Archive for the 'Paul Krugman' Category

Krugman Versus Keynes

Remember Paul Krugman? You know, the guy who thinks we’re so deep in a liquidity trap that pretty much all spending is good spending, even if it’s socially wasteful?

Well, here’s something odd. That very same Paul Krugman is outraged to the core by expenditures on fiberoptic cables to support high frequency trading — expenditures that I happen to agree represent a giant social waste.

“We’re giving huge sums to the financial industry for little or nothing in return”, gripes the very same Krugman who thought it was a swell idea to stimulate the economy through hundreds of billions in government spending, whether or not we got anything in return.

It’s true that Keynesian economists have reasons to believe that wasteful spending is sometimes good. But honest Keynesian economists tend to acknowledge that those reasons apply equally well to both private and public spending.

Krugman’s view, apparently, is that, at least in the current climate, wasteful spending is good as long as you’re spending taxpayer’s money, but bad if you’re spending your own money. That’s not Keynesianism. It’s just crankiness.

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Homer Nods

Well, nobody’s perfect.

When it comes to skewering bad reasoning — and making the right arguments crystal clear — Don Boudreaux is usually about as close to perfect as anyone gets. But this time I believe he’s committed a gaffe of his own.

In a column on the minimum wage, Don writes:

Suppose that I invent and use a machine to steal $15,000 every year from each of 500,000 poor Americans, with the $7.5 billion being transferred into my Swiss bank account. After skimming off a few hundred million bucks to cover processing and handling expenses, I share the bulk of these proceeds with about 16.5 million friends…Am I acting immorally? Most people would answer “yes”…

By way of context, a CBO study forecasts that raising the minimum wage to $10.10 per hour will cause 500,000 workers to lose their $15,000-a-year jobs, while raising the pay of 16.5 million others.

But Don’s analogy fails, because taking someone’s $15,000-a-year job is not the same thing as taking someone’s $15,000. I think it’s a fair guess that most minimum wage workers dislike their jobs. So losing one of those jobs has an upside, which has to be weighed against the downside of not getting paid. On balance, losing that $15,000-a-year job might be no more painful than losing, say, $5000 a year.

The right version of Don’s analogy, then, goes more like this:

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Style Versus Content

Paul Krugman pauses to wonder why he’s been characterized as immoderate when — according to him — “there’s not a lot of air between my views and those of, say, staff economists at the Fed.” His conclusion: “What was radical, if you like, was my style, not my content.”

Bingo. Krugman’s detachment from mainstream economics is indeed a matter more of style than of content. But one symptom of that detachment is his failure to recognize that style is all that matters. Economics is most valuable not as a repository of received truths, but as a way of thinking — a way of thinking that has proved itself extraordinarily valuable as a bulwark against nonsense and claptrap. It’s that way of thinking — the style of economics — that Krugman so often and so depressingly abandons.

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Minimum Insight

Paul Krugman argues that:

  1. Hiking the minimum wage has little or no adverse effect on employment
  2. and therefore

  3. A minimum-wage increase would help low-paid workers, with few adverse side effects

.

In other words, Krugman, not for the first time, is peddling the sort of claptrap that few of us would accept from a college freshman.

The first point — that hiking the minimum wage has little effect on employment — is an empirical one. Not all smart observers agree with Krugman’s reading of the data, but many do — so for the sake of argument, let’s assume he’s right about that.

The question now is: How the hell do you get from point 1 to point 2? Answer: Only by forgetting the most basic principle of economics, which is that things have to add up. If the minimum wage has no effect on employment, then it’s basically a pure transfer of resources. Which means that the costs and the benefits are equal. The only way there can be “few adverse side effects” —- i.e. few costs — is if there are few benefits. Our job as economists is to make sure people understand such things.

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Six Observations

Do correct me if I’ve got any of the history wrong here:

1. It seems pretty likely that a big part of the reason why Amazon’s website works so well and Obamacare’s website works so poorly is that Obamacare, unlike Amazon, is not subject to the discipline of the market (and therefore, for example, employs coders with no equity in the enterprise).

2. A whole lot of people predicted that the Obamacare bureaucracy would not work well because it would not be subject to the discipline of the market. I’m not sure anyone pointed to the webpage as a particular point of vulnerability, but plenty of people made the general observation that large government bureaucracies don’t work well and that this was a reason to be skeptical of Obamacare.

