Robert Parenteau: The Large Fly in Krugman’s New Keynesian Soup

By Rob Parenteau, CFA, sole proprietor of MacroStrategy Edge and a research associate of The Levy Economics Institute

Paul Krugman had a delightful field day with his March 2nd New York Times column trashing media poseur economists like Larry Kudlow – economists who somehow manage to survive on their entertainment value alone, despite their repeated analytical errors. No doubt their prolonged shelf life has more than a little to do with the fact that the points of view they espouse tend to encourage their readers (or viewers) to think that their self interests are perfectly aligned with the self interests of say, oh, the Koch Brothers and their ilk. Useful idiots is the phrase that comes to mind. Useful idiots engaging in willful ignorance.

On his way to skewering the clownier clowns of the economics profession, however, Krugman could not help but to once again remind his loyal readers that everything you ever needed to know about macroeconomics was already discovered and described in his 1998 paper on Japan’s alleged liquidity trap. Humility is not one of Krugman’s strong suits, but we will allow you to come to your own conclusions after reading yet another of his repeated attempts at shameless self pimping in the March 2nd piece:

In my own case, I’d guess that about 80 percent of what I’ve had to say about macroeconomics since the crisis was prefigured in my 1998 liquidity trap paper, which was classic MIT style — a stylized little model backed by and applied to real-world events, with lots of data used simply. (Seriously, skim that piece and you’ll see why I sometimes seem so frustrated: People keep rolling out arguments I showed were wrong all those years ago, or trotting out arguments I made back then as something new and somehow a challenge to conventional wisdom.)

Now let’s conveniently forget for the moment that Krugman really doesn’t have a clue about liquidity traps, at least as Keynes presented them. Jan Kregel pointed this out over a decade and a half ago, but perhaps Krugman has not gotten around to reading that piece, since Krugman did not write it…and everything you need to know about macro, according to Krugman himself, is written by Krugman. You can read Jan’s argument here if you care to discover where Krugman has gotten Keynes’ liquidity trap wrong, especially as it applies to Japan’s deflationary lost decades.

Since Krugman wrote the introduction to the latest edition of Keynes General Theory, which is where Keynes lays out the liquidity trap issue, this might be a source of embarrassment to a liberal, especially if he indeed has a conscience. But as Jan points out, in the world of Very Serious Macroeconomists, there are people walking around calling themselves New Keynesians, when really they are just Old Friedmaniac monetarists, with a little pre-Great Depression Irving Fisher, and maybe a dash of 19th century Wicksell too, thrown in on the side for good measure. And they get away with it. Somehow. Like Kudlow does.

New Keynesians like Krugman, Bernanke, Blinder, Yellen, etc. believe they have found a hammer, namely Irving Fisher’s real interest rate hammer, and so the whole economic world looks like a nail to them. Got an unemployment problem? Lower real interest rates. Got an inflation problem? Raise real interest rates. Life is simple, and life is good. It’s all there in Krugman’s 1998 paper – seriously, skim that piece.

In that world, we are encouraged to forget about fiscal policy – government debt to GDP ratios are too high already – just ask Reinhart and Rogoff – and so few developed markets nations have the policy “space” to use fiscal stimulus, ever again, apparently. Even if they have sovereign currencies. Instead, monetary policy is deemed hegemonic.

And by the way, now that even central banks like the ECB are doing QE, monetary policy is fiscal policy. It is just that rather than using money to produce something useful and increase household incomes, which is what fiscal policy usually does, and is so unfashionable, money is being used to produce capital gains for bondholders, and maybe even equity holders as well, if the portfolio balance channels are not too clogged. The only problem seems to be that bond and equity holdings are highly concentrated in the highest reaches of the income distribution, so this is just trickle down economics in New Keynesian drag.

But putting that all to the side, there is a big black fly doing the back stroke in the New Keynesian policy soup. And nobody dares call the waiter over – it is all just a little too embarrassing. And nobody dares to clue Krugman into the insect intrusion, because he did not write about it, so it has not been discovered yet…has it?

Matthew Klein reported in Tuesday’s FT Alphaville on some findings delivered by Goldman Sachs economist Jan Hatzius, who is no clown, and BAML’s Ethan Harris, to the Chicago Booth Monetary Policy Forum last week. As displayed in the FT chart below (full article linked here) there is a little problem with the widely received and deeply believed story that real interest rates are the one and only steering wheel of economic policy.


As you can see for yourself in the chart, over the past 135 years, there is not much of an inverse relationship between real interest rates and real GDP growth rates over the long run. We should concede the point that the expected inverse relationship between real interest rates and real GDP growth does appear to show up only at the extreme high and low levels of real interest rates. But notice the dates on these observations at the tails of the distribution.

Real GDP last reliably rose with low real interest rates in the late 1940s and early 1950s. They also last reliably fell with high real interest rates in the 1930s. So that means Krugman, rather than Keynes, appears to be practicing “Depression Economics” – that is, an economics only relevant to long ago and far away, which is basically how Krugman interprets Keynes, but that is an issue we’ll take up on another day.

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  1. RN

    Prof Krugman has plenty of wiggle room left for his arguments. He is one of the first to recommend 750 B USD stimulus in 2008. His problem is he has not figured out the rigth mix or tradeoffs between fiscal and monetary policies. But the fact of the matter is nobody else has figured it out either.

    1. Yves Smith Post author

      During the deficit debates, Krugman took the position that the US should balance its budgets eventually. If you understand sectoral balances, that’s an austerian position. An economy has four sectors: households, businesses, government, and import/exports. We’ll keep imports/exports out of the picture, since it does not change the conclusion in the case of a country that runs chronic trade deficits like the US.

