" over the last 3 years. He has been consistently arguing that the stimulus was far too small (of the order of around 1/6th the size it should have been) and that all the extended tax cuts, cuts in social services and lack of government spending are prolonging the weak economy.

Regarding the size of the stimulus (I may be misrepresenting him here, but as I understand it), he argues that the stimulus should have been of the order of the size that GDP dropped by to ensure that the drop in available funds was taken up by the slack.

He particularly argues that given the extraordinarily low interest rates (lowest ever?) on government bonds, this is the best time to borrow funds to kick start the economy with governmental investment in infrastructure projects which will contribute to long term growth. He also points out that if the markets anticipated runaway inflation, the interest rates would be much higher. Keynesians effectively believe that once stimulus spending drives demand, the private sector will have an incentive to invest and the employment situation will improve, and the task of tackling the deficit can begin in the medium term.

Note that he does not claim that it is impossible for the economy to improve without stimulus, just that it will take longer and will cause unnecessary social costs. Neither does he claim that deflation is guaranteed without stimulus, just that it is currently a higher risk than inflation, particularly hyper-inflation.

"they can weave incomprehensible, meaningless magic spells -- I mean, mathematical formulas"

Surely you aren't suggesting that economics could be approached without considering mathematics? That just seems bizarre...

Anonymous @10:53pm - "just like he predicted QE2 would not increase commodity prices"

I can't speak for your other claims, but his claim was more nuanced than this. He effectively stated that commodity prices would increase due to exogenous shocks driven by demand from international markets (i.e. China), and that the increases in commodity prices would level off once the prices had fluctuated enough to reflect this increased demand.

Having said all that...

Kyle @6:57pm - For the record, I'm not sure I buy into your comments about "fresh currency" - I don't think that the impact of inflation occurs quick enough to offset the added benefits to society of seeing improved economic growth, but I don't have the models to justify it... Perhaps you could provide papers to support? I will read through the Rothbard paper linked by Larry...

However -
"The people on fixed incomes (retirees for example) do not get to increase their wage rate. Their buying power for each dollar they own is decreased."

This is the first time I've seen a good argument against a steady inflation rate. I'm English, and I do not know how retirement works in the US (nor exactly how it works in the UK, to be honest), but I believe that here, our pensions are inflation adjusted. Unfortunately, they have recently been changed to CPI from RPI, which is a shame... But at least they are protected from the effects of inflation.

Are you talking about people living off capital funds, or do pensions work differently in the US? If we are talking capital funds, part of managing your portfolio is to try to ensure that you continue to earn a return above inflation. I understand that this is not easy in this economic environment (hence the flight to safety in US bonds), but that is why a decent "living pension" for everyone would be (IMHO) a preferable solution...

49. @Bob Roddis,

Points taken.

@sibusisodan & vetch101 (and whomever else may be interested in understanding Austrian Business Cycle Theory [ABCT]),

and,

http://mises.org/books/Essay_on_economic_theory_cantillon.pdf

I hope these assist on providing a better basis for us to effectively communicate on some our differences in the future.

Enjoy!

50. @Larry - thanks for the references.

I will check them out.

51. @Vetch101 -

CPI adjustments for social security and other programs do take place, but people who rely on those heavily primarily use it for energy and food costs, neither of which are in CPI. Also, anybody with a job who is in a "raise freeze" (and there are many in the US) are harmed by any increase. They continue to make the same amount while the value goes down. My employer has cut merit raised from 8% to 4% to 2.5% and now to 2%, and I'm lucky.

I'd toss EPJ and http://blog.mises.org/ into your ECON favorites and browse occasionally. Over time the austrian point of view will begin to make more sense.

52. @vetch101,

You're quite welcome.

53. @krugmanite 1051
"The best thing for the economy in the long term is to boost GDP back up to potential in the short term by any means necessary."

Except that when you use monetary "stimulus", you are presuming that the money is going into investments that the market has judged productive. Actually, the new money goes to speculation (in risk-on sectors - leading to the price inflation you say you don't see, but which is killing poor people in emerging markets, where the inflation is exported).
The new money also goes into government projects, which, as with Solyndra, are usually unproductive, high cost boon doggles, so the employement that results is short-lived and not really self sustaining.
So your inflated GDP is just that...a fudge of the numbers, not real growth of production.
That can only take place when the malinvestment first clears out.
Which brings us back to Mises, not Keynes...
Which is just what Wenzel is saying and Krugman isn't.

54. @Larry, ditto, thanks for the refs - will browse through them. A shorter summary of Cantillon ('For Dummies', as it were) would be welcome.

If I'm understanding your points correctly, you're saying that inflation can only occur when the new money enters the parts of the economy that actually produce 'stuff' (to use the technical term), not just when it is first created. How do you know when that is taking place?

And a key question for me is this: what are the weaknesses of Austrian Theory? What real-life situations doesn't it handle very well?