Sunday, November 25, 2018

22 Days in Paul Krugman's Masterclass (Day 7) (Krugman Lies With Statistics)

Lesson 7 in Paul Krugman's Masterclass is 8 minutes and 53 seconds long.

In this class, Krugman just outright lies with statistics.

This is his most deceitful video so far.

Being a monetary Keynesian, he first tells us that "You can solve a recession by printing money." This, of course, is wrong. (See: Austrian School Business Cycle Theory by Murray Rothbard.) He then points to the 2007 recession and Federal Reserve response as an example.

He then goes on to tell us that the Great Recession (2007 December to 2009 June) was a period when money printing failed because of a "liquidity trap," which means no one is spending money--just holding most of it.

But if you believe in the possibility of a "liquidity trap," you can't possibly believe in a fundamental principle of economics: supply and demand and that markets clear.

If economic actors are hoarding significant amounts of cash then prices will adjust and markets will clear, no liquidity trap.

But Krugman becomes a snake in trying to prove his case by claiming the Federal Reserve pumped in massive amounts of money and that, and I quote him, "There was no [price] inflation."

He is using the no price inflation claim as a proxy for proof that there was a liquidity trap. There are many problems with him using price inflation as a proxy in this manner but let us just go on to the heart of the lie and look at the obvious places he attempts to be a sneak.

First off, he uses the monetary base to show the amount of money he claims the Fed printed but fails to mention that a lot of that money (aided by Bernanke starting to pay interest on reserves) simply went into excess reserves and not into the system.

Here is the chart of the percentage change in monetary base annualized and the same for M2 money supply as calculated by the Fed.

As can be seen by the above, the monetary base exploded (blue line) early on after the recession started compared to M2 (red line) growth. It is very dishonest for Krugman to use the monetary base as opposed to M2 and also fail to mention that Bernanke started paying interest on reserves which played a role in the monetary base not causing a similar growth rate in M2.

But it gets worse.

Remember, Krugman's claim is that there was no price inflation even with the Fed printing.

He published this chart (I captured it directly from the video and added the arrow)

The blue line shows the monetary base index growth and the red line shows the consumer price index
which supposedly shows that there was no price inflation.

But doing it this way is simply dishonest. As we saw in the first chart the monetary base exploded by as much as 120% on an annualized basis. By using the same scale on the Y axis for the monetary base and the CPI, he is creating an impression that there has been no price inflation but this is not true.

Here is the CPI for the same period on its own scale:

Prices actually have climbed by approx 20% from the start of the Great Recession. This shows the dishonest methods Krugman is now resorting to in his "Masterclass."

Krugman is simply lying when he says there hasn't been any price inflation. He is doing this because he can hardly claim a "liquidity trap" if prices have climbed by 20%!

What a sneak.


Links to discussions of all Krugman's Masterclass lessons are here.

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