3. Paul Krugman pooh-poohed those concerns.

4. Paul Krugman reminds us approximately 914 times per month that only a very bad person would fail to acknowledge accurate predictions of his adversaries. (It’s true that in approximately 914 of those 914 cases, the vindicated adversary is Paul Krugman. But he has indicated support for the general principle.)

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The Road Not Taken

Paul Krugman, having apparently received another of his divine revelations, proclaims that if we demand (somewhat) better working conditions in Third World countries (backed up, presumably, with boycott threats), “we can achieve an improvement in workers’ lives … And we should go ahead and do it.”

Don’t ask how he knows; the ways of the Oracle are mysterious and beyond human ken.

Look. A well designed policy of boycotts and boycott threats can certainly improve working conditions in the Third World. It can also lower either wages, employment or both. Whether or not that package amounts to “an improvement in worker’s lives”, as Krugman puts it, is an interesting and important question, and well worth thinking about. But apparently the last thing Krugman wants you to do is think about it, since he’s already told you the answer, and seems to presume you won’t have the slightest interest in where it came from.

Now, among the many differences between me and Paul Krugman, there are probably some that redound to his credit. But his propensity to hide all of his reasoning (if any) is not one of them. Compare, for example, my blog post of a few years ago on working conditions in 1911 New York City, when the Triangle Shirtwaist fire claimed 146 lives, most of them young women, partly because the fire exits were blocked to prevent pilfering. Would workers in 1911 have wanted safer working conditions (including unblocked fire exits)? This was my answer:

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Multiple Comments

Following up on yesterday’s Keynesian Cross post:

  1. The point, for those who missed it, is that using exactly the same reasoning that we find in Eco 101 textbooks to derive the Keynesian multiplier, we can conclude that sending all your money to me will make everyone rich. The conclusion is absurd; therefore the reasoning is invalid. And reasoning that’s invalid in one context is also invalid in another.
  2. Some commenters thought that my version of the Keynesian cross argument was an unfair caricature. I invite those commenters to peruse some actual Eco 101 textbooks. For example, they might browse through the section labeled “The Income-Expenditure Model” in a widely used textbook called Macroeconomics. The authors are Robin Wells and Paul Krugman.
  3. Let’s review the logic of that model. (See yesterday’s post for explanations of the notation.)

    Step I: Start with an accounting identity (in this case C+I+G).
    Step II: Throw in an empirical regularity (in this case C=.8Y).
    Step III: Combine the two equations to get a third equation (Y=5(I+G).)
    Step IV: Do a thought experiment involving a policy change (e.g. an increase in G) and predict the outcome by assuming that your equations will continue to hold after the policy change.

    By contrast, my alternative model starts with an accounting identity (Y=L+E), throws in an empirical regularity (Y=.999999E), combines these equations to get a third (Y=1000000L) and then predicts the outcome of a thought experiment (send me your money!) by assuming that the equations will continue to hold. In other words, yes, exactly the same logic.

  4. The problem with the Landsburg multiplier story is that after you send me your money, the equation Y=.999999E is not likely to remain true. The problem with the Keynesian multiplier story is that after you increase government spending, the equality C=.8Y is not likely to remain true. Why not? Well, for one thing, if the government buys you a bowl of Wheaties, you’re correspondingly less likely to go out and buy a bowl of Wheaties for yourself. For another, if the government spends wastefully, you, as a taxpayer, are going to end up poorer, which means you’ll probably consume less. The exact nature of the change depends on the exact nature of the government spending. But there’s surely no reason to buy into the model’s assumption that there will be no change at all.
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The Story Darkens


It turns out that last week’s tag-team smear of a young Heritage Foundation economist, executed by Senator Sheldon Whitehouse of Rhode Island and his lackey Paul Krugman of the New York Times, was even worse than we knew.

As you’ll recall, Salim Furth of the Heritage Foundation testified before the Senate Budget Committee, accurately presenting data on economic policy changes in various countries for the years 2007-2012. Then Senator Whitehouse, cheered on by Paul Krugman, spent eight minutes excoriating Furth for inventing those numbers — the sort of accusation which, if it were taken seriously, would surely destroy Furth’s career. (As well it ought to, if it had contained a grain of truth.)

And what was Senator Whitehouse’s evidence for Furth’s “meretriciousness”, as he put it? Well, it was the fact that Whitehouse had gone to Furth’s source, looked for the numbers, and found them to be entirely different.