      The savings of the household, business, and government sector need to sum to zero. That’s double entry bookkeeping.

      Households (except for a brief highly anomalous period in the early 2000s) are net savers. They in aggregate save for emergencies and retirement.

      We like to think of businesses as net spenders. They in fact should be net borrowers to invest in growth. That is why it is not popular to have the government run deficits. They are assumed to crowd out business investing.

      In fact, the government has been a much bigger spender on basic research than the private sector, precisely because the private sector can’t bear that level of risk. And since the early 2000s, the business sector in aggregate has been a net saver. Note that this is NOT the result of the crisis, in fact, this is a pervasive pattern across all advanced economies and even in a lot of developing economies ex China.

      In those circumstances, you NEED the government to run deficits or else the economy contracts. And in fact, the evidence is every time the Federal government balanced its budget, we’ve had a recession.

      So Krugman is wrong in a more fundamental way than your comment indicates. And he now supports the “secular stagnation” hypothesis, rather than calling for more stimulus.

      1. kibosht

        If your only critique on this particular score is (whether you are explicitly saying it or not), “well, Krugman may have been mainly right about the prescription for the current crisis, but wrong about long-term budget balancing,” you’re 1) disagreeing with both Krugman and Keynes, in a way that disagrees with the main emphasis of the post in question, 2) eliding the fact that you actually agree with him on the policy prescription for the current status, and 3) undercutting the entire point of this post. You both feel that $750 was too small– you both said it at the time (I read both of you). You both say that fiscal stimulus is preferred to monetary. You both say that deficit spending in a recession is fine. Possibly you disagree on the long-term budget position in the case that housing and business spending are insufficient to sustain demand, although frankly both of you would advocate significant government spending on research, infrastructure, and other things the private sector can’t do well.

        I get that you disagree on the way banks and modern money creation work, and you may well be absolutely right and Krugman wrong, but those things have no bearing on what either you or Krugman have advocated to *get out of* a liquidity trap. You both turn to fiscal stimulus by preference. It’s a little silly to take your fundamental argument about the workings of money and turn it into a critique of Krugman for things he did not, in fact, do, particularly as you’re on the same page on this one.

        1. Yves Smith Post author

          Krugman believes in the loanable funds model and that lead to a LOT of erroneous thinking. We’ve discussed this at length.

          Krugman has long ago stopped saying in any serious way that more fiscal stimulus is needed now. In fact, he’s applauded that deficits are falling as opposed to saying that that is not what we should be doing now. He’s instead been focusing on interest rate policies, and not even bothering with the presumed caveat, “They are better than nothing” which is a dubious proposition.

          In other words, Krugman is far more conservative in his positions than you indicate.

      2. kibosht

        Also, while Krugman has looked at some secular stagnation research and said in essence “well, maybe,” he also said, “but that’s different from than a supply-side slowdown, and the solution is still stimulus, maybe in the form of infrastructure spending.”

        Again, if your solutions are the same, why so much harping on the diagnosis?

        1. Yves Smith Post author

          He has not said the solutions are the same:

          This is a really important distinction, because secular stagnation and a supply-side growth slowdown have completely different policy implications. In fact, in some ways the morals are almost opposite.

          If labor force growth and productivity growth are falling, the indicated response is (a) see if there are ways to increase efficiency and (b) if there aren’t, live within your reduced means. A growth slowdown from the supply side is, roughly speaking, a reason to look favorably on structural reform and austerity.

          But if we have a persistent shortfall in demand, what we need is measures to boost spending — higher inflation, maybe sustained spending on public works (and less concern about debt because interest rates will be low for a long time).

          So please, let’s not confuse these issues. This isn’t some academic quibble; we’re trying to understand what ails us, and saying that high blood pressure and low blood pressure are more or less the same thing is not at all helpful.

          1. kibosht

            Yes- are you reading this as an anti-stimulus argument? “That is, we will often find ourselves facing persistent shortfalls of demand, which can’t be overcome even with near-zero interest rates.” […] “But if we have a persistent shortfall in demand, what we need is measures to boost spending — higher inflation, maybe sustained spending on public works (and less concern about debt because interest rates will be low for a long time).”

            He is saying, very explicitly, that even if secular stagnation is real, the policy implications are the same as for a purely demand-side recession.

            1. Yves Smith Post author

              “maybe sustained spending on public works” is weak and highly qualified. That falls well short of saying the problem is a shortfall in demand. The secular stagnation hypothesis in part argues that demographics and workforce quality are the problem, and explicitly relies heavily on the loanable funds mode. In fact, workforce participation is highly variable over time and tons of people who are older would work if they could for income reasons alone, so this demographic aging population bugaboo is way oversold. It also blames the US workforce for its low skills (the Summers speech has references to this), as opposed to the failure of capitalists to invest in expanding their businesses and creating jobs. Summers actually acknowledges low investment first and foremost in his famous secular stagnation speech, but he refuses to acknowledge that 1. Tons of studies show that businesses seek an unreasonably high rate of return and 2. Institutional factors, namely stock linked pay and equity market short-term-ism, have made that worse.

              Apart from our discussion of that, if you believe that story, you would acknowledge the need for virtually permanent fiscal deficits to make up for capitalists’ over high profit targets, with the government cutting back only when the economy was overheating (or better yet, having heavy emphasis on programs that are naturally countercyclical, since politics makes it hard to cut spending, since that means goring someone’s ox).

