Archive for the 'Paul Krugman' Category

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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Panglossian Economics

PanglossIn a radical departure from his previous expressions of dissillusionment, Paul Krugman has implicitly declared in his latest blog post that we are now living under the best of all policy regimes. I presume he will now be able to retire with satisfaction from his career as a gadfly.

The context is Eric Cantor’s demand that any federal disaster relief in the wake of Irene be offset by spending cuts elsewhere. Krugman thinks this is silly, and proves his point with an appeal to the standard Ricardian theory of public finance. According to that theory, which all economists understand and accept, if you’ve got to bear a cost, it’s best to spread that cost out over as many activities as possible. So ideally, you’d pay for disaster relief partly through spending cuts, partly through (current) tax increases, and partly through an increase in the deficit. Therefore says Krugman, “the bottom line is that basic, regular economics says that Cantor isn’t making sense.”

Since Krugman has carelessly neglected to spell out an important detail of his argument, let me fill in the gap for him: The Ricardian conclusion does not come from thin air; instead it follows logically from certain premises, key among which is that you’re starting from an ideal policy regime.

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Terrifying Prospects

Paul Krugman wisely reminds us that:

The odds are that one of these years the world’s greatest nation will find itself ruled by a party that is aggressively anti-science, indeed anti-knowledge. And, in a time of severe challenges — environmental, economic, and more — that’s a terrifying prospect.

Yes, a terrifying prospect — and an excellent reason to limit the powers of ruling parties, though Paul never seems to notice this.

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Economics 102

One of Paul Krugman’s favorite tactics is to assert that all he’s doing is channeling the time-honored lessons of Economics 101 — pre-empting dissent with the implication that any dissenter must be either an ignoramus or a radical. (Journalistic honesty compels me to acknowledge that I might have employed this rhetorical tactic once or twice myself over the years.)

It’s interesting, then, to take note of how very far his central arguments actually deviate from Economics 101. Here’s what he said last week on his blog:

Mulligan and others keep emphasizing examples of individual groups that have managed to gain jobs by cutting wages or offering other attractions to would-be employers. They then assert that these examples tell us what would be needed to expand overall employment.

The point, of course, is that all such arguments amount to committing the fallacy of composition…The essence of macroeconomics is understanding why such things are a fallacy, why what happens if one group does something is not at all what happens when everyone does it.

But you see, here’s the thing: According to the standard Economics 101 version of the sticky-wage Keynesian model, this is a case where what happens if one group does something is exactly the same as what happens when everyone does it. According to that model, as long as wages continue to fall, firms will continue to move along their labor demand curves until we reach full employment.

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Friday Quotes

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.)

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Subtraction Distraction

Paul Krugman, getting less serious by the minute, on the budget deal:

It’s worth noting that this follows just a few months after another big concession, in which [Obama] gave in to Republican demands for tax cuts. The net effect of these two sets of concessions is, of course, a substantial increase in the deficit.

Well, no, actually. The net effect of these concessions is a (small but not insignificant) cut in spending coupled with a (somewhat larger) set of tax cuts.

To sum that up by saying that the “net effect” is an increase in the deficit is like saying that if a woman gives birth to twins and then murders her husband, the “net effect” is to increase the population. We’re entitled to care about more than just the bottom line.

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Unhealthy Reasoning

Paul Krugman on the Ryan budget proposal:

And then there’s the much-ballyhooed proposal to abolish Medicare and replace it with vouchers that can be used to buy private health insurance….

…The House plan assumes that we can cut health-care spending as a percentage of G.D.P. despite an aging population and rising health care costs.

The only way that can happen is if those vouchers are worth much less than the cost of health insurance.

Well, this is just plain illiterate. In fact, the only way that can happen is if the voucher system affects people’s health care choices. Which is, you know, the whole point.

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I Bet You Paul Krugman Can’t Do This

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(Larger and more easily viewable version here.)

(My daughter is far more advanced and more graceful than I am. I hope soon to post video proof.)

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How’s That Again?

Paul Krugman’s latest gets my vote for his most incoherent column ever. As I understand his argument, it goes like this:

  1. Computers are good at routine tasks.
  2. Therefore the rewards to performing routine tasks are falling. This is true at all skill levels.
  3. Therefore education does not always make people more productive. It makes people more productive only when it trains them to do tasks that are not better done by computers.
  4. Therefore we need stronger labor unions and universal health care.

Say what?. The basic thesis — that there’s no point in learning to do something difficult if a computer can do it better, and that this is significantly affecting the returns to certain kinds of education — is an interesting one. The moral, of course, is that you can’t imitate your way to prosperity. If we want to be rich, we have to innovate.