What Senator Whitehouse didn’t tell you was that he was “refuting” Furth’s accurate report of the historical record with projected numbers, which is to say pie-in-the-sky promises by politicians about what they’re going to do in the year 2016. It was, as I said last week, as if I’d announced plans to lose 30 pounds and then promptly gained 10. When Furth accurately reports my recent weight gain, Whitehouse calls him a liar because a 10 pound gain is not a 30 pound loss.

Paul Krugman, who must know better, cheered on this mendacity when he wrote:

a Heritage Foundation economist has been accused of presenting false, deliberately misleading data and analysis to the Senate Budget Committee.

What’s so shocking? Not the false, misleading data and analysis — that’s SOP at Heritage. … What’s shocking is that they got called on it, in real time.

Now it turns out that Senator Whitehouse’s numbers were even farther off base. Not only was were the numbers invented to begin with; he took those numbers for various years and added them up, even though they were already cumulative. It’s as if I’d announced plans to lose 30 pounds in 2013 and another 20 in 2014 — a total of 50 over two years. What Senator Whitehouse did was the equivalent of adding the initial 30 to the total of 50, and then announcing that my projected weight loss is 80 pounds. And then calling Furth a 90-pound liar for accurately reporting my 10 pound weight gain.

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Lies and Lying Liars

When a politician misleads the public with distorted or flat-out fictional data, or uses eight minutes of national TV time to smear the character of the careful scholar who dared to report an inconvenient set of facts, you can always count on Paul Krugman of the New York Times to leap to the defense of truth and honesty — or, alternatively, to jump on the bandwagon if the politician happens to be a Democrat.

Here, you see, is what happened this week: Salim Furth, an economist at the Heritage Foundation (and a graduate of the University of Rochester, where I knew him to be a thoughtful and honest researcher) testified before the Senate budget committee, where he presented data from the Organisation for Economic Cooperation and Development (OECD) showing that most European governments have recently increased their spending. (This isn’t surprising for several reasons, one of which is that governments often spend more in recessionary times.)

Enter Senator Sheldon Whitehouse of Rhode Island, who spent eight excruciating televised minutes lambasting Furth and questioning his honesty, by reading out OECD numbers that differed dramatically from what Furth had reported. Some choice comments:

Dr. Furth, I am very concerned about your testimony….

When I look at the graph, for instance, which you source to the OECD — did you actually look at what the OECD says?….

They’ve actually written what the numbers are. And here’s what the numbers actually are, according to the OECD….

I am concerned that your testimony to this committee has been meretricious…I am contesting whether you have given us fair and accurate information.

And then there’s another eight minutes of reading out numbers that are, Senator Whitehouse keeps reminding us actually from the OECD, as opposed to these other numbers reported by Furth, which Furth claims are from the OECD, but obviously can’t be, because Whitehouse has the actual OECD numbers right here, and look how different they are — all of this interspersed with a barrage of attacks on Furth’s character and integrity. (See the video below, if you have the stomach for it.)

Now here’s the thing: There are a couple of legitimate reasons why Furth’s and Whitehouse’s numbers don’t agree. The first is that they’re for different time periods. Furth’s are for the years 2007-2012, while Senator Whitehouse’s are for the years 2009-2016. That’s right, 2016. Which brings us to the other reason these numbers differ: Furth’s come from the historical record, while Senator Whitehouse’s come from somebody’s ass.

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To Hold You Over….

Sorry to have been so silent this week; various deadlines have kept me away from this corner of the Internet. I’ll be back in force next week for sure. Meanwhile, if you’re looking for some good reading, this is the best thing I’ve seen all morning.

Edited to add: “Best all morning” was not intended as damning-by-faint-praise. It’s actually the best of many mornings.

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Deficit Attention Disorder

Imagine you’ve got a drinking problem. And imagine this conversation with your spouse:

Spouse: Dear, you’ve really got to do something about your drinking. You’ve been in three auto accidents this week, you’ve lost your job, and you’ve been trying to beat the children, though you keep passing out before you can get to them. I want to help you figure out how to get this under control.

You: You’ve got a fair point there. But let me point out that it would also be a good idea to redecorate the living room.

Spouse: Well, maybe so, and it’s something we can talk about at some point. But right now, I’d really like to focus on the drinking issue.

You: Doesn’t that strike you as imbalanced? Here we’ve got two issues on the table, and you want to focus 100% on one of them and 0% on the other. Why are you being so one-sided?

