Friday, December 16, 2011

Paul Krugman as the Evil Jokester

Paul Krugman has another absurd attack on Ron Paul, most of which is not worth going over. It's his basic lies and distortions.

But I will comment on one of his most deceiving statements in his column. He writes:
So here we are, three years later. How’s it going? Inflation has fluctuated, but, at the end of the day, consumer prices have risen just 4.5 percent, meaning an average annual inflation rate of only 1.5 percent. Who could have predicted that printing so much money would cause so little inflation? Well, I could. And did. And so did others who understood the Keynesian economics Mr. Paul reviles. But Mr. Paul’s supporters continue to claim, somehow, that he has been right about everything.
This is apparently Krugman's new preferred method of deception, he also did it two days ago.

He lumps a period of low price inflation with a period of higher price inflation and declares, Viola! There is no inflation. In the paragraph above, he is taking a three year period (which included the Great Recession---the greatest economic calamity since the Great Depression, and a period where you would expect price inflation to decline, since it is a period of slowing money supply AND a period of high demand for cash balances) and he mixes it with a period of higher inflation. And puts out that the three year average annual inflation rate in only 1.5%. Well ,yeah Paul, but what happens if you look at price inflation during the rebound period in the economy, say, the last 12 months? Price inflation isn't anywhere near 1.5 percent.

I quote directly from the Bureau of Labor Statistics CPI release made today:

Over the last 12 months, the [CPI] all items index increased 3.4 percent.
That's a 127% greater rate of increase over the last 12 months than Krugman gives the impression of via his sleight of hand.

Worse, if you spend a good chunk of your money on energy, such as gasoline and heating oil, you are really getting smacked. Those prices are up, according to the BLS, by 12.4% over the last 12 months. (Gasoline is up 19.9%). Food, bought for the home, is up 5.9%. Apparel is up 4.8%.  In fact, of the top 20 categories and sub-categories identified by  the BLS, only 1 shows an increase over the last 12 months of less than 1.5%.  Four categories (surrounding energy) are up by double digits.

So if you stay at home and do nothing all day but read Paul Krugman posts on an iPad, maybe your personal inflation rate is zero, but if you eat at home or hop in your car, or keep the heat on in the winter, then unless you are a Krugmanite, you know that Krugman is an evil jokester that shouldn't be taken seriously.


  1. Paul Krugman made a big mistake calling out Peter Schiff by name. As he did by writing the article in the first place, which will probably only help us, as the only people that believe his crap are never going to support Ron Paul anyway.

    BTW, I love EPJ, which I can always count on to respond to stuff like this in a timely fashion. Keep up the good work, Bob!

  2. I remember a line from Jerry Seinfeld...He was asked if it bothered him that the tabloids spread lies about him. He said 'no...because if you're the type of person that reads the tabloids, you deserve to be lied to.'

    To the same effect, if a person looks to Krugman for economic advice, then perhaps they deserve to have their seed corn eaten away by inflation.

    The fact that Krugman is attacking Ron Paul with his B.S. articles shows that the establishment is concerned.

  3. I understand Krugman's attempts to downplay the consequences of money printing but if I may.
    1) Doesn't anyone consider the criticisms of John Williams (and others) concerning the adjustments made in CPI calculations?

    2) Isn't it the changes in relative prices that are more important?

    3) Most of the money printing is sitting as excess reserves in the banking system and hence not goosing prices, is that so hard to understand?

    4) Does Krugman deny the concept of supply and demand?

  4. Fix the quote from the BLS. You got part of yourself quoted as from the BLS.

    Also, inflation is even worse but hidden by hedonic adjustments.

  5. This owning of Krugman gets better and better! The man didn't know a recession was coming in 2007, and he evidently didn't know better than to pick a fight with someone who is tearing him apart.