              By contrast, Krugman is clearly looking to create more inflation as the first line of defense, that’s the only idea he endorses without reservation. That implicitly is a call for monetary policy solutions. And the qualified call ONLY for infrastructure spending is to create more low skill jobs (as well as acknowledging that recent paper claim infrastructure spending has a high fiscal multiplier, but again that is more evidence that he believes that it is important not to let debt/GDP ratios get too high, as opposed to taking the point of view, “Take care of the economy, and the deficit issue take care of itself.””

              1. kibosht

                Yes, but he calls for infrastructure spending not only in that post, but often. And of course he has called for many other forms of public investment. And he says, in that very post, that secular stagnation would result in a persistent shortfall of demand (a far cry from “falls well short” of saying this- he says it). In a number of prior posts, of which that is a culmination, he was saying that secular stagnation is false– but he’s revisiting some more evidence here from the Davies article, which itself says: “Is this ‘secular stagnation’? The term is interpreted differently by different schools of economists. Some believe that the disappointments in growth since 2009 have been mainly due to persistent shortages of demand because of balance sheet problems after the Great Recession, while others attribute them to a slowdown in supply potential over a longer period of time. The Fulcrum study does not attempt to settle this debate. ”

                Krugman is responding to a post about a study which is possibly refuting some of Krugman’s own very recently prior contentions that secular stagnation is bunk. And his takeaway, even then, is that it’s a demand-side problem, and infrastructure spending would help. You differ greatly on the interest rate argument, and certainly on the question of running long-term deficits, and the effectiveness of monetary policy generally– but not really on the question of a demand side recession and the value of stimulus. You are really overestimating that difference, I believe.

                That said, *I* agree that secular stagnation is not the issue, and that real industrial policies (and I use that term broadly, not in its sense of “encouraging manufacturing, but in the term of “enabling everyone willing and able to find a decent-paying and sustainable job”) are the answer, and require tremendous public investment. I’m not sure Krugman would disagree in the long run either, but it’s moot to the short-term argument about current conditions, where I think we all agree.

              2. Tammy

                Yves, I learn much from your comments that I appreciate without measure. This said, why do you state, “And the qualified call ONLY for infrastructure spending is to create more low skill jobs…”? Do you not consider clean manufacturing that is a component of today’s infrastructures more a technical skilled job vs. “low skill”? I think that’s part of Summers argument that he questions ‘retooling’ and more education is needed. If I misunderstood you I recant in advance.

                1. Yves Smith Post author

                  Clean manufacturing is not “infrastructure spending” in Washington speak. As the Ron Suskind book Confidence Men makes clear (there’s an incident at the very start of the book where someone throws out the idea of “infrastructure spending” as part of the 2009 stimulus bill, and Obama grabs onto it because it creates manly jobs. “Infrastructure spending” is roads, bridges, high speed rail, airports, as in construction projects of various sorts. Even though the DARPANET, the precursor to the Internet, wound up being critically important infrastructure, no one classifies that as infrastructure spending. It was military-related R&D, a backup communications network.

                  1. redleg

                    And infrastructure to this administration, as the 2009 stimulus demonstrated, is “very visible infrastructure” like paving jobs and replacing bridges that had replacement plans-n-specs already on the shelf. Not more complicated things like sewers, wastewater treatment, and water supply projects that were painstakingly constructed in the 1930’s and have a 75 year design life.

    2. kibosht

      Actually, Krugman said very directly at the time that $750 billion was too small. And he recommended QE only in lieu of fiscal policies that he believed were unworkable in the given political climate, although much preferred. He has advocated deficit spending, and large amounts of it. There is certainly much to critique in Krugman, but little of it shows up here. The misrepresentation that he believes interest rates are the best and only mechanism in the current economic climate, the odd notion that he dislikes stimulus, the lumping of him with Reinhardt and Rogoff when he has devoted significant time to discrediting their current work… this all makes it appear that the writer has actually not read Krugman– the very crime he accuses Krugman of. Funny stuff.

      1. Yves Smith Post author

        I suggest you scroll to the end of the comments and read what Parenteau has written. QE is no substitute for fiscal policy. And why should Krugman gag himself in light of prevailing views in DC? What exactly is the point of having a NYT column? Krugman had no problem with being way outside the DC orthodoxy early on the Iraq war. If he really believes in fiscal stimulus, he should call for it, rather than keep defending the Fed’s failed monetary interventions. The fact is that he is deeply loyal to Team Dem and not willing to call them out except in the most cautious manner.

        1. kibosht

          I agree that QE is no substitute, but so does he– as do you. I think he’s just made a calculation that the current congress provides no possibility of stimulus– as have I. That could be wrong, but I think he believes that he is putting his policy effort where it may be meaningful (although he simply disagrees with you on monetary intervention, or at least, feels like at worst it’s harmless, and worth attempting, and that he has some traction there– but he doesn’t see this as a repudiation of stimulus, as far as I can see) This is not to say that he has abandoned saying, periodically, that fiscal stimulus is important– this pops up fairly regularly, and of course just in the last week he has pointed out on a couple of occasions that the predictions of the deficit hawks were ludicrous, but I don’t think any evidence in his writings or anywhere else indicates that he’s had a change of heart or mind on the effectiveness of stimulus. It takes a very willful misreading to get to that understanding of his beliefs.

          I don’t find the comments you reference particularly trenchant; yes, Krugman calls for sustained inflation (and why not), but while in the Japan case he seems to disbelieve in the possibility of enough stimulus, he certainly advocated it strongly in the U.S. case. And doesn’t the U.S. case prove that he was correct in despairing of the ability of politicians to enact an appropriate stimulus? It came in much smaller than you or he advocated, for purely political reasons.

