Friday, September 14, 2012

Paul Krugman Doesn't Know His.... side from his demand side.

This probably shouldn't come as a surprise about a guy who doesn't understand the broken window fallacy.

In a post over at NYT, Krugman tells us that the new iPhone 5 will boost the economy. And indeed, it will, just like any other new or superior product will. But this is supply side stuff. Krugman doesn't seem to get that. He writes:

A recent research note from JPMorgan argued that the new iPhone might add between a quarter- and a half-percentage point to G.D.P. growth in the last quarter of 2012. How so? First, the report argued that Apple was likely to sell a lot of phones in a short period of time. Second, it noted that although iPhones are manufactured overseas, most of the price you pay when you buy one is domestic value-added — retailing and wholesaling, advertising and profits — all of which counts as part of G.D.P. Finally, it took some plausible guesses about the price of each phone and the number of phones sold, and used those guesses to make an estimate of the impact on G.D.P.
It's amazing that Krugman is agreeing with all this because it is an argument that G.D.P will grow from the supply side, not because of some new fangled government spending or Fed money pumping. But he says of the Morgan analysis:
It’s all pretty straightforward. 
This in my view is simply stunning, a Keynesian is admitting Say's Law that supply will (without Fed printing or other government interference) create its own demand.

But although Krugman appears to agree to all the above, there is one kicker, the JP Morgan analyst appears as Keynesian as Krugman is and manages to attempt a demand side twist to the entire thing:
...the reason JPMorgan believes that the iPhone 5 will boost the economy right away is simply that it will induce people to spend more.
Krugman (and JPM) are again focused on the demand side. Krug goes on:
 And to believe that more spending will provide an economic boost, you have to believe — as you should — that demand, not supply, is what’s holding the economy back. 
Is this not major league confusion or what? It's not demand by itself that is boosting the economy, in this case. Plain and simple, it's the new superior iPhone 5. That's new supply! I would think it's  pretty obvious to anyone, who doesn't have his career based on Keynesian economics. Without the new supply, there wouldn't be new demand. In other words, supply creates its own demand.


  1. Let us all take a moment of silence to facepalm.

  2. dr wenzel has screwed up says law too unfortunately. says law does NOT say that the supply of iphones will create a demand for iphones.that is the usual keynesian distortion of the law.
    what jb say and every austrian understood was that the supply of iphones creates the demand for other goods: ie iphone suppliers can now demand for food/clothes etc because they have supplied what the market wanted.
    i really wish austrians themselves didnt distort say.this is no supply side mumbo jumbo.
    says law is : The supply of X creates the demand for non-X

    1. A. I think you misunderstand Wenzel's point, that even in the context of Say's Law from Keynes perspective that the iPhone disproves the Keynesian view.

      B. It is not completely clear to me that your distinction holds a lot of water. If I create a widget aren't, I creating demand for that widget, in that others will offer other goods (demand) for the widget?

    2. Whatever Wenzel's intent, I don't like the mis-use of Say's Law. Say never even claimed to be formulating a law. He was just analyzing a situation and stated the obvious - for an exchange to take place, there must be production.

      It would be more accurate to say that "Say's Law" says that supply IS demand. The terms distinguish a subject point of view not an objective set of objects. Demand is not pictures of dead presidents. It is a product or service just as supply is. When you point this out to Keynesians it drives them nuts.

    3. banacek : no,if you create a widget which nobody wants,you cant 'create' demand.

    4. So you then admit that a "good" (as defined in economics as a useful product) creates its own demand?

    5. Well technically still no. Another good has to be produced. The supply of two goods create their own demand, the demand for each other, of course under the assumption that two individuals desire to exchange those goods.

    6. Say's Law is basically that people produce because they want things. Supply of one good is demand for other goods in exchange. It's not that difficult.

      If there were only two goods in a barter economy, X and Y, then demand for X would be supply of Y. In the money economy, supply of good A is synonymous with the supplier's demand for money to buy other goods.

  3. Bob,

    You left out the crucial part of Krugman's analysis.

