Paul Krugman, defending the IS-LM (a/k/a “old Keynesian”) model of the macroeconomy as a non-rigorous but useful “scratchpad”, misses the point by a mile:

It’s a simplified model that more or less gets at what you think are the essentials of an issue, and is easy to work with, so you can use it to reach quick first-pass judgments about policy or whatever.

………

But IS-LM isn’t the prime example of a scratchpad. What is?

The answer is, supply and demand.

It is not easy to derive supply and demand curves for an individual good from general equilibrium with rational consumers blah blah. And it’s definitely not easy to justify consumer and producer surplus as measures of welfare. And there have always been some purists who condemn any use of the S and D curves we all grew up with, the use of triangles to measure welfare loss, and all that.

But for the most part nobody pays attention. The supply-and-demand framework is so convenient, while pretty much getting at what you want to get at, that it’s what almost everyone uses to get a first-pass analysis of economic issues.

Okay, look. Supply and demand (and, especially, triangles of welfare loss, etc) are not entirely rigorous, but they’re good useful simplifications that actually give useful (though approximate) answers to important policy questions. Sort of like Ohm’s Law for electrical circuits.

But IS-LM is not like that at all, because IS-LM does not even address the key policy questions in macroecomics. IS-LM can tell you, perhaps, how to fight a recession, but it can’t tell you whether the recession is worth fighting — not even loosely, because the model contains no individual utility functions and no social welfare function. It therefore does not allow you even to formulate the question of whether a given policy is worth its costs, because it provides no framework for weighing costs against benefits.

Continue reading ‘The Wrong Tool for the Job’

Okay, this one’s almost too bizarre for words. First, Paul Krugman makes an argument that ignores the existence of corporate dividends. Then, pretty much everybody in the world points out his error. Then, he admits his error, but, true to form, takes an irrelevant swipe at his critics. But in this case, the irrelevant swipe is: “Aha! You’ve just admitted that corporations pay dividends! So much for your past claims that corporations pay wages!”

Umm…Paul? They pay both. I’d lift Krugman’s own favorite dismissive phrase and say “That’s Economics 101”, but actually it’s probably standard knowledge among middle schoolers.

To review the details:

First, Krugman reposted (from the website of a left-wing advocacy group) a highly misleading chart purporting to illustrate the federal tax burdens borne by various income groups. The chart accounts for payroll and income taxes, but omits corporate taxes, thereby making the burden on high-income tax payers appear substantially smaller than it is, because corporate taxes reduce dividends which are disporportionately paid to high-income taxpayers.

Next, he got called on it by lots and lots of people, including, for example, Greg Mankiw.

Next, Krugman acknowledged his error. But, as always, he did so with the least possible grace, suggesting that his critics, by virtue of pointing out Krugman’s mistake, have somehow undermined their own principles.

In particular, his position is that by acknowledging that corporate profits benefit shareholders, “conservatives” have undermined their own ability to claim that corporations benefit anyone other than shareholders (e.g. workers). He relies, in other words, on the cockamamie notion that if something is good for group A, it can’t possibly also be good for group B.

Continue reading ‘In Which Paul Krugman Leaves Me At a Loss for Words’

Paul Krugman, economist:

This insight illustrates a general principle of the economics of taxation: the incidence of a tax — who really bears the burden of the tax — is typically not a question you can answer by asking who writes the check to the government.

Paul Krugman, blogger, remarking on a straightforward application of that principle:

There are multiple things wrong with this claim, but the most fundamental, I think, is that it represents a remarkable misunderstanding of the reasons why we have taxes in the first place.

(Edited to add: My response to Krugman is here.)