Spouse: Well, but I feel like there’s some urgency about the drinking thing, and I’d like to prioritize it.

You: Apparently, you’re fanatical on this issue. I don’t see how I can continue to take you seriously.

Spouse: Well, actually I’m trying to get you to focus on a very serious issue.

You: Yes, but by focusing exclusively on that issue, you’re betraying your fanaticism. Clearly, I’m the one who’s willing to address our problems, and you’re the one who’s just out to score debating points.

Spouse: Huh?

You: Not only that, but I’ve got a Nobel-prize winning economist who agrees with me!

How does that make you feel? I feel that way a lot when I read the news lately. Arguably, our country faces a spending crisis. The Republicans claim they want to deal with that crisis. (There’s some legitimate question about how sincere they are, but they at least say they want to deal with it.) The Democrats say: Okay, but let’s also talk about raising taxes. Maybe they’d also like to talk about redecorating the Rotunda; this seems roughly as pertinent. In other words, the Democrats attempt to deflect attention from the crisis (or the alleged crisis) by insisting that we talk about some other thing at the same time — and then they insist that the Republicans, by insisting that we focus on the issue at hand, are “betraying their fanaticism”. And they’ve managed to find a Nobel-prize winning economist willing to parrot this nonsense almost daily on the pages and webpages of the New York Times.

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But Foolish *In*consistency Can Also Be Problematic…

Paul Krugman is at it again, bemoaning the mendacity of politicians who, for “careerist reasons”, will never admit their mistakes and therefore lock themselves into bad policies. He even quotes Ralph Waldo Emerson:

A foolish consistency is the hobgoblin of little minds,
adored by little statesmen and philosophers and divines.

And Krugman’s solution to this problem? More power for the politicians, of course.

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Thoughts on the Minimum Wage

The usual case against the minimum wage has three components:

  1. Minimum wages reduce employment among unskilled workers.
  2. Therefore minimum wages are bad for unskilled workers.
  3. Therefore minimum wages are bad policy.

The problems with this case are that

  1. Minimum wages might not reduce employment very much.
  2. Even if they do, that doesn’t make them bad for unskilled workers.
  3. Therefore we cannot conclude (via this route) that minimum wages are bad policy.

Minimum wages are bad policy, though — but for entirely different reasons.

I’ll get to those reasons shortly, but first let’s examine the traditional argument a little more closely. I’ll number my paragraphs to make it easier for commenters to respond.

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Paul Krugman Hopes You’re Stupid

Paul Krugman, apparently relying on the stupidity of his readers, opens with this quote:

“At some point, Washington has to deal with its spending problem,” Speaker John A. Boehner of Ohio said Wednesday. “I’ve watched them kick this can down the road for 22 years since I’ve been here. I’ve had enough of it. It’s time to act.”

Then Krugman comments as follows:

22 years, huh? Indeed, Boehner was elected in 1990, and entered the House at the beginning of 1991. So what kind of can-kicking was going on during his first, say, decade in office? Here’s the picture:

Hmm — it sort of looks as if the US was sharply reducing its debt during the presidency of a guy named, I don’t know, Bill something or other.

See what he did there? Boehner says something about spending; Krugman responds with an irrelevant chart depicting debt, and hopes you won’t notice he’s completely changed the subject.

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Krugman — So Right and So Wrong

Paul Krugman offers a nice thought experiment to illustrate why government debt, in and of itself, does not make the country as a whole any poorer:

Suppose that … President Santorum passes a constitutional amendment requiring that from now on, each American whose name begins with the letters A through K will receive $5,000 a year from the federal government, with the money to be raised through extra taxes. Does this make America as a whole poorer?

The obvious answer is not, at least not in any direct sense. We’re just making a transfer from one group (the L through Zs) to another; total income isn’t changed. Now, you could argue that there are indirect costs because raising taxes distorts incentives. But that’s a very different story.

OK, you can see what’s coming: a debt inherited from the past is, in effect, simply a rule requiring that one group of people — the people who didn’t inherit bonds from their parents — make a transfer to another group, the people who did. It has distributional effects, but it does not in any direct sense make the country poorer.

Two comments:

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Stopped Clocks

Paul Krugman gets this one exactly right; among the 47% of Americans who pay no federal income tax in a given year, most do pay federal income tax at some point in their lives — and thus have at least some stake in the tax system.