    I will say that I appreciate how Wenzel publishes the posts attacking him by the krugman followers, while krugman and the NY Times routinely engages in censorship and does not allow facts discrediting Krugman or his many failed predictions -- QE2 will not increase commodity prices, we have to worry about deflation, the stimulus will work, he didn't know in 2007 that a recession was coming, he called for the fed to cut interest rates in 2003 to make the housing bubble worse, etc -- to be published on the site on a regular basis.

  6. Wenzel is a pretentious know-it-all who knows very little in reality. Why is he so worried about a 3.4% annual inflation rate? An annual inflation rate (by any measure) of between 3 and 4 percent is a sign of a healthy growing economy. Anyone who understands aggregate supply and aggregate demand knows that mild inflation is only natural for a growing economy. Seeing as unemployment is still hovering around 9%, the Fed should be focusing on a gdp target rather than an inflation target. We need to do anything we can to make real gdp match potential.
    Inflation and interest rates will remain low. And pointing to the prices of gas and food to show the supposed "recklessness" of the Fed is dishonest. Those prices see speculation, with respect to oil and natural gas, and upward pressure from emerging markets- two things the Fed cannot possible control.

  7. Why didn't you discuss today's CPI numbers month-to-month? They show zero increase in prices from last month. Since you object to smoothing, wouldn't that then be your preferred measure, rather than the +3.4% increase you do mention? Quantitative easing started in 2009, shouldn't the inflation show up by now, as predicted by Schiff and others (including yourself and Dr. Paul)? At the very least, didn't you predict accelerating price inflation? Shouldn't this now start according to your model, especially since you just yesterday argued that initial unemployment claims suggest the economy is improving? If anything inflation is falling right now, today' data shows it, as does your own graph in your other post (the red line in the end is falling not increasing). It seems to me you are very selective in which data to present. But maybe I am wrong here.

    The weights in the CPI, as you well know, reflect the purchasing behavior of an average household. If you commute by SUV for over an hour, clearly your personal inflation rate is higher. How is that relevant? Why should the CPI focus on anything else but the average purchasing behavior?

  8. Klueless Krugman picked a fight with a bigger, badder man on the neighborhood block. Sort of Georgia picking a fight with Russia a while back.

  9. While Krugman may be overstating things, I feel like you're ignoring the core issue; given a tripling of the monetary supply, doesn't the Austrian model predict significantly larger inflation than what we're seeing? Even 3.4% is a relatively modest reaction to such severe monetary expansion, and it appears that it's not trending up.

    Also, my understanding is commodities like gas are influenced by much more than inflation: politics, supply & demand, speculation, Middle East conflicts, etc... Inflation without energy & food is 2.1% YOY.

  10. Krugman is a political apologist, not an economist. Most of these guys like Krugman and Stiglitz will say anything to make their controllers happy.

  11. Krugmanite1051

    "An annual inflation rate (by any measure) of between 3 and 4 percent is a sign of a healthy growing economy. Anyone who understands aggregate supply and aggregate demand knows that mild inflation is only natural for a growing economy."

    Total nonsense. The most sustained period of economic growth in U.S. history was between 1866 to 1897, during which prices gradually FELL and living standards improved.

    Why do you think it is acceptable policy to rob retirees, and others living on fixed incomes, of 3 to 4 percent of their purchasing power every year?

    And anyone who "understands aggregrate supply and aggregate demand" knows these are nonsensical concepts that lead to nonsensical conclusions.


    Hyperinflation !!!

  13. I'd like to know the answer to that question above, also.

    I agree that inflation is ridiculous, but I'm curious why it isn't worse. I don't understand the mechanism of bank reserves not leaking into the economy until now.

    Bernanke was printing the money, giving it to the banks, and then they were...what?

    Did the money just sit there to keep their balance sheets in the black? What's changed to move this money from reserves into the real economy?