So to encourage innovation, you want to strengthen the unions? To encourage innovation, you want to reduce the relative reward to innovation, by insuring that everyone gets the same health care regardless of their social contributions?

Now, you might suppose that Krugman was thinking something along the following lines: Large swaths of American workers are being rendered unproductive by computers. Somehow or another, we have to support those people even though they’re not producing much. Unions and universal health care will keep them afloat.

But that can’t be what Krugman was thinking. I’m sure of this, because I happen to know that Krugman has a Ph.D. in economics. Therefore he must surely be aware that you can’t divorce incomes from productivity. Sure, you can redistribute, but you can’t redistribute more than what gets produced. If the problem is that our old skills are no longer productive, then our incomes must fall unless and until we acquire different — and less computer-replaceable — skills.

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Dow 36,000 12,000

In 1999, the journalist James K. Glassman co-authored a book called Dow 36,000. The eponymous prediction did not pan out. A couple of days ago, Glassman popped up in the Wall Street Journal, trying to explain where he went wrong. “The world changed”, explains Glassman. The relative economic standing of the U.S. is declining. Plus terrorists and economic instability made the world a riskier place.

But there’s a better explanation. Glassman’s story never made sense in the first place, for reasons Paul Krugman explained when the book first came out.

Glassman has a substantial history of confusion about how financial markets work. Ten years before he wrote Dow 36,000, he was explaining in The New Republic that stocks are better investments than real estate:

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Nursery Tales — An Afterword

babyOne of Paul Krugman’s favorite stories is about the baby-sitting co-op that almost collapsed when members started hoarding scrip; similarly, he says, a lot of economic activity can dry up when people start hoarding money. Last Tuesday, in a post called Nursery Tales, I observed that money-hoarding can’t retard economic activity (at least in anything like Krugman’s sense) unless something prevents prices from adjusting. So absent an auxiliary story about what that “something” is, I don’t find the baby-sitting story terribly helpful.

Several commenters responded that in the real world, prices and/or wages are “known” to be sticky (that is, slow to adjust), and thought that this rescues Krugman’s metaphor. I don’t agree. Here’s why:

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Nursery Tales

babyPaul Krugman, not for the first time, invokes the Great Capitol Hill Baby Sitting Co-Op Crisis as a metaphor for the macroeconomy.

First things first: Krugman is absolutely right that we learn a lot from well-chosen simple examples. But this particularly example seems poorly chosen.

The Capitol Hill Baby-Sitting Co-Op consisted of about 150 couples who baby sat for each other. They paid each other in scrip — pieces of paper each worth a half hour of baby-sitting time. New members received 20 units of scrip, which they were expected to pay back upon retiring. Aside from that, you earned scrip by baby-sitting, and you purchased baby-sitting with scrip, so that in the long run you’d sit exactly as much as you were sat for.

The problem was that people started hoarding scrip, thinking they might need it someday. As a result, the demand for babysitting services dried up. This made it harder to earn scrip, which encouraged even more hoarding, and so on around the vicious circle. The solution was to issue more scrip — each member got 10 more units. This made the hoarders a little less frantic and a little more willing to go out, which meant more sitting jobs were available, which eased the hoarder’s minds still further, and soon the co-op entered a golden age.

That, says Krugman, is the story of most recessions. People hoard money, which makes it hard to earn money, which makes people hoard still more money, which makes it even harder to earn money. The solution is to issue more money.

But here’s the part of the baby-sitting story that never made sense to me: Continue reading ‘Nursery Tales’

The Return of Depression Economics

Paul Krugman writes that trade does not equal jobs and concludes that trade restrictions cannot even in principle trigger a depression. After all, restricting trade means restricting exports (less jobs!) but it also means restricting imports (more jobs!) so everything washes out.

Well, let’s try an extreme example. Suppose I prevent everyone in America from trading with anyone outside their own households. We’d eat only what we could raise in our own gardens, burn only the fuel we could gather from our own backyards, and wear only the clothes we could make for ourselves. In other words, we’d all be living pretty much at the subsistence level. Would you be willing to call that a Depression? I would. Krugman, apparently, would not.

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And in This Corner….

How much would you pay to see Paul Krugman debate the irrepressible Austrian economist Bob Murphy?

Murphy isn’t the first Austrian to challenge Krugman to a debate, but I bet he’s the cleverest. He’s calling for pledged donations to help the New York City Food Bank feed the hungry — with the pledges contingent on Krugman’s accepting the challenge. The pledge total is currently around $40,000 and Murphy is hoping to hit $100,000. Then Krugman can choose between facing off against Murphy or denying $100,000 worth of food assistance to the poorest of the poor — an option that in another context, Krugman himself might be quick to label as “callous”. Or worse yet, “Republican”. Here‘s where you go to pony up.