    "The crucial thing to understand here is that these likely short-run benefits from the new phone have almost nothing to do with how good it is — with how much it improves the quality of buyers’ lives or their productivity. Such effects will kick in only over the longer run. Instead, the reason JPMorgan believes that the iPhone 5 will boost the economy right away is simply that it will induce people to spend more.

    And to believe that more spending will provide an economic boost, you have to believe — as you should — that demand, not supply, is what’s holding the economy back

    Krugman accepts supply-side benefits but claims that they are long term. But the JPMorgan analysis claims a short-term benefit simply from the increased spending.

    Krugman asks, "Where does this spending come from?" He doesn't say, but presumably it is from "hoarding" (i.e saving) of money by consumers, and he concludes that if more private spending can boost the economy, more public spending can boost it even more.

    It seems to me that the correct critique of Krugman is to note that the new spending is coming from an increase in the velocity of money which will have a small inflationary effect on prices. Massive government spending would have a much more noticeable effect. But the relevance of this uptick in terms of real, physical growth is hard to see.

    The real point is that the uptick that JPMorgan projects, even if it is real, is not relevant. This is the problem you get into when you try to claim that the economy can be reduced to numbers. JPMorgan is looking at the thermometer not the weather.

    Krugman is certainly right that increase in the supply or velocity of money will increase the GDP, but that is only because he wants to tinker with the measuring sticke.

    1. There is no such thing as velocity of money. And more supply of goods has a deflationary impact. Outside of these points, you are almost on track.

    2. I didn't claim that there was such a thing as velocity. I was arguing from the Keynesian perspective which assumes hoarding. From that point of view, you still don't get real growth. You only get an increase in the numbers. That's what the JPMorgan analysis got. But it is not relevant. Measuring numbers floating around is not the same as measuring productivity. A decrease in prices could reflect productivity increases, but that won't show up in GDP.

      But my point was that Krugman did not ignore the supply-side effects. He simply claimed that they were long-term and Keynesianism was needed to explain the short-term effects. Your analysis did not address Krugman's real claim. My point was that if he was right about the short-term effects then massive government spending would just create more inflation. An increase in numbers cannot automatically be assumed to represent real growth.

      Neither Krugman nor I denied that an increase in supply would be price deflationary in the long term.

    3. Well, if you were trying to argue from the Keynesian perspective, you are way off.

      Velocity is a Chicago school concept.

    4. I stick by my claim that Krugman did not ignore supply-side effects but merely classified them as long-term effects. He is claiming that a short-term demand-side stimulus can be detected in the JPMorgan analysis and then claims that therefore government stimulus spending could stimulate even more. I attempted to infer a Keynesian explanation for this that Krugman did not provide, but now I think it is probably a bad idea to try to put words in Krugman's mouth. Better just to point out that he offers no explanation and that therefore his confidence in government stimulus is unjustified.

      As an explanatory concept velocity belongs to the Chicago school, but as a descriptive term it can be used in a variety of situations. Where consumption has an immediate effect, savings in a bank (hoarding to Keynes) has a lag time before it is spent which Keynesians claim to have documented. It is not inappropriate to label that velocity. It is not an explanatory concept. It is merely a label of a process.

  4. Robert, you obviously can mangle this guy in a debate, why not make the offer?

  5. But what if he can force people to buy widgets? He can appoint ten private companies to produce some widget with ten different colors and then the government pays for it. The Fed can initiate QE4 to cover the increased debt from the widget program.

    Then he can force all the people to pick up the ten widgets at the city council and carry with them for at least a week. We can recruit people to police each other so they pick them up and don’t throw them away. And then after a week we can hire ten other private companies to recycle the widgets into some other widget.

    Then we can fill the aggregate output gap from 2007, increase house prices back to their 2005 level and create animal spirits and fantastic escape velocity. Then the recession is clearly over as GDP will skyrocket by 12% QoQ.

    See, it is all about demand. Supply does not matter. I can’t believe we are still discussing this. And that’s why we are still in a depression.

  6. The problem with the standard supply side argument is that it's confusing to people. How can supply generate money? Everyone knows that you have to get people to buy goods before anyone makes money. That was my knee jerk reaction to Say's law the first time I read it.