  14. Every attack on Krugman exposes you as someone who is financially illiterate. Your personal inflation rate is irrelevant to the discussion. The 4 year smoothed inflation is relevant for the reason you claim it is irrelevant. You have a period of very low inflation due to a recession and then demand picks up so prices rise quickly until supply can meet demand. If you look only at the rate of inflation when supply picks up, you get a distorted picture of the change in the dollar's purchasing power.

    Ah....why bother. You're stuck on stupid.

  15. Aseem,

    While it is true that some Austrians jumped the gun on the inflation call (timing), it does not make it any less true that inflation (not deflation) is in our future (unless the Fed tightens). The monetary base was tripled and eventually that money will be lent out, deposited (adding to other banks reserves) and then spent. Some of it already has gotten out over the course of the past few months as shown by M2, which I imagine will cause an uptick in CPI over the course of the next few months.

    Yes, it is true that commodities such as oil are homogeneous, are traded worldwide and are thus affected by world problems, however I would not say that gasoline is affected to the same degree (it is more regional). Now, if you are talking about natural gas, it is almost entirely regional. When looking at commodity prices, one must always be cognizant of the factors that would effect those prices. Over the past year and a half we saw a lot of commodities and producers goods see pretty dramatic inflation, which does put upward pressure on consumer prices (from the supply side).

    It is also true that there is far more that goes into what produces a price for a good than merely money. This is why calling inflation is so difficult and why not all prices rise or fall in unison or to the same degree.

    Regardless, whatever specific predictions state isn't what is important (at least not to me). The Austrian contention is that there was a lot of money created and that it will present an inflationary problem in the future when it starts to enter the market. When this will occur and to what degree is unknown, because the future is always uncertain.

    Austrian economics is not a predictive science, it is an explanatory science. It can only state that given an action that such and such will be the result. It cannot say when or to what degree. Economists that make predictions (from any school of thought) are no longer engaging in economic science, but are rather expressing their own opinion (educated as it may be).

    I will say that I believe the predictions espoused by many Austrians over the course of the past 10 years have been far more accurate than that of the Keynesians. The one outlier remains that of inflation. However, I am still convinced that this has far more to do with timing than the actual prediction itself.

  16. @aseem

    You write:
    I feel like you're ignoring the core issue; given a tripling of the monetary supply, doesn't the Austrian model predict significantly larger inflation than what we're seeing?

    The monetary SUPPLY has not gone up by nearly that much (although its been rocketing up the past 5-6 months) ... the monetary BASE has gone up a tremendous amount the past 2 years, but nearly all of that has been parked in excess reserves held at the Fed and not been put into the actual economy (again, until the last 5-6 months when excess reserves have gone down a good amount)

    Timing is very very difficult because of the complexity of the economy and human action generally ... but much more severe price inflation is likely, unless there is a very drastic change in fed policy and/or the desire to hold cash balances

  17. From what I've gathered on this site, I would say that we haven't seen the massive price inflation yet because the banks are sitting on their reserves (bc the Fed is paying them to do so). The fact that price inflation is higher than whatever that 2 percent aribitrary "target" is seems to be indicative that when those reserves are emptied (I'm not sure what would bring this about?), you will see the massive price increases that have been predicted. Until then, I don't think the current inflation numbers are anything to rejoice about for Krugmanites. Thanks for this blog, RW.

  18. Michael Duff,

    The money that the Fed gave to the banks became their "excess reserves held at the Fed". To simplify it, it is kind of like each bank having a bank account at the Fed.

    When the crap hit the fan a few years ago the Fed bought a ton of bad assets off of the banks books which left the banks highly liquid but without capitalization. The banks aren't going to lend if they are not capitalized, because lending to the public at that point represented a great risk. So, they instead left those funds in their account at the Fed and earned interest on those funds (which I believe is illegal, not entirely certain).

    Anyhow, over the course of the past 2 years the banks have been recapitalizing by moving treasuries and getting the spread, by playing the stock market, etc. Now, after two years, most of the banks are recapped and are beginning to lend (as seen by M2 over the past few months). Whether they'll continue to lend from their reserves remains to be seen, but I am guessing that they will (even though M2 leveled off a bit).