But even putting that aside, what’s particularly distressing about Mitt Romney’s “47%” speech is the failure to recognize at least one of the following two propositions:

a) Even people who never pay federal income tax have a substantial personal stake in a healthy, thriving economy, and therefore have a stake in federal tax policy. In particular, wages are determined by productivity, and productivity depends to a substantial extent on the accumulation of capital, which can be directly influenced by tax policy.

b) It is possible for a skilled candidate to explain the above, and to sell pro-growth tax policies as pro-wage-earner tax policies.

Yes, the candidate who tries to make such a reasoned case will be the victim of a certain amount of demagoguery about “trickle-down economics”, but the candidate who allows himself to be paralyzed by such threats should not be running for president.

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The Wrong Tool for the Job

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.

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Charting the Tax Plans

Ezra Klein, quoted with approval by Paul Krugman, offers this chart of how the Obama and Romney tax proposals will change rates for taxpayers in various quintiles:

What we’re supposed to infer, according to Krugman, is that

we have an election in which one candidate is proposing a redistribution from the top … downward, mainly to lower-income workers, while the other is proposing a large redistribution from the poor and the middle class to the top.

But no such thing is remotely true. What we actually have is an election in which both candidates are proposing massive redistributions from the top downward, one slightly less so than the other. You’d never know this from looking at Klein’s chart because it illustrates changes in rates, whereas what actually matters is the rates themselves. It makes no sense to ask whether any particular group ought to be paying more or less without reference to how much they’re already paying.

Indeed, this is a classic example of what I once called the “Grandfather Fallacy” — by focusing on changes instead of absolutes, Klein’s chart conceals any existing inequities and hence treats them as “grandfathered in”.

Fortunately, Greg Mankiw has provided the numbers that allow us to make the requisite correction. Here, according to Mankiw, are the current tax burdens on various income groups (counting transfers as negative taxes, as of course one should):

Bottom quintile: -301 percent
Second quintile: -42 percent
Middle quintile: -5 percent
Fourth quintile: 10 percent
Highest quintile: 22 percent

Top one percent: 28 percent

That “-301 percent” means, for example, that a typical family in the bottom quintile receives $3.01 in net transfers for every $1 that it earns.

By adding these numbers to the numbers in Klein’s graph, we can construct a picture that actually depicts something interesting, namely the projected tax burdens for each group. It looks like this (the vertical axis represents percentage of income):

Note, for example, that, contrary to the impression you might have gotten from Klein’s and Krugman’s posts, both plans place the highest percentage burden on the top 1%, and both plans place a negative burden on the middle quintile — though Obama’s does both of these things to an ever-so-slightly greater extent than Romney’s does. There’s room for disagreement about which plan is fairer, but no room, I think, for disagreement about which chart is relevant.

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When the Saints Go Marching In

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Sixteen years ago, Slate Magazine was launched, with Paul Krugman and me as the alternating economics columnists. At the time, Paul was fond of observing (with considerable dismay) that most of the time, highly educated and intelligent non-economists appear to be completely incapable of distinguishing between compelling arguments and utter nonsense in the field of economics. His essay on “Pop Internationalism” is a brilliant series of riffs on this theme — a guided tour of sheer balderdash that gets a respectable hearing even though no economist could possibly take it seriously. “Pop Internationalism” (the lead essay in the book of the same name) is high on my recommended reading list.

The lesson I took from this observation was that we (Krugman, I, and economic commentators in general) had a responsibility to explain not just what economists believe, but why we believe it — to help readers understand that there’s a rigorous underlying logic to the discipline, and that there are good reasons for insisting that people adhere to that logic. Nowadays, when he’s at his most obstreperous, I sometimes suspect Krugman of having drawn a very different lesson — that because nobody understands the real logic of economics, we can get away with saying any damned thing we want to. It’s a frustrating thing to watch, because when he’s good, he’s very very good. But when he is bad he is horrid. I won’t list examples here, but you can find quite a few by browsing my Paul Krugman archive.

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Block Grants and Bad Faith

Paul Krugman on last week’s Supreme Court arguments:

I was struck, in particular, by the argument over whether requiring that state governments participate in an expansion of Medicaid … constituted unacceptable “coercion.” One would have thought that this claim was self-evidently absurd. After all, states are free to opt out of Medicaid if they choose; Medicaid’s “coercive” power comes only from the fact that the federal government provides aid to states that are willing to follow the program’s guidelines. If you offer to give me a lot of money, but only if I perform certain tasks, is that servitude?