        2. kibosht

          In addition, I think his shift to harping regularly on the need for infrastructure spending is a way at the stimulus argument by other means– it’s the least controversial, most tangible form, and it’s obviously needed for more than just job-creation… why not just put your policy-prescriptive energy there? I think it’s a deliberate calculus on his part that there is more chance of actually getting some stimulus that way. More timid than you would like, perhaps, but se la vie, se la guerre.

        3. kibosht

          I’m beginning to suspect that I pay much more consistent attention to both of your actual arguments than either of you do to each other’s. I wonder who is most unhealthy in that equation?… Probably me.

          1. Rob Parenteau

            kibost: As Susan has recommended, please work your way through my extended responses starting this morning which pull quotes directly from the paper Paul himself declares, glowingly, is his major contribution to solving liquidity traps, which I think he still believes are an issue to be dealt with. If that does not make you healthier, at least it will make you better informed about what Krugman the economist says in Very Important Economic Journals Respected in the Profession, versus Krugman the NYT columnist…though I suspect if you looked hard enough you would see the columnist is actually saying pretty much the same thing as the economist…and to his credit, Paul can play both of those roles, and he plays them well. He is just wrong in some cases – like real interest rates making much of a difference for real GDP growth in the long run at least, which by his own admission, is what is it going to take for policy to win against liquidity traps and/or secular stagnation. Where as Larry Kudlow can only do the clown act, and that is all he has ever done, and he unfortunately wasn’t that good at it either, though I am sure he would beg to differ, as would the man who used to fill his silver spoon back in the day. (I remember this guy from the ’80s when he was the Bear Stearns economist and he would sit at the end of the table pontificating in a slightly Lafferesque but always very Thatcherian fashion while chain smoking away, and looking out the window frequently as if he could not wait to get to the bar afterward – but hey, he was entertaining, and my memory may be failing me, so take all of this with a gram of, no I mean a grain of that other white crystalline stuff…yeah, that would be salt, right?

            1. kibosth

              Yes, I did read your comments (they are not so dense or difficult that “work my way through” is exactly descriptive, no offense– I simply read them in their totality); I am not disagreeing on some of your or Yves’ points, I simply disagree that Krugman is anti-stimulus, or that he ever felt that the U.S. stimulus was adequate, or felt that QE was an adequate substitute. And I have read a certain amount of his academic work at various points (primarily journal and conference articles), so while I appreciate what is, I will charitably assume, your well-intentioned although in fact totally concern-trolling attempt to further my education, it is somewhat redundant. I don’t disagree that he feels interest rates have much more traction than you do, nor that he prefers a temporary stimulus- my disagreement was fairly narrowly targeted, and remains apt imho. The Larry Kudlow anecdote is nice though– I will take it as a friendly and funny remembrance you are nicely sharing with me, rather than the “I’ve been in this game way longer than you and here are my war stories so my argument from authority wins” kind of shorthand someone else might take it for.

              Sorry if this comes across as snarky; when someone assumes I need “educating” simply because I disagree with them, I find it more than a little condescending. Assuming that wasn’t your intent, however. At another website, I wouldn’t even bother to make the point, but I tend to have a lot of respect for the writers here, so take it fwiw.

              1. Yves Smith Post author

                With all due respect, you appear to be reconfirming your prior beliefs. Parenteau quotes Krugman at length, in more than one paper. Krugman regards sustained negative real interest rates as the first line of defense against Japan-types situations, and fiscal stimulus as important only when interest rates don’t do the job.

                1. kibosht

                  I didn’t disagree with that, or not in the main, although I’m not sure he hasn’t modified his Japan-era beliefs from what he saw in the current crisis. Not exactly the point I was making… actually I don’t think we’re all in disagreement *that* much about what Krugman thinks; my point responding to you initially was more on the lines of what I believe I see here frequently: because of your disagreements with Krugman on some basic aspects of theory, you tend to magnify *all* differences, even at times when you’re largely in agreement. The fundamental differences in your analysis of the economy translates itself into an “always-ever” difference in policy prescriptions, that is not always there.

                  My response to Rob was, gently, “stop condescending to me. I can read you and still not agree, and my disagreement is not necessarily a sign of ignorance.” I’ll echo that to you: why is it guaranteed that I *shouldn’t* reconfirm my prior beliefs after reading him, and you? The power of your analysis and rhetoric is so irresistible that I must necessarily change my mind? ;-) (sometimes it is, but not always…) However, no harm, no foul.

  2. TG

    One is reminded that Keynes – like basically all economists before 1970 – was a disciple of Malthus, and believed that demographics was at least as powerful as finance. Anyone not talking about demographics, and the effect of forced population growth on wages and profits, is at best a hemi-Keynesian. Or perhaps, useful idiots engaged in willful ignorance (wonderful phrase that – I think I’ll steal it!).

    1. Pepsi

      It’s an issue no one wants to confront for fear of sounding like a white nationalist maniac or just a crank.

      But if we can’t use the resources we have sustainably, everyone, including the exponentially larger amount of people in the future, is screwed.

      I’m in favor of a one child policy for everywhere forever.

      1. digi_owl

        It takes two to make one, so that would quite likely result in a dwindling population…

        1. lyman alpha blob

          Doing it forever would result in extinction.

          I believe the amount of children needed to maintain the status quo population is ~2.3 per couple.

          A one child policy for a few generations would likely improve conditions dramatically but at some point you need to level off if you want your species to survive.