    I instead phrase it as innovation generates demand. If you don't build something that people want, then there won't be demand for it, and thus no money. The cause for demand is the product, but the product itself doesn't make money until someone buys it. Even if a person has a million dollars in a bank account, they won't buy a $5 widget unless the widget makes them WANT to buy it.

    But WANT to get out of debit right now more than they WANT most goods. Thus supply is not creating demand. No amount of government stimulus short of paying off people's credit card and mortgages outright would lower the bar on how big a deal a new product would have to be before people would buy it. (and of course long term this would collapse because of the debit caused federally)

    The problem is that if you say Say's law as written people see it as a contradiction. It has to be phrased differently and more intuitively to get people on board. As soon as you phrase it effectively people see it as a given.

    1. I think the best way to explain Say's in an intuitive manner is to tie it into what most people already understand- working and consuming.

      Everyone wants to buy a plethora of products, everyone DEMANDS goods. But just because a 18 year old working at Taco Bell "wants" a new private jet doesn't mean he can acquire one.

      The magnitude of what any laborer can effectively DEMAND in a market is linked directly to the relative worth of what they SUPPLY in their work. An electrician supplies more useful goods and services than a fast food cashier, is compensated for it by the market, and subsequently can demand more.

      In this personally identifiable sense supply creates demand.

    2. If you don't produce some real or conceptual product there will be nothing to buy.

      If no one else produces some real or conceptual product they will have no way to pay for what you produced.

      Find a snapshot of the lines that existed for just about every product and service that existed in the Soviet Union and add this caption, "This is what aggregate demand looks like in the absence of supply."

      The opposite of Says law is the old Soviet Aphorism, "We pretend to work. They pretend to pay us."

      This is what Krugman doesn't understand with his demand side nonsense.

      The supposed utility of the iPhone 5 means little. We're not designing cars or many other real products or services by means of iPhones. And there is no indication that the products that are made on and for iPhones - Apps - will be special or different on the i-5 vs the i-4. And if there are some efficiency improving applications that are unique to the i-5, they are at the margin.

      The value in the i-5 vs the i-4 is, like every other value, in the eye of the buyer, purely subjective.

      Any growth in world economy that results from it will be attributable to:

      1) Efficiencies that result from and are unique to the i-5 (hard to see)

      2) Production that was triggered by people's desire to earn for the purpose of trading it for an i-5 which otherwise would not have happened (only applicable to non-welfare purchasers as the production that was transmitted to the welfare recipients in the form of welfare, social security, etc was patently not triggered by i-5 lust. And any other production by a welfare-recipient for i-5 purchase would certainly be otherwise absorbed by survival if they had no direct IV from a productive person's veins.)

      3) Efficiencies that were engineered to facilitate the production of the i-5...but that can subsequently be applied to other products.

    3. I think the important thing to remember is that money is not demand. Money is a medium exchange. Demand is a product or service just as supply is. If you increase the amount of money in circulation, you have merely lengthened the ruler. You've changed the measuring device. But you haven't increased actual demand only the measure of it.

      If I have potatoes to exchange for your apples, which is the demand and which is the supply? It depends on your point of view.

      If you want to increase demand in our economy, you need for people to get out of debt and save more so that more investment and more production can occur.

      Policies that propose to increase demand by creating money or redistributing wealth are actually creating phony demand not real demand.

  7. I don't know anything about supply side vs. demand side economics, is there a place I can read up on it? (briefly, not a textbook, i'm ADD)

    But there was an explicit demand for the iPhone 5 before even the 4S came out.. so is it really supply side? I would try to find a different example...

  8. It seems like Krugman is engaging in his usual circular style of argument. He uses Keynesian assumptions about the importance of final stage consumer spending and Keynesian metrics like GDP as the only legitimate means of measuring desirable economic activity, which apparently only occurs in the short term.

    As usual he doesn't care about savings, debt, demand for factors of production or the subjective nature of value. He sure as hell doesn't care about the moral difference between consumers and producers making free choices instead of being treated like lab rats in some social engineering experiment. There is no legitimate basis in economic science for his contention that he can perceive the value of a new iPhone better than the purchaser. It's just his subjective, typically arrogant and self serving opinion.

  9. Krugman doesn't know his glass from his Keynesian hole in the ground.