I would love to see this debate, all the moreso after watching Murphy’s two promotional videos, each so entertaining in its own way that they made me want to send him money independent of the Krugman thing. Watch, and enjoy:

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Feeling the Surge

Paul Krugman says there’s been no surge in government spending. I say there has been. Paul offers a graph in evidence. I look at that same graph and see a four-year surge.

Several commenters have insisted that I am ignoring Paul’s point — the point being that if we take the Bush years as a baseline, then there’s been no surge relative to that baseline. Really? Here’s federal government expenditure from the beginning of the Bush years to today. The blue line projects a continuation of the average annual spending increases under Bush. The vertical bar marks the advent of the Obama age.

(I constructed this graph from the invaluable FRED database at the St. Louis Fed.)

Now personally, I look at this graph and the main thing I see is a ten-year surge in federal government expenditures. But if you insist on taking the Bush years as a baseline — well, then what you see, starting in 2009, is an Obama surge. You might or might not want to argue that the surge was justified (or compelled) by economic conditions, but I don’t see how you can deny it’s there.

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Surgin’ USA

Paul Krugman offers the following graph as evidence that “spending hasn’t surged”:

Now, what I’m seeing here is something like a 25% increase in spending under the Bush/Obama policies of the past four years. Which makes me wonder exactly what it would take to count as a surge in Krugman-land.

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On separate notes:

1) Yesterday’s post on rationality generated several comments that deserve responses. For the most part, I am reserving those responses for a separate blog post a few days down the line.

2) I just now hit a wrong button and deleted about 100 comments that my software had classified as spam, without first skimming through them. There is therefore a small but non-zero chance that I deleted a legitimate comment or two. If so, I very much apologize and hope you’ll try again.

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Krugman Phones One In

I rarely post in the middle of the day, but this seems to call for an immediate response:

Paul Krugman, feisty as ever, scoffs at the claim that public-sector employees are overcompensated. True, salaries are 13% higher in the public sector. But, says, Krugman, you’ve got to correct for the fact that public employees are (on average) better educated. After the correction, those public servants earn 4% less than the rest of us.

Well, Krugman is certainly right that you can’t take the raw data at face value. But, at least if you’re trying to be honest, you don’t get to pick and choose what you correct for either. Sure, let’s correct for education levels. Let’s also correct for the fact that public sector employees work fewer hours per week. And for differences in pension plans, and job security, and working conditions.

How can we ever be sure we’ve counted everything important? We can’t, as long as we do it Krugman’s way. So let’s do something sensible instead. Let’s look at quit rates. Quit rates in the public sector are about one third what they are elsewhere. In other words, government employees sure do seem to like holding on to their jobs. More than just about anyone else, in fact. Doesn’t that tell us everything we need to know about who’s overcompensated?

Weekend Roundup

roundup2Before we get to the roundup, here’s the latest chapter in the ongoing intellectual suicide of Paul Krugman:

  • Economists Carmen Reinhart and Ken Rogoff write a scholarly paper purporting to show that high levels of government debt lead to slow economic growth. For the record, I have not read this paper.
  • Krugman, while praising the authors’ previous work, asserts that this time, there’s no there there. Specifically, he says that most of the Reinhart-Rogoff evidence comes from four episodes. According to Krugman, none of these four episodes counts. One could certainly well imagine a reasoned argument along these lines.
  • Krugman’s, however, is not that reasoned argument. Here is how he dismisses the episode labeled “Canada in the 90s”:

advocates of austerity have been using Canada in the mid-90s as an example of a success story; surely they can’t have it both ways.

The problem, of course, is that there is no “they” who are trying to have it both ways. Reinhart and Rogoff have made an argument about Canada in the 90′s. That argument stands or falls on its own. It is no refutation to observe that somebody else might have made some other (correct or incorrect) argument about Canada in the 90′s.

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A Pencil in the Eye

Okay, if Paul Krugman is going to keep on writing the same column twice a week every week forever, then I am going to keeping on objecting to it forever, though not, I promise, twice every week.

A couple of bullet points from his latest:

  • In response to the priorities of Senator John Kyl, Krugman writes: “So $30 billion in aid to the unemployed is unaffordable, but 20 times that much in tax cuts for the rich doesn’t count.” Oh, for goodness’s sake. $30 billion in aid to the unemployed might or might not be good policy and 20 times that much in tax cuts might or might not be good policy; that’s beside the point here. The point is that these are quite entirely separate issues and one’s position on the first need not dictate one’s position on the second. Aid to the unemployed is costly. Tax cuts are not. Didn’t I just say this?
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Weekend Roundup

Somehow we’ve gone a month since the last weekend roundup. So this will reach back a little further than usual in time.

