Tuesday, May 28, 2013

My Encounter with Paul Krugman

By Murray Sabrin
Paul Krugman wears many hats — Princeton University professor, New York Times columnist, Nobel Laureate in Economics (2008), prolific author of scholarly books and journal articles, and now president of the Eastern Economic Association. The EEA is a regional scholarly group that publishes a journal and holds an annual academic conference in New York City every other year. The EEA is housed in the Anisfield School of Business, at Ramapo College, where I have taught Corporate Finance, and Financial Markets and Institutions for the past 25 years.
On September 29 there was a brief ceremony dedicating the Anisfield School of Business as the new home for the EEA. Prior to the dedication, there was a ribbon-cutting ceremony marking the official opening of the Global Financial Trading Lab, which was made possible by a generous gift from Mr. and Mrs. Anisfield. After these two events, Krugman delivered a 40-minute address on the "liquidity trap" and its "discontents," followed by a lively Q&A session.
Krugman is an engaging speaker, droll at times, very serious occasionally, and frustrated as hell that the Obama administration is not taking his advice to spend like no other time in history on the basis that there is "insufficient demand" in the economy to close the "output gap." According to Krugman, the economy is operating below its "full potential," and therefore it is the federal government's duty to take up the slack, because individuals and the business sector are "holding back."
Krugman's thesis, which he articulated in his lecture, has been repeated over and over in his Timescolumn — policymakers are too timid to really turn on the spending spigot because of their "failure to understand" the liquidity trap. According to Krugman, although the Federal Reserve's zero-interest policy has flooded the nation's banks with newly printed dollars, lack of spending by the private sector is causing companies to lay off workers, which in turn causes aggregate demand to decline, and thus the downward spiral is never ending or causing a tepid recovery at best — unless the federal government steps up to the plate to boost aggregate demand. That, in a nutshell, is Krugman's view of the state of the economy.
Many years ago I either read an article by Murray Rothbard or heard him speak at a conference discussing economic policy. He pointed out that any explanation of economic events that does not include the importance of prices as a market-clearing mechanism is a useless exercise.

1 comment:

  1. I take a slight issue with Prof. Sabrin’s implication that all prices will necessarily be slashed during the healing and repricing phase after an artificial boom. It is also possible for firms to simply cut back on production and employment without cutting prices which may be impossible due to fixed costs. The always dishonorable “Lord Keynes” has been announcing that Austrian theory has been refuted due to examples such as this. Nonsense, I say. Prices tell you what is demanded, how much, the quality, the style etc… Firms may respond to changes in the market by cutting prices, quantities, quality, styles etc… or simply taking things off the market until times improve. The key is prices as essential information and that prices are distorted by Keynesian policy.

    Dishonorable Keynesians (as opposed to the other kind) simply do not want Austrian analysis to be true and will latch on to the slightest misstatement or ambiguity on our part such as this.

    For those of you with insomnia, part of this miserable debate with “Lord Keynes” can be found here: