Krugman in Wonderland UPDATED

Sometimes you cannot make this stuff up. The lead Keynesian Cheerleader, Paul Krugman, contradicts himself when trying to throw a Repub down the rabbit hole. In his textbook on macoeconomics he blamed "Eurosclerosis" (persistent high unemployment) on unemployment benefits:

Public policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect. . . . In other countries, particularly in Europe, benefits are more generous and last longer. The drawback to this generosity is that it reduces a worker's incentive to quickly find a new job. Generous unemployment benefits in some European countries are widely believed to be one of the main causes of "Eurosclerosis," the persistent high unemployment that affects a number of European countries.

Now he encourages extended unemployment benefits. From a blog wonderfully entitled Krugman-In-Wonderland, here is Krugman's case:

What Democrats believe is what textbook economics says: that when the economy is deeply depressed, extending unemployment benefits not only helps those in need, it also reduces unemployment. That’s because the economy’s problem right now is lack of sufficient demand, and cash-strapped unemployed workers are likely to spend their benefits. In fact, the Congressional Budget Office says that aid to the unemployed is one of the most effective forms of economic stimulus, as measured by jobs created per dollar of outlay.

The snarky remark is what he touts as "what textbooks say" is the opposite of what HIS textbook says. So it is ok to create persistent unemployment and Amerosclerosis since it somehow stimulates the economy? There are so many things wrong with this sort of advice it is hard to know where to start. I happen to favor extended unemployment right now for reasons of compassion, to bridge people through the downturn, but not to somehow stimulate the economy. 

Stimulus is not the end, but a means to the end. What good is "stimulus" if it leaves us stuck with high levels of unemployment and reliance on government life support to sustain a moribund economy? 

Amazingly, Krugman goes back through the looking glass again today on this issue, as also reported by Krugman-In-Wonderland: 

I hear through the grapevine that the usual suspects at the WSJ have put out something along the lines of “Krugman says that unemployment benefits won’t raise unemployment, but in his textbook he says they will, neener neener.” Are they really that stupid? Probably not — but they you think that you, the reader, are that stupid.

"Neener neener"? That passes for sophisticated dialog? It bodes very poorly for the punditry to be so thin-skinned that any criticism is met with childish ridicule. I guess that is why Krugman goes on to make this naive and childish comment:

What’s limiting employment now is lack of demand for the things workers produce. Their incentives to seek work are, for now, irrelevant.

The Krugman in Wonderland post dissects that remark. It assumes that at some times incentives work, and at other times they don't, a proposition with no foundation in theory or practice. 

Ask yourself why there is a lack of demand for what workers produce? Could it be the huge Stimulus has primarily gone to things people have little demand for, specifically, the continued increase in government jobs and wages at the expense of the productive sectors of the private economy? Or, the rathole of subsidies for Clunkers and Homes that simply pull future demand forward, but leave no lasting improvement? 

This is but one of a number of Krugmanisms. More on Krugman's follies here. 

UPDATE: I want to elevate an interesting discussion on this post that occurred outside of the comments. A reader's ripose was the following:

His textbook addresses a general situation: 
 "Public policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect."

but his column addresses a specific situation:
"when the economy is deeply depressed, extending unemployment benefits not only helps those in need, it also reduces unemployment."

If that distinction isn't clear, let's try an illustration:  Does it matter at all whether the gov't funds its spending via taxes or via debt ? 

Answer (you can Google Stiglitz on this; trust me please): it depends on whether the economy is at or above full employment or substantially below that level.  Deficit spending is harmful in the first instance, but beneficial in the second.

Good stuff. I got the distinction, but clearly should have expanded on why it fails to convince. 

Krugman is asserting that giving people money (under any rubric - unemployment, tax credits, welfare) stimulates the economy such as to reduce unemployment. My counter to it that any such effect (which is really hard to substantiate) only lasts as long as the money is being given away. When govt life support ends, so does the faux stimulus and those jobs.  

What Stiglitz, Krugman et al overlook is that "aggregate demand" is not a fungible lump of spending. It matters a lot where the deficit is put, where the govt stimulus goes. If it goes into more govt jobs at higher pay it reduces investment into private and productive jobs. 

Until we restart private investment, we remain in a limbo that is sustained only as long as the bond market or the voters allow. While we can fool the bond market for a while longer, the voters are restless. Maybe they can see beyond Krugman's claims? Or more likely stopped listening to Keynesian Cheerleading a while ago. It boggles sense that a government can borrow its way into the poorhouse and create prosperity. 

For investors, we have the following dilemma: some sort of recovery seems real, but it is based on government life-support, and is being led by people with a very ahistorical view of how economies work. Rather than rely on real incentives and reform, they rely on gimmicks and puffery. The economy needs a revitalization of the private sector, which creates real jobs, not Keynesian cheerleading. I stand by the view that after a "recovery-less recovery" in 2010 we slip back down in a double dip as the real problems have not been addressed.

Comments

[Mamma Boom Boom]

When we elect people like Obama or Bush, to be our leaders, we don't stand a chance. There's really no sense in discussing it.

[twitter.com/DrBubb]

Good article.
It is certainly time that Krugman's reputation was thrown under the bus.

The man is a font of dangerous ideas, and giving him a nobel prize was a cruel joke. Instead of enhancing his reputation, it diminished the reputation of the Nobel committee.

[yelnick]

DrBubb, the Nobel is looking pretty tarnished these days! One to Obama for being .. Obama. One to Gore and the IPCC for .. a huge fraud. And one to Krugman on Trade, where I think his thinking is still sound; but he opines on everything else these days.

All three have a common thread, which is politicization of truth.

I remember learning from Greek Tragedy that societies roll forward in three phases:
1) the Aeschylus phase, a society of honor, duty, country
2) the Sophocles phase, a society of realism
3) the Euripides stage, a society of corruption that exhibits the human comedy

[twitter.com/DrBubb]

I fear that is right.

If the Greek tragedies come in a cycle, then something must get us from #3 back to #1. And I suppose that happens when the rotten fruit from the corruption stage smells so bad that people cannot stand it any longer, and they insist on a return to a society of honor and duty.

We must stop desiring mere wealth (Goldman Sachs?) and attach our aspirations to something less material.

Some say, "if you need gold, you will need guns even more." On my own GEI website, I like to counter that sort of thinking, by saying that the ultimate investment is neither gold nor guns, it is ... community.

Thanks for investing in the community that has grown up around thsi website.

[Hockthefarm]

Yelnick:

Another Dandy.

"Ask yourself why there is a lack of demand for what workers produce? Could it be the huge Stimulus has primarily gone to things people have little demand for, specifically, the continued increase in government jobs and wages at the expense of the productive sectors of the private economy? Or, the rathole of subsidies for Clunkers and Homes that simply pull future demand forward, but leave no lasting improvement?"

And look what these same folks have done to the cost of an education. A 20 year old is willing to pay 400 k$ for a law degree so they can go out and earn 5 k$ one month and none the next.

My only complaint about your post is the use of Keynes' name. I doubt he ever proposed the lunacy we see going on in society today.

Hock

[Mr. Pibb]

Law degrees are more like 250K including living expenses.

[Chris]

psst...Krugman...Hey Krugman, take the red pill!

Krugman = Noise

[Diamond Jim]

I really am impressed with most of your commentaries, but I think you went off the track on this one. There is a huge difference between a structural welfare system like they have in Europe and a one-off extension of unemployment benefits during the worst economic downturn since the Great Depression. The harsh reality is that we may have widespread social unrest if we don't feed the many families unable to find work in the current economic environment. Unemployment benefits are just another way to stimulate the economy. Unfortunately I think the Obama stimulus was not not sufficient to pull us out of this recession. The economy is probably poised to roll over again unless we take drastic steps.

[Gleen Loser Neely]

Where is DG?

Upps I forgot Sundays and Mondays are his worst days at his Mc Donald's job!!

[yelnick]

Diamond Jim, as I say at least twice in the post, I am fine with extending unemployment, to bailout families in need. Just don't confuse this with "stimulus." It leads down a rathole. We have done tax rebates now 4 times without impact (76, 01, 07 and 09). The money does not stimulate, it is used to pay down debt and is saved.

The learning after the 70s was that temporary fixes do not stimulate since they do not change behavior - only permanent (or time indefinite) changes stimulate. This is why a change to tax rates has a 3x stimulative effect to welfare, according to research done by Obama's head economic advisor (Christina Romer).

So unemployment is NOT "just another way to stimulate the economy." It can be justified on other bases.

[yelnick]

Hock, Keynes would not recognize Keynesianism!

[joe]

WOW - the guy wins the noble prize in economics - but you are going to tell me what it "really means" - that is just sad.

Joe

[nspolar]

Diamond Jim, I worked and lived in Norway for near 8 yrs. By the time I left I felt more Norwegian than American, and spoke their language fairly well.

It took a long time to really 'begin' to understand their system, which is different than ours. I felt I had to, since I was a manager and dealt directly with Norwegian workers and had to deal with daily personnel issues. So I tried and think in some respects succeeded.

I really do not have time to explain the differences between their system and ours. Nor can I necessarily do so, as it really difficult to put in words. Furthermore not sure I really lived there long enough to do so.

BUT ... I never did really discover that structural welfare system you (and perhaps many others) often refer to. The Norwegian and European system is different yes, but imo the label you have given it is not necessarily correct. By the time I left Norway I think I did develop a much better and stronger respect for our system, but this does not imply I lack in respect for their system.

nspolar

[joe]

Tell me something else - how is it that FDR gets elected to four straight terms on the Keynes advise and be wrong in popular sentiment - what is it that you know that THEY did not??

Revisionist histories make me sick to my stomach.

They should to you to.

Joe

[yelnick]

Joe, FDR was a great man and one of the best Presidents, even if he made mistakes. But be careful in your revisionist revisionism. FDR didn't really follow Keynes - saying he did is the real revisionism!

He met Keynes and didn't really take to him. Keynes' seminal book came out in 1936, after FDR's first term. In his first term he was more a continuation of Hoover's interventionist policies. FDR's policy-makers paid more heed to Keynesian thinking in his 2d term. By his third term he was a war President and all that was behind him. His fourth term was still during war.

A lot of the lore of Keynesianism came out after the war, to justify more intervention in a normal economy. By 1970 Nixon said "We are all Keynesians Now." By 1980 Keynesianism fell out of style since it seemed to cause the Great Inflation of the '70s.

FDR almost lost in 1940, but the war saved him, much as it did Bush in 2004. You might ask yourself, why was the 22nd Amendment passed after FDR died, to prevent more than two terms, if FDR was so popular?

[yelnick]

Joe, about not respecting Krugman's Nobel, maybe I have a problem with authority ... I did note his thinking on trade (for which he got the Nobel) is still sound. It is the rest of the stuff that I find suspect. Perhaps I should have cited other authority which also finds him ludicrous in his pandering to the political classes. You could check out the site of Krugman-In-Wonderland (from a credentialed economist). He follows the slings and arrows of outrageous Krugman daily.

I will also keep an eye out for you when another Nobel economists comments on Krugman's policy mistakes. John Taylor of Stanford has occasionally taken Krugman on, and they volley back and forth a bit in the papers (WSJ vs NYT).

[joe]

No Yelnik - After he talked to Keynes it was - "it can't be that simple"

You point out that the 40 election was close -but it wasn't. And FDR won then and then he won again in 44.

I had to come up with my grad paper in school, and I was already two business schools past my prime - I had read so many crappy revisionist papers. You would laugh your ass off if you heard some of the theories.

You know what is true? - Argue against the populist outcome - and you have a real loser.

Revisionists re write history as they think it should be - conservative historians record it as it was.

It is a really big difference - and a "world turned upside down" as it were - if you understand the revolutionary war jingle at the surrender of Yorktown.

Joe

[Diamond Jim]

The European social support network began to be put in place by a man who was hardly a liberal philantropist, Otto von Bismarck. He did it to forestall revolution, something we tend to lose sight of. FDR was also a pragmatist, not a doctrinnaire liberal. He was smart enough to realize the whole system could come tumbling down without radical measures. We may end up revisiting the same type of realities that these two gentleman had to face.

[yelnick]

Joe, you are right, the 1940 election was not that close, but much closer than 1936 had been. Hence it is seen (maybe revisionistly) as closer than expected. I have no vested stake in that question either way.

I would be interesting in learning more of what you know of Keynes's meeting with FDR and FDR's reaction.

[yelnick]

Diamond Jim, FDR acted more decisively than Obama has, to deal with the financial crisis. I think history will judge Obama poorly (depending how things turn out) for chasing a new healthcare entitlement while leaving the financial reform on the back burner.

[joe]

Yes Jim -

You know Yelnik - we should never have been able to win that war - not on two fronts, simultaneously - it was theoretically impossible.

But we did didn't we? - with an army the size of "portugal" in the begining.

FDR must have been pretty damn smart to pull that off - isn't it?? And his economic advisor was who...oh yeah, Keynes...

About right man??

Joe

[joe]

Look - I am just an old school math guy - I'll tell yout this - if this makes its betting wave up- it will kiss that line before it goes - the most classic of 4 wave action.

When it kisses that high "kiss your ass goodbye" - kind of thing.
and if you are long when that happens - you will be perm screwed.

It is all coming soon to a "theater near you"

Your basic take that a more severe low comes in end Q3 - I get the same math.

Really - it is all math in the end - there are no politics in numbers.

We do get about the same result.

Joe

[joe]

"I would be interesting in learning more of what you know of Keynes's meeting with FDR and FDR's reaction."

There was only two on record I have seen. In 1934 after the New deal stared and then in 1937 before the 2nd wave of the depression started

In both meetings K said - "print enough money and keep the V up - and that is what you have to do" (I am paraphrasized that thing) to which FDR did it the first time, failed to do it the second time, and history records what happened.

Of course after the failure the second time we were in a war for our souls a few years later.

What a revisionist is - is somebody who will come up with any dramatic and far out theory - to sell a book - too late to mean anything, even if it had merit, which it almost always does not.

Want some examples?? I got some that will blow your mind.

Joe

[joe]

I don't want to argue with you - cause mostly - we just want to get a call right and make some money on that - and that is capitalism - and that is a good thing. Mostly - we even agree on the general timing forecast too.

So - want to know - what I really hate about revisionists - it is because they "rerun" history to meet an objective. Not even a political objective either. More arbitratry.

I could cite western war theory and Leptano - let me give you a better one - there was this bitch that calculated political leaning of Hueguenots in the 17th century - honest to god - based on the number of lath turnings of a piece of furniture then.

That little bitch got her goddamn docturate based on that - and is a practicing history professor now.

Every other accepted political theory of the time was based on the movement at the time - but this little bitch decided it was more based on the style of furniture at the time - and It got Published.

I couldn't even make this shit up if I tried.

FDR - he wasn't directing an "American Economic Comeback" - he was directing stopping a dark age from western civilization- and was doing so from 1935 on - from which time it was clear it was starting.

Did he listen to Keynes - sure - but it was his over all call.

Joe

[KRG]

On Keynes vs Keynesians, here is from the original Keynesian(!), Axel Leijonhufvud

http://www.voxeu.org/index.php?q=node/4244

cheers

[yelnick]

Joe, thanks for the additional info on K and FDR. My beef with the argument about K and FDR is that FDR did not increase spending or deficits as a percent of GDP beyond Hoover. Hoover got the deficit to the 5% range and it essentially hung there until we ramped into WWII. Where was the Keynesian Stimulus, if not the Hoover Stimulus?

Hoover is the answer to a trivia question, at least until Obama: which President had the largest increase in Federal spending (as a percent) in peacetime? People who wish to explain how fiscal spending got us out of the Depression have to answer (a) why it didn't work for Hoover and (b) why we didn't really get out until 1942, 10 years into FDR's terms. Something is incomplete in the Narrative about K and FDR.

[twitter.com/DrBubb]

Loads of sensible folk "take on" Krugman:
Niall Ferguson, Marc Faber... amongst others.

But it is no contest. The man is simply wrong about almost everything.

In fact, so is the Princeton Economics department. They spawned Bernanke, and BB was someone who recommended that Princeton take on Krugman. That alone should put you on guard.