    Granted, this isn't the most elaborate explanation, but its a decent summary of the situation.

  19. Drew, that is exactly correct. I'd like to add that bad Keynesian predictions are far more troublesome, because these are the guys pulling the levers. When their predictions are wrong we all get screwed.

  20. @Anonymous, I know why you are anonymous. It is because you are afraid of being made a fool.
    The most sustained GDP growth in US history was during WWII (between around 1933-45). During this period, the nation saw the GDP growth rate turn from -15% to +20%. During this time period, inflation ranged from 0% to 5%.
    You say the period from 1866 to 1897 was the best years for America. WELL, during this period, the nation did briefly achieve a GDP growth rate of 20% from around 1970-73. Over the entire period however, GDP growth fell to hover around 5%. During this period the nation saw deflation of around 0-5%. This period also came off the tail end of the civil war, so deflation would be expected.
    More importantly, which time period should we compare to our current economic situation? The last half of the 19th century saw the industrial revolution in America with the building of vast railroad infrastructure and rebuilding after the civil war (oh, wait, Krugman was just proven right about massive infrastructure spending). In any case, the main engine of growth was an increase in supply to due infrastructure investments similar to the technology fueled growth of the 90's. The period around WWII was preceded by our worst depression and the growth was fueled through primarily government investment to support the war effort, causing an increase in aggregate demand. We are in a similar state as the nation was during WWII and only massive government investment can sustain the economy until we reach full employment. The stimulus measures and increases in the monetary base by the Fed are only fractions of total annual GDP. We need to do more to increase aggregate demand (especially seeing as Europe may go into recession or collapse and China might be facing a real estate bubble shorty).

  21. For anyone that is here for the sake of learning and honest debate, welcome. I see a lot of questions coming from Times readers about how the Austrian model could possibly be right when the supply of money has been increased dramatically but its price has been more or less constant. The answer is that the Austrian school sees all prices, including that of money, as being a function of perceived supply and perceived demand. So an Austrian would predict that, given constant demand, and increase in the money supply would lead to a decrease in the amount of goods it would buy.

    That condition (constant demand) has NOT been met. We have reached 'peak credit'. I'm sure the banks would love nothing more than to make 4% on the money the fed's poured into them rather than the 0.25% the get from having it in excess reserves. But, there is less demand than there used to be for new loans because businesses perceive less return on investment than they used to.

    Prof. Wenzel has been predicting inflation to accelerate any minute now, but that is because he thinks the economy is picking up steam and money will start moving again. This view does not represent all Austrian economists. See Mike Shedlock's blog for a counter example. Austrian economics doesn't have an official position on what the demand for money currently is or will be next week or next year.

    I suspect that the reason Paul Krugman chose this blog as an example of Austrian economics is because he's hoping his readers would conflate Austrian economics and everything that Wenzel has written. As a through and through Austrian, I enjoy reading EPJ and agree with much of what Wenzel has to say, but I disagree with him that we're headed out of recession. I also think it was a mistake for him to call the majority of Paul Krugman's readers unintelligent and clueless. Most of them have a different hierarchy of authority for empiricism vs. logic than we do and thus end up coming to different conclusions. Thanks for listening.

  22. Just to clarify something that I said above regarding excess reserves. While it isn't illegal for the Fed to pay interest to the member-bank's excess reserves, the rate that they pay must be equal to or less than the general level of short-term interest rates. The Fed was paying 0.25% on excess reserves during a period where short-term treasury rates were near zero. This is the part that was illegal.

  23. "The most sustained GDP growth in US history was during WWII (between around 1933-45). During this period, the nation saw the GDP growth rate turn from -15% to +20%. During this time period, inflation ranged from 0% to 5%." - Krugmanite1051.