  3. yenwoda

    In that world, we are encouraged to forget about fiscal policy – government debt to GDP ratios are too high already – just ask Reinhart and Rogoff – and so few developed markets nations have the policy “space” to use fiscal stimulus, ever again, apparently.

    This is meant as a description of Krugman’s economic worldview?

  4. Petey

    “In that world, we are encouraged to forget about fiscal policy”

    Ummm… I seem to have a memory of Krugman strongly denouncing the 2009 Obama stimulus as far too small economically, and far short of what was achievable politically.

    I also seem to have a memory of Krugman denouncing both Obama’s initial inauguration speech as bizarrely focused on balanced budgets, and his disdain for Bowles-Simpson.

    I also seem to have a memory of Krugman repeatedly denouncing Japan’s periodic efforts to tighten fiscally.

    Finally, I also seem to have a memory of Krugman repeatedly citing FDR’s 1937 fiscal tightening as an example of extreme economic wrong-thinking.

    But I guess my memory (and all those publicly accessible writings) must be faulty…

    1. Benedict@Large

      But Krugman thinks that stimulus has to be paid back over the business cycle. (Keynes didn’t, although he left it out of his General Theory.)

        1. Yves Smith Post author

          I call bullshit. Krugman has repeatedly supported the use of extreme monetary measures which as Parenteau has described, increased inequality and have been shown to be unproductive. He’s not called for more fiscal stimulus and during the deficit debates, and Benedict correctly states, REPEATEDLY endorsed the idea of balancing the budget longer term.

          And Krugman did NOT support continued Japanese deficit spending, see here:

          What continues to amaze me is this: Japan’s current strategy of massive, unsustainable deficit spending in the hopes that this will somehow generate a self-sustained recovery is currently regarded as the orthodox, sensible thing to do – even though it can be justified only by exotic stories about multiple equilibria, the sort of thing you would imagine only a professor could believe. Meanwhile further steps on monetary policy – the sort of thing you would advocate if you believed in a more conventional, boring model, one in which the problem is simply a question of the savings-investment balance – are rejected as dangerously radical and unbecoming of a dignified economy.

          This is precisely the type of thing Parenteau called him out for, BTW.

          Krugman believes in the loanable funds model, which is something Keynes clearly rejected but “Kenyesians” like Paul Samuelson distorted Keynes to make his theory more amenable to modeling and to make it consistent with neoclassical economics. And Parenteau provides a long form rebuttal later in the thread.

      1. washunate

        I’m curious about your remark on Keynes. I thought broadly speaking Keynes argued for counter-cyclical policy, possibly mild inflation, not significant and continuously growing deficits? Are you referencing a specific quote or paper? One of Keynes’ most famous lines is about the dangers debauching the currency. From that larger essay:

        These “profiteers” are, broadly speaking, the entrepreneur class of capitalists, that is to say, the active and constructive element in the whole capitalist society, who in a period of rapidly rising prices cannot but get rich quick whether they wish it or desire it or not. If prices are continually rising, every trader who has purchased for stock or owns property and plant inevitably makes profits. By directing hatred against this class, therefore, the European governments are carrying a step further the fatal process which the subtle mind of Lenin had consciously conceived. The profiteers are a consequence and not a cause of rising prices. By combining a popular hatred of the class of entrepreneurs with the blow already given to social security by the violent and arbitrary disturbance of contract and of the established equilibrium of wealth which is the inevitable result of inflation, these governments are fast rendering impossible a continuance of the social and economic order of the 19th century. But they have no plan for replacing it….

          1. MyLessThanPrimeBeef

            The other idea is to advocate for a full share of the pie for each of us.

            “I know you can make $billions shorting currencies, but you did not get where you are today all by yourself, did you? I mean, the society must have helped along the way. Don’t you think you should share some of that?”

            “I also know you can make $trillions selling driverless electric cars, but you did not get to where you are today all by yourself, did you? I mean, you had to have gone to school, learn from others, and rely on your customers to make you rich, right? Don’t you think you should share some of that?”

            It’s possible to dream about GDP sharing.

          2. washunate

            I’m curious about Benedict’s thoughts.

            But the concept of full employment doesn’t have anything to do with the paying back part of the matter. A full employment program could be funded by deficit spending. It could be funded by taxation. It could be funded by a combination of the two. There are two different, unrelated questions when talking about the federal budget:

            1) How many currency units should the government spend?
            2) What percentage of those currency units should be newly created?

              1. washunate

                I didn’t say anything about government debt, though. Treasury securities merely defer the choice of taxation or money printing into the future. It is not a third source of financing in and of itself.

                A full employment system funded by issuing Treasury securities would absolutely increase the debt/GDP ratio. My question would be who cares? Or perhaps more accurately, why do you care? Why is that a feature of full employment that debt/GDP would go down? It is statements like that which is why I think MMT is fundamentally monetarist. It operates within the mainstream view that the quantity of money matters, that a good monetary policy must choose some kind of buffer stock approach.

                I’m critiquing this from outside the mainstream. I think only external constraints, political processes outside the monetary realm, can anchor prices over time. No buffer stock approach within monetary policy can do that, whether that be full employment or unemployment or gold or wool. Only political decisions that allocate resources in productive rather than wasteful manners can do that. It’s not the amount of currency units that matters – it is the activity directed by those currency units that matters.

                1. Ben Johannson

                  You ask how it “gets paid off”. When someone answers you claim that wasn’t your question.