Riddles. We tackled some riddles: Why do guys with deep pockets take on risky ventures instead of selling them off to someone with nothing to lose? Why, when a plane headed for Atlanta is diverted to Greenville, does everyone else choose to stand for an hour at the ticket counter while I (and only I) saunter over to the Hertz counter and grab one of many available cars? And why does Jet Blue, after investing $800 million in its new terminal at JFK, choose to make that terminal so hellish a place that I for one will never travel through it again if I can possibly avoid it?

Paul Krugman. Yes, I know, I can’t seem to let this topic go. I was at it here, and then here, and here and finally here.

Let me summarize my complaint in a paragraph: Krugman has some policies he’d like to see enacted. Some people oppose those policies for silly reasons and others oppose them for sensible reasons. Krugman habitually ridicules the silly reasons and pretends that he has therefore dispensed with the sensible reasons.

More specifically, Krugman attacks “deficit hawks” but ignores the “spending hawks” who present a much stronger case for fiscal restraint. He’s right to attack the deficit hawks, who make the silly mistake of conflating spending (which is costly) with tax cuts (which are not)—but then he makes the same mistake himself when it suits his purposes.

Incidentally, my Toy Stories post contains a link to a toy model intended to highlight the key questions that Krugman willfully ignores. At the end of that post I added an addendum confessing to arithmetic errors in the model and inviting readers to correct them. On a second reading, I realized there are no arithmetic errors—just one typo in an equation. Because some comments refer to that typo, I’ve chosen not to correct it, but it’s explained in the current addendum to the original post.

Books. Our book posts covered everything from the ridiculous to the sublime to the magnificent.

Math. The music of the primes gives a glimpse of the glorious intricacy of arithmetic, and our post on Fermat’s Last Theorem gives a small taste of how to tackle a particularly vexing problem.

Videos We had videos on cruel and unusual punishment, on the end of racism, and on how to fix everything.

Miscellaneous. Can Mike Huckabee possibly believe the things he says about religion? Does anyone still subscribe to the superstition of dollar cost averaging? And why the disproportionate outrage about an oil spill in the Gulf when there’s so much more to be outraged about?

Okay, we’re more or less caught up now! See you Monday.

Toy Stories

toysPaul Krugman is at it again, casting aspersions on everyone who opposes extended unemployment benefits while offering absolutely no positive argument for those benefits. Let me explain what would count, to an economist, as a positive argument.

There’s no question that extending benefits would be good for the currently unemployed, and no question that it would be bad for those who are called on to foot the bill. Economists usually deal with that kind of conflict by asking what policy you’d prefer if you had amnesia, and and didn’t know your own employment status. (You can read a lot more about this approach to policy analysis in Chapter 16 of The Big Questions.) The amnesiac is an impartial judge who is forced to care about everyone, because he/she might be anyone.

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You Can’t Keep a Good Straw Man Down

The artwork above is courtesy of Jodi Beggs, proprietress of the lively Economists Do It With Models site, who graced us with a visit in yesterday‘s comments and expanded on those comments on her own page. (That’s me kicking Paul Krugman in the gut.)

Jodi objects to the tone, and in part to the substance, of my response to Paul’s recent attacks on the “deficit hawks” who oppose various spending programs that Paul happens to favor. I’d summarized his rhetorical technique as follows:

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There He Goes Again

krugmanPaul Krugman sinks to a new low with this passage:

In America, many self-described deficit hawks are hypocrites, pure and simple. They’re eager to slash benefits for those in need but their concerns about red ink vanish when it comes to tax breaks for the wealthy. Thus, Senator Ben Nelson, who sanctimoniously declared that we can’t afford $77 billion in aid to the unemployed, was instrumental in passing the first Bush tax cut, which cost a cool $1.3 trillion.

Where to begin?

First, no economist—let me repeat that—NO economist, not even Paul Krugman on the days when he’s being an economist—would count a tax cut as a cost for purposes of policy analysis. A cost is something that consumes resources, not something that changes the ownership of resources. My Principles of Economics students all understand this; so, presumably, does the Nobel-prize winning author of a prominent Principles textbook. (A possible exception: You could call a present-day tax cut costly if it necessitates a future tax increase which, for some reason, is costlier to collect than the present-day tax. I guarantee you this is not what Krugman has in mind. If it were,the $1.3 trillion number that he highlights would be totally irrelevant to the actual cost.)