    This is a fantastic example of failing to see the wood for the trees. It's also mildly amusing when someone who is anonymous bags other people for being anonymous. You are just an incoherent thinker buddy.

  24. My condominium board met with our property manager last week. "You have to increase your condo fees," he said with a smirk. "The price of everything is increasing--except wages and salaries."

    Inflation is happening. Normal people can see it.

  25. @Krugman:

    The growth in the late 19th century was clearly not due to government spending. And if you would be so kind as to explain why you think the boom was because railroad spending instead of despite that. Or point to a link where that hypothesis is explained. In a growing economy prices fall as production increases because of capital investment. Why do you think it was a given that inflation fell after the civil war? Clearly it did not fall in Germany after WW1.For anyone interested, Robert Higgs has examined the myth of economic prosperity of WW2. Sugar rationing anyone?

  26. "He lumps a period of low price inflation with a period of higher price inflation and declares, Viola! There is no inflation. In the paragraph above, he is taking a three year period (which included the Great Recession---the greatest economic calamity since the Great Depression, and a period where you would expect price inflation to decline, since it is a period of slowing money supply AND a period of high demand for cash balances)"

    There's nothing wrong with this because this was a criticism specifically about Ron Paul. And Ron Paul was screaming hyperinflation since 2008. Maybe this doesn't apply to you because you were looking at m2 (although, you were screaming double digit inflation in 2008, not hyperinflation), but Ron Paul was definitely only looking at the monetary base and was even telling his supporters that the money supplied had doubled.

    "and he mixes it with a period of higher inflation. And puts out that the three year average annual inflation rate in only 1.5%. Well ,yeah Paul, but what happens if you look at price inflation during the rebound period in the economy, say, the last 12 months? Price inflation isn't anywhere near 1.5 percent."

    But 12 months is a completely arbitrary range. Technically, you're also mixing a period of high inflation with a period of low inflation. The first half of the year was very inflationary, but the second half hasn't been. Since the 2008 crash, after the numerous warnings from both you and Ron Paul, the best evidence you can muster is is a period of around half a year in in late 2010 and early 2011. But that has since past.

    Fun fact: In the past 6 months, unadjusted CPI has increased a total of .1%. Seriously. I don't mean .1% per month. That's .1% total in 6 months.

  27. @Krugmanite1051:

    Again, your focus on "aggregate demand" and GDP leads you to the nonsensical conclusion that WWII was great for the economy. Tanks and bombs don't satisfy the wants of consumers spending their own money. Ordinary Americans suffered privation and rationing during the war years. Living standards DECLINED until the war ended and government was slashed.

  28. As to the post about GDP growth equaling real economic growth fallacy and the US in WW2/New Deal nonsense that the followers of keynes/krugman always spout -- if that were true, then the Soviet Union would have never collapsed, or the Chinese would not be about to experience a massive economic correction.

    GDP takes into account government spending, and thus the mistakes were made by keynesians for the entire existence of the USSR that it was some sort of booming economy, while Mises predicted its demise five decades before it collapsed to the shock of many mainstream keynesian followers.

  29. November CPI unchanged. Hmm.

    But, core inflation went up 0.2%!

    Ron Paul was RIGHT!

  30. Everyone in this thread that believes 3-4% inflation is bad for the economy right now or that we will be seeing hyper-inflation in the near future is entirely ignorant of the whole of macroeconomics. I encourage everyone to enroll and retake a basic econ101 class at your local college to get reacquainted with what we have learned over the past 50 years since the Austrians were refuted.

  31. Austrians refuted? I guess you forgot the collapse of 08 when Krugman and Bernake said they weren't sure if a collapse was coming, while the austrians had anyone listening prepared for what was about to happen years in advance.

    Econ 101 classes are largely a joke when taught by keynesians. They still teach that things like the Phillips Curve are real, or that GDP always equals economic growth, or that things like earthquakes are good for the economy (as krugman has also said), and that inflation basically has nothing to do with monetary policy at all.