        1. Rob Parenteau

          Washunate – You want to look at Keynes’ proposals for full employment without inflation going into WWII. Required compulsory private sector savings that would be released after the war effort was winding down. Keynes was much less about stabilizing the economy in the short run through fiscal policy OR monetary policy, and more about using interest rates, government infrastructure spending, public/private capital spending projects, and possibly even tax policy to create an economic environment where investment was fairly steady and strong enough to carry the economy close to if not on a full employment growth path with low inflation. His writings in Essays in Persuasion also show while he viewed both inflation and depressions, he judged for a variety of reasons, the first was the lesser of the two evils, but as his policy proposals going into WWII show, inflation was still an evil he would prefer to minimize by design where possible.

          1. Rob Parenteau

            By the way, Singapore does this compulsory savings and seems to be able to use it with some degree of effectiveness in countercyclical fiscal policy, though I would not pretend to be an expert on that.

          2. washunate

            inflation was still an evil he would prefer to minimize by design where possible

            What I find interesting is how that’s exactly the opposite of what we’ve been doing. In 1935, US GDP per capita was about $600. In 1975 it was over $7,000. Today it’s over $50,000. That’s massive aggregate growth. If this kind of growth hasn’t solved our problems, how much growth will it take?

  5. Petey

    “(Krugman) is one of the first to recommend 750 B USD stimulus in 2008.”

    I have no idea if this is true, or importantly, when in 2008 you think he recommended this.

    But by January 2009, he was loudly and repeatedly calling the similarly sized administration stimulus far too small economically…

    1. MyLessThanPrimeBeef

      I think a lot of victims will be stimulated by the thought of going after the money looted by bankers ($trillions at least).

      But no.

      We must all get along – bankers and victims.

      Stop dwelling on the past. Let’s all look forward (to more money printing…wait for this…so they can loot again – it’s just a matter of time…they are that ‘smart.’)

      1. MyLessThanPrimeBeef

        Whatever you do, don’t look back (like Lot’s wife, not related by marriage to Lott, I believe).

        In this way, we are conditioned, sorry, educated or taught to look forward, always.

  6. Petey

    Finally, while Krugman is not an infallible pope, the idea in this post that he doesn’t think strong fiscal measures are crucial in a ZLB scenario is just beyond bizarre…

      1. Jack

        “filled with lies. Typical for Naked Capitalism.”

        I do believe those are fighting words.

      2. Clive

        A woman, in Northern Ireland at the height of the “troubles”:

        “You are a disgrace BBC and you should stop that at once. You’re filming things that are not happening here”.

        1. MyLessThanPrimeBeef

          A news reader at India at the time said: “It’s all maya.”

          (Just kidding).

      3. Yves Smith Post author

        If anyone here is making misrepresentations, it is you. Do you deal with ANYTHING that Parenteau said in his post? You straw man and use that as the basis for your bile. Please see my comments earlier in the thread.

      4. Ben Johannson

        Does you has a sad, Pete? All those big mean liars beating you and Kruggles up.

    1. jsn

      Petey, not Peter K,
      You are right in your statements about Kurgman’s general positions. That is not what Parenteau is critiquing. Krugman uses an ISLM model to describe the economy and in that model, when interest rates approach the “zero bound” the interest rate mechanism fails to work normally. For this reason he calls for stimulus, and did in 08, 09 just as you say.

      But because he uses ISLM rather than Keynes general theory, he both believes the stimulus must be paid back and that “quantitative easing” can function as stimulus by pushing the zero bound into negative territory. The nature of the ISLM model implies that if money is subsidized, by negative interest rates investors will be bribed into investing, which is the engine of profits via the Kalecki/Levy profits equation (two independently discovered assessments of the same underlying mechanism of capitalist profit formation).

      Keynes, on the other hand, like Schumpeter, believed that money profits, not investments, were the motive of capitalism and that no level of subsidy on money would encourage entrepreneurs to invest in the face of an aggregate demand deficiency because without apparent future demand there is no profit incentive to make the investment. Thus Keynes stimulus is intended to put money in the hands of actual humans, citizens, workers etc, whereas QE just doubles down on investors who, as Keynes would have predicted, have just hoarded it.

      In addition Keynes understood that fiscal deficits were necessary on aggregate to expand an economy because reducing the accumulated deficit was in fact deflationary as it soaked money out of the real economy: he understood the chartalist nature of money, having managed GB Treasury through WWI with fiat money, that government spending created money, taxation destroyed it and that govt surpluses were only useful as a tool to dampen an overheated economy.

      Parenteau’s frustration with Krugman is the latter’s systematic attacks on anyone to the left of him who understands the limits of the ISLM. Which limits have been demonstrated these last 7 years to favor creditor, corporate and other wealthy private interest at the expense of all the actual humans who must live under that systems constraints as the goal of surpluses drains the possibility of incomes out of the macro system.

      1. mikkel

        Now this is what the article should have been.

        One of my greatest frustrations in life is how Keynes is bastardized by both his detractors and those who purport to believe in him. As you rightly point out, Keynes recognized the nature of fiscal deficits, and his primary focus on cyclical balances was with regard to trade.

        In 2008/09 when suddenly everyone was “Keynesian” they all overlooked trade rebalancing as being the primary point, and instead the fiscal stimulus exacerbated the macro imbalances. Well we see how that’s turning out!

        As someone commented above, Keynes also respected limits to growth and therefore the end of growth capitalism…something that Krugman explicitly denies.

        But the article was written so sloppily that all of this is lost and makes it sound like Krugman is against fiscal stimulus.