Wrong question. The right question is:

If you take a lot of money from me and then offer to give it back, but only if I perform certain tasks, is that servitude?

Because, you see, the federal government is not handing out its own money to state governments — it’s handing out money that it takes from the citizens of those very states for the purpose of (conditionally) handing it back. (Of course “handing it back” isn’t exactly right either, because the payments go not to taxpayers but to their state governments — but it’s a lot closer to right than Krugman’s formulation.)

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In Which Paul Krugman Leaves Me At a Loss for Words

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.

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Off the Deep End

Paul Krugman argues that success in business is not, by itself, a qualification for making wise economic policy, and I agree. But then he goes all looney-tunes on us:

A businessman can slash his workforce in half, produce about the same as before, and be considered a big success; an economy that does the same plunges into depression, and ends up not being able to sell its goods.

So according to Krugman, it’s better for you and your spouse to earn $40,000 each than for one of you to earn $80,000 while the other stays home with the kids. I wonder how many two-earner families would agree with him.

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You, Your Grandchildren, and the Public Debt

Nick Rowe, applauded by such luminaries as Don Boudreaux and Bob Murphy, argues that, contrary to folks like Paul Krugman and yours truly, government debt is too a burden on our grandchildren, unless you believe in Ricardian Equivalence.

I want to explain what that means, and why it’s wrong.

To make sure we’re all talking about the same thing, I’m going to adopt all of Nick’s assumptions, most critically that all taxes are lump sum. I’ll come back at the end and say a little more about why this obviously false assumption is the right assumption to make.

Now: Suppose the government borrows money to finance a tax cut. That makes us feel richer. We therefore buy and consume more stuff, which leaves less stuff for our grandchildren to consume. (Nick tells a very nice detailed story about how this might play out across generations; I applaud that kind of detail, but it’s not important for this response.) Government debt is therefore a burden to our grandchildren.

Unless! If we — the current generation — foresee all this, and care about our grandchildren, we’ll choose to (in effect) undo what the government has done by saving our tax cuts and giving them as gifts to our grandchildren (presumably as part of their inheritance). This restores every generation’s consumption to the original status quo.

Ricardian Equivalence is the economist’s jargon for the assertion that we will foresee all of this, and will care about our grandchildren, and therefore will give them our tax cuts as gifts. Nick Rowe’s claim is that unless you make the very strong assumption that Ricardian equivalence holds, government debt enriches us at the expense of our grandchildren.

Here’s why that’s wrong: Continue reading ‘You, Your Grandchildren, and the Public Debt’

Actually, We Owe It All to Ourselves

Paul Krugman has a very good column on government debt and why it doesn’t matter nearly as much as many people believe. There’s just one spot in the column where I think Krugman misses the point, and therefore makes a weaker case than he could have made. He writes:

U.S. debt is, to a large extent, money we owe to ourselves.

It’s true that foreigners now hold large claims on the United States, including a fair amount of government debt. But every dollar’s worth of foreign claims on America is matched by 89 cents’ worth of U.S. claims on foreigners. And because foreigners tend to put their U.S. investments into safe, low-yield assets, America actually earns more from its assets abroad than it pays to foreign investors. If your image is of a nation that’s already deep in hock to the Chinese, you’ve been misinformed. Nor are we heading rapidly in that direction.

All true, but all beside the point. Even if 100% of U.S. debt were held by foreigners, and even if Americans had no offsetting claims on foreigners whatsoever, the U.S. debt would still be money we owe to ourselves.

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Paul Krugman in a Nutshell

By way of background: Obama says that Republicans favor dirtier air and water. Paul Ryan calls that a petty characterization of an honest policy disagreement. Paul Krugman says that some Republican policies would lead to dirtier air and water (presumably in exchange for some offsetting benefits) and Ryan ought to be man enough to say so.

This is a fair point, I think. There is nothing dishonorable about believing that under current regulations we overclean our air and water, and if that’s Ryan’s view he should own it. Though perhaps Ryan would prefer to respond — also fairly — that he and/or the GOP favors different kinds of regulation that might not leave the air and water dirtier after all.

In any event, Krugman can never be fair for long. Here he is complaining about Ryan’s rhetorical style and defending his own:

If I say that Paul Ryan’s mother was a hamster and his father smelt of elderberries, that’s ad hominem. If I say that his plan would hurt millions of people and that he’s not being honest about the numbers, that’s harsh, but not ad hominem.