  32. If anyone thinks the economy was good during WWII, go ask anyone who was alive at the time and old enough to remember. They are getting fewer are further between so go do it now. I have. I have yet to talk to a single person alive during WWII that thought the economy was doing well. They all say when it ended it was great, but not during. If you find someone who says different I would like to know who. Numbers lie, experiences don't. WWII is not a good time in history (from the perspective of any American alive at that time) to want to re-create.

  33. How do you decide what a 'healthy' inflation rate is?

    To find the doubling time in years you divide 100*ln2 (approx 70) by the yearly inflation rate.

    At a rate of 4% inflation, prices double every 17.5 years.

    But there's always disagreement in the measurement of inflation. What happens if we're off by a few percentage points because of the accuracy and precision of our methods are not ideal.

    With a 7% inflation rate prices double every decade. Now I'm pretty sure that amount of inflation is going to put the HURT on people. Are we sure the dollar could retain reserve currency status at this rate? Would foreigners want to park their wealth in a currency that loses half of it's value every decade? I wouldn't.

    Watch this lecture if you want to listen to somebody talking about real world understanding of percent increases:

  34. Also, rationing was also used during WWII. Food, gas, tires, fuel oil, coffee and clothing were rationed. This was to prevent inflation and starvation. There were also metal shortages. That doesn't sound like a good economy to me. You want to recreate the economy of WWII, there you go.

  35. @ Krugmanite 1051

    Should we take that econ 101 class at Princeton, who's current and past econ teachers missed this great recession, or from an Austrian economist who predicted it?

  36. I have a relative who was alive in WW2 who was fortunate enough to be on a farm with chickens, so they actually had someone trade them a shotgun for just a couple dozen eggs. With the severe rationing that went on, there were all sorts of barter deals going on for basic food supplies since the people did not have access to them.

    WW2 was horrible for the average consumer.

  37. The WW2 era was the most productive time period in American experience. GDP does equal economic growth. While living standards were low during WW2, the gains from that era led to the largest standard of living increase in American history after the war was over. Social Security and other "socialist" "planned" initiatives from the 1930's lifted millions of people out of poverty. Government can spend on anything it wants; its a shame that it took world war to get the government at the time to invest a large enough amount to boost aggregate demand.

    My grandfather came from a very poor family. His father was once a moonshiner. He and his brothers had to share clothes. My grandfather worked for Naval Ordinance his entire life. He was able to join the middle class and bring his family out of poverty because the government gave him a job. Millions of other people had similar experiences. Others who actually fought the war returned home and used the "socialist" GI bill to get a college degree, thus improving their economic circumstances. Would it have been better that the government pay my grandfather to make something more useful rather than guns, bullets and bombs? Would it have been better to pay the soldier to build rather than destroy? Yes, but the course of history did not turn out that way.

    DT, I'm sure your local community college would do just fine. Econ 101 is that basic.

    In 2002, Krugman predicted that Greenspan would have to initiate a housing bubble to keep the economy going.

    2006 Krugman predicts bursting of housing bubble:

    His current predictions hold true in 2011:

  38. Unfortunately we have had inflation. Krugman pretends that there is only one index of inflation, the consumer price index. There are also the producer price indexes
    "Tuesday, October 18, 2011
    Producer Price Index
    Change in crude goods from 12 month ago: 20.9%
    Change in intermediate goods from 12 months ago: 10.5%
    Change in finished goods from 12 months ago: 6.9%"
    "Consumer Price Index Summary
    12 months ago: 3.9%"

    which measure inflation in the cost of goods producers use at different stages of the production cycle from raw materials to intermediate goods to finished goods. I grabbed this data back in October, its gone down slightly since then but it was higher before that and the issue is that inflation has occured the last couple of years despite Krugman's claims. Due to the slow economy producers are reluctant to pass on price increases to the next stage of production so inflation at each stage is lowered, but that leaves less funds available for producers to expand and hire people.