        1. Rob Parenteau

          Mikkel: Here is some more sloppy analysis, where the framework of sectoral financial balances you are alluding to, but which most macroeconomists and policy makers remain painfully unable to grasp, is here.

          And I agree on your point regarding limits to growth and think that is a very good reason why any fiscal stimulus should be heavily oriented towards environmental remediation and shifting the nation to a much more robust renewable energy basis as rapidly as possible, because the private marketplace is not getting us there fast enough, judging by the third year of drought going on where I live. Bob Pollin at UMass Amherst writes a lot on all of that – go take a look.

          1. susan the other

            I’m glad this got mentioned – the environment. There is an entirely new economy waiting out there and capable of absorbing every dollar we can print. It can match the value of every dollar all the way to infinity. Our understanding of money has reached the end of an era, and if we weren’t so afraid of change we could get started on a new reality right away. I think we should forget all about efficiencies and productivity for profit (unless that profit gets plowed back into labor intensive ecological pursuits like new age sustainable, healthy farming….) If we can’t get out of the profit ratrace it will be our nemesis. It already is. And the tragedy is that there are more good environmental jobs out there, worldwide, than we can fill in 50 years. Yes, it will probably make modern finance look quaint. But it is.

      2. Rob Parenteau

        jsn: You are quite right on all of that, and there is a lot you could teach Paul, if you could only just convince him these were all his ideas first…and he wrote about them in a 1998 BPEA paper….Seriously. That is the Keynes/Kalecki/Lerner/Minsky framework that is missing…or has been “disappeared”, as they used to say in Chile in 1973. And in its place, we have clowns, albeit Very Serious Clowns, seated in Very Serious Positions, who try to pass themselves off as New Keynesians, when they have little or nothing to do with Keynes, but maybe have something to do with Milton Friedman the monetarist, or Irving Fisher the real interest rate guy, at least before he lost his house and his fortune in the Great Depression and did a major rethink on the self-equilibrating tendencies of modern capitalist economies. It is twisted. Really twisted. But hey, Kudlow is on TV everyday, so I guess anything is possible when you go through the Looking Glass.

  7. Alex Hanin

    I agree with what others have said: Krugman is in favor of fiscal measures in the current situation. Maybe for the wrong reasons (ZLB and IS/LM), but still.

    1. Yves Smith Post author

      Please provide links as to where he has said that. In the deficit debates, he called ONLY for continued deficits now, not for an increase in spending, AND he clearly endorsed the idea of getting to balanced budgets longer term.

      See this comment as to why this is bad policy:

      More recently, Krugman has endorsed extreme monetary measures and has not been calling for more fiscal stimulus.

  8. Peter Dorman

    I’m not out to defend Krugman, but there is a rather low ratio of analysis to invective in this post. Regarding the chart, the chief problem here is endogeneity. As we all know, during buoyant economic times the demand for funds generally rises, putting upward pressure on real interest rates. Using a lagged moving average for r will not necessarily eliminate this. One should also take into account the effects of fiscal policy on both real interest rates and growth. The effectiveness of interest rate policy (I prefer this term to monetary policy in a world of endogenous money) can be determined only by controlling, so far as one can, for other confounding factors, including case study evidence.

    I agree, however, with the criticism that New Keynesians are willing to countenance stimulative fiscal policy only in circumstances in which interest rate policy loses traction (liquidity trap) and not more generally as they should. This view is based on arguments that have little to do with the claim that interest rate policy is normally ineffective.

    1. Rob Parenteau

      Yes, Peter, you are right, the analytics and econometrics her are rather simple minded. We both know you can do all sorts of econometric tweaking and theoretical hemming and hawing, and yes, that is what economists do, though unfortunately, it is a rare day that any of the econometrics seem to settle these issues. Let’s instead ask ourselves, what is the story we are telling ourselves, that Krugman is telling us, and that central banks want us to believe? The story is also simple: if we lower real interest rates, one way or another, we will get out of liquidity traps and secular stagnation traps, and we will get back to full employment growth paths, and we will do so without having to worry about ever escalating public debt to GDP ratios, which we are told all the time will either lead to the hell of hyperinflation or some other form of economic collapse…even though we seem to have this little problem with headline CPI deflation creeping into nation after nation over the past year or so. And we are also told if we do in fact take this lower real interest rate medicine, that any recovery might take time – Paul was talking 15 years or something in Japan at 4% inflation as his back of the envelope guesstimate in 1998 to close the output gap in Japan. Yeah, that is right – 15 years. Seriously, skim the paper. And what does the chart from Goldman Sachs et al tell us? In the long run, there is not much of a relationship between real interest rates, specifically real policy rates, and real GDP growth. I am not talking causation here. I am just talking correlation. What does the connection look like – forget what the theory tells me it should look like. Read the Hatzius paper if you want the actual correlation coefficients – there answer is roughly, it depends, but it looks like a small positive correlation to them. Now after all the pissing and moaning that mainstream economists have made about discretionary fiscal policy and recognition lags and fine tuning, lets agree to agree with them. Yup, it is the long run that matters, and these liquidity traps and secular stagnation traps, yup, they might just be long run problems that we need long run policy measures to address. And so in the long run, what do we see, and what do Hatzius’ et al’s econometrics tell us? Real interest rates, specifically, real policy rates, do not seem to matter much to actually, observed real GDP growth outcomes.The earth of real GDP growth does not appear to revolve around the sun of real interest rate levels. Hasn’t done so for a 145 years or so. And has not done so across a dozen nations over the length of Paul’s professional career. It just ain’t happening. But that is what are supposed to believe. And if there is no relationship in the long run, why should we believe there is one for the short run? I am sure someone can rig the econometrics up to show one. (Oh wait, dig out your Taylor Rule equations). Let them. Then Hatzius can write the rejoinder.