And you really have to be somewhat awed when people who routinely accuse Obama of being a socialist get all weepy over him saying that eliminating protections against pollution would lead to more pollution.

Except that, you see, at least as far as I can tell (and do correct me if I’m wrong) Paul Ryan (whose “weepiness” is the primary subject of Krugman’s blogpost) has never accused Obama of being a socialist. So (unless I’m mistaken) what Krugman’s engaging in here is best characterized as neither harsh nor ad hominem but, well, lying.

Two points:

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Stopped Clocks

Incidentally, Paul Krugman made an incisive point last week when he wrote:

Here’s a question I haven’t seen asked: If fear of future regulations and taxes is holding business back, as everyone on the right asserts, why didn’t the Republican victory in the midterms set off a surge in employment?

After all, if you really believed that fears of Obamanite socialism were the key factor depressing employment, the GOP victory — with the clear possibility that the party will take the Senate and maybe the White House next year — should greatly reduce those fears. So, where’s the hiring surge?

I even set out to write a blogpost citing this argument with approval — but around the time I was composing it, Krugman followed up with this bit of idiocy, to which a response seemed more urgent.

Now that that’s out of the way, I can come back to the bit about the missing Boehner Boom. It’s a more-than-fair question. How would you respond to it?

Click here to comment or read others’ comments.

There He Goes Again

Paul Krugman’s latest venture into self-parody starts with a recent paper on the cost of air pollution, which finds that said costs are big and heavily concentrated in a few industries. Krugman then links to a New York Times article surveying Rick Perry’s past clashes with the EPA. With no further argument, he concludes that

Today’s American right doesn’t believe in externalities, or correcting market failures; it believes that there are no market failures, that capitalism unregulated is always right. Faced with evidence that market prices are in fact wrong, they simply attack the science.

Where to begin?

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Compassion Play

One thing I like about the study of economics is that it fosters compassion. When part of your job is to predict human behavior, you quickly learn the value of understanding other people’s problems. When the other part of your job is ferreting out the unseen global consequences of our choices, you’ve taken the first step toward caring about those consequences.

For example: Suppose a guy with no health insurance and no assets shows up at a hospital emergency room with an urgent life-threatening condition. Should you let him die? Ordinary compassion says no. The heightened compassion of the economist says, at the very least, maybe.

First, a policy of providing emergency health care to everyone is pretty much the same thing as a policy of providing emergency health insurance to everyone. It was specified here that this was a guy who didn’t want health insurance. So let’s recognize for starters that such a policy runs counter to — I am tempted to say runs roughshod over — the guy’s own revealed preference. It’s an odd sort of compassion that forces people to buy things they don’t want.

Now you might object that nobody’s forcing this guy to buy emergency health care; we’re trying to give him emergency health care. Not so fast. Here’s the first place where a little economic training goes to hone one’s sense of compassion: The emergency health insurance we’re foisting on this guy has a cost. We can spend that money on emergency rooms or we can spend it on a myriad of other things the guy might prefer. How is it compassionate to give him one thing when he prefers another?

This is particularly true if the guy happens to be very poor. Poor people have a lot of problems, and emergency health care is only one of them. They need better education, they need better transportation, and they need a little help buying groceries.

There is room for lots of debate and lots of disagreement about how much we as a society should be spending to help poor people. That’s not the issue here. The issue here is: Given that you’ve decided to spend an extra such-and-such many dollars a year helping poor people, why would you spend it in this particular way rather than one of the many other ways they could use it? For God’s sake, why not at least ask them if they’d rather have the cash?

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Recap

Some commenters still seem confused about the locus of disagreement in this week’s back-and-forth with Paul Krugman. I post today not to beat a dead horse, but to clarify the issues for those who are interested in understanding them. Please keep any discussion both civil and on-topic. I’ve numbered the points below for easy reference.

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Krugman Followup

What I like about people in academics is that when we disagree, we actually care about figuring out who’s right — and therefore we have a tendency to reach consensus, though it can take a while.

Anybody who blogs often enough (very much not excluding yours truly) is occasionally going to post something that, at least as written if not as intended, is objectively plain flat out wrong. Paul Krugman did that a couple of days ago, I responded, he’s responded to my response, and at least 4/5 of our disagreement is now resolved. That’s exactly as it should be.

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