Next, unemployment benefits are costly, both insofar as they discourage recipients from seeking work and insofar as they necessitate taxes that discourage productive activity. The cost of $77 billion worth of benefits is not $77 billion, but it’s not zero either.

So unemployment benefits are costly and tax cuts are not. Which doesn’t mean that all unemployment benefits are bad or that all tax cuts are good, but it’s plenty adequate to absolve the hypocrisy charge.

But Krugman, as is his wont lately, appears committed to the following flat-out dishonest rhetorical agenda:

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Bad Logic — Or Bad Arithmetic?

In a blog post on what he calls the “Bad Logic of Fiscal Austerity”, Paul Krugman lays the following calculation before the public:krugman

Let me start with the budget arithmetic, borrowing an approach from Brad DeLong. Consider the long-run budget implications for the United States of spending $1 trillion on stimulus at a time when the economy is suffering from severe unemployment.

That sounds like a lot of money. But the US Treasury can currently issue long-term inflation-protected securities at an interest rate of 1.75%. So the long-term cost of servicing an extra trillion dollars of borrowing is $17.5 billion, or around 0.13 percent of GDP.

Yes. That’s the long-term cost of borrowing an extra trillion dollars. (Actually, the cost is even lower than Krugman says it is.) But the long term cost of spending an extra trillion dollars is somewhere in the vicinity, of, oh, about a trillion dollars, or about 7.4% of GDP.

Now you might argue that if some of that spending puts unemployed resources to work, then the true cost of spending a trillion is somewhat less than a trillion, but Krugman, at least here, does not attempt to make that argument. Nor do I expect that even Paul Krugman would dare to argue that an adjustment for unemployed resources could reduce the cost of government spending by roughly 98%.

Krugman is right when he says that borrowing is cheap. But the issue isn’t borrowing; it’s spending—and spending is expensive. It appears that like the President, Krugman wants to divert your attention from spending to borrowing so he can dismiss legitimate concerns without even acknowledging them. It’s a cheap trick. Don’t let either of them get away with it.

Edited to add: In fairness to Krugman, he appears to be imagining that the trillion is never paid back, so that the cost of spending it is simply the debt service of 17.5 billion per year forever. But his column makes it sound like the cost is a single one-time payment of 17.5 billion, which is absurd.

Weekend Roundup

The bulk of the week was devoted to Krugman on green economics, with posts here, here, and here.

Although I agreed with Krugman on some points and disagreed on others, there were two places where I not only disagreed but thought he had the economics wrong. First, he is wrong when he suggests that if we’re more risk averse, it follows that we should spend more on climate control. The reason is that risk averse people don’t like income inequality (because it boosts the risk of being born poor), and spending more on climate control exacerbates income inequality across generations. Therefore risk aversion cuts both ways on this issue. Second, Krugman is wrong when he gives (some) credence to James Hansen’s economically illiterate belief that altruism is somehow less effective under a cap-and-trade regime than under an emissions tax.

To round out the week, we had two posts about shameless hucksters trying to gull the public. Those posts are here and here.

As always, I’ll be back on Monday.

Krugman on Climate—Some Final Words

Having blogged twice this week (here and here) on Paul Krugman’s green economics essay, I want to add a couple of quick comments on what it takes to contribute usefully to this discussion.

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Krugman on Climate

Yesterday I blogged about Paul Krugman’s recent piece on climate control policy. The bottom line: After recovering from a shaky start, Krugman does a good job of laying out the issues and posing many (though not quite all) of the right questions. But I’m not sure he gets the answers right.

A few years ago, writing in Slate, I listed the key questions that the Al Gores of the world mostly fail to address or even acknowledge. (See also the discussion on pages 186-190 of The Big Questions.) Krugman (thankfully) is no Al Gore, and he does address most of these questions. Let’s see how he does with them.

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A Tale of Three Economists

Halfway through reading Paul Krugman’s New York Times piece on green economics, I had my snarky retort all ready to go. Then in the second half he went and got all reasonable on me. I still don’t buy his conclusions, but (sadly for readers who like fireworks), he’s not (at least in this instance) nuts.

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Weekend Roundup

Here at The Big Questions, we try to stand up for clear thinking and shame its enemies. This week, the enemies included Paul Krugman (writing on unemployment), the President of the United States (expounding on rising insurance premiums), a Washington Post columnist who seemed to forget that political reforms are supposed to serve a purpose, and that perpetual offender, the Conventional Wisdom, in its judgments about anti-gay agendas and fiscal responsibility.

Unless Krugman or someone like him offers an irresistible target tomorrow, I’ll see you next on Monday. Thanks for visiting.