      Look, we are running enough live experiments on the effectiveness of negative real, and now negative nominal interest rates as well, each with various degrees of financial tightening and in some cases, for short times, fiscal loosening. How are they working out? In the US we have the lowest mortgage rates since WWII or maybe the Great Depression. Corporations have record high profit margins and face record low borrowing costs. Plot the investment share of GDP for the private sector, leaving out inventories and government investment . Pretty low, right. Not much of a lift from the lows of 2008/9, right? In fact, basically back to an investment share that we normally see at the bottom of prior post war recessions. Or ask PM Abe how he feels about the effectiveness of negative real rates after he puts up the consumption tax to save Japan from a higher public debt to GDP ratio? Ask the people of Greece and Spain and Portugal how they feel about Draghi’s negative nominal deposit rate and TLTRO or the imminent unleashing of QE? They’ll say, what are you talking about, my son just overdosed, he couldn’t find work, and I read in the paper the youth unemployment rate is 50%. So please, yes, go do much more sophisticated econometric work on the relationship between real GDP and real interest rates, and yes, please tweak the theory and hash it out all out very elegantly and oh so complexly, but let us not lose sight of what is at stake here, and what is working and not working, in the world that we are actually inhabiting. Please. I mean that sincerely, Peter.

      1. Whine Country

        You remind me of a classic scene from Good Morning Viet Nam:
        Cronauer: Now, here’s the weather, we’re going to go right to Roosevelt E. Roosevelt. Roosevelt, how’s it goin’?
        Funny voice: Adrian, I’m with somebody! Don’t ever come here and bother me right now!
        Cronauer: Well thanks, Roosevelt. Can’t you give us a little weather?
        Funny voice: Not now, man! I’m on the balcony, man, I’m tryin’ to score! Back off!!
        Cronauer: Well, what’s the weather like?
        Funny voice: You got a window? OPEN IT!

        Economists really have get out more often. Like Yogi Berra said, “You can observe a lot by just watching.”

  9. jonf

    There is no doubt that interest rates can affect economic activity, especially at the extremes. But a business man will invest in a project, not depending on the interest rate, but his expected profit. And high interest rates may have little effect to tame inflation caused by supply shocks like shortages of food, oil or available labor. Just ask Volcker.

    The federal government with a freely floating fiat currency can control the economy and maintain full employment and price stability. And this can be done through spending and taxing. So far as I know no one has ever shown such a government can be forced into involuntary insolvency. So the debt to gdp ratio is so much nonsense. ( and to hell with Rogoff, and his idiot friend,) Bonds may be useful to control interest rates but aside from that, there is no need to issue them. Heck the government creates money from thin air to buy them back in QE or spends trillions to bail out banks.
    Krugman seems to discover these truths as needed. So he is useful, perhaps not the idiot like Kudlow.

  10. Jkiss

    The author is writing about some other krugman.
    Krugman is not an mmt guy, but he has continuously called for lots more fiscal stimulus at least since 2008.
    And he has politely dissed rogoff etc….
    For that matter, fed also has quietly and continuously called for fiscal stimulus, too…
    Granted they don’t appreciate qe is counterproductive, but even here must remember this was aimed at saving banks, not economy.
    The problem bringing back the economy is austerity focus in congress/administration/general public, and the never ending wet dreams of a balanced budget amendment that will bring endless prosperity (a la European experiment), as discussed today by Mitchell.

    1. Yves Smith Post author

      Please provide links on the “calling for more fiscal stimulus” since 2011.

      In the deficit debates, he was against reducing the deficit now, which is not the same as calling for more spending, AND he endorsed the idea of balancing the budget longer term.

  11. craazyman

    what this tells me is real interest rates have to be -1.75% to really work.

    anything else and your just guessing!

  12. Peter K.

    “New Keynesians like Krugman, Bernanke, Blinder, Yellen, etc. believe they have found a hammer, namely Irving Fisher’s real interest rate hammer, and so the whole economic world looks like a nail to them. Got an unemployment problem? Lower real interest rates. Got an inflation problem? Raise real interest rates. Life is simple, and life is good. It’s all there in Krugman’s 1998 paper – seriously, skim that piece.

    In that world, we are encouraged to forget about fiscal policy – government debt to GDP ratios are too high already – just ask Reinhart and Rogoff – and so few developed markets nations have the policy “space” to use fiscal stimulus, ever again, apparently. Even if they have sovereign currencies. Instead, monetary policy is deemed hegemonic.

    And by the way, now that even central banks like the ECB are doing QE, monetary policy is fiscal policy. It is just that rather than using money to produce something useful and increase household incomes, which is what fiscal policy usually does, and is so unfashionable, money is being used to produce capital gains for bondholders, and maybe even equity holders as well, if the portfolio balance channels are not too clogged. The only problem seems to be that bond and equity holdings are highly concentrated in the highest reaches of the income distribution, so this is just trickle down economics in New Keynesian drag.”

    Factually incorrect. Bernanke regularly testified that austerity was hurting. Krugman writes about the harms of austerity and the need for fiscal stimulus. Even Larry Summers is calling for government spending.

    Europe is finally resorting to QE because they have to. Meanwhile the U.S. is doing well enough to consider raising rates. Naked Capitalism: always making the perfect the enemy of the good.

    1. Jack

      QE isn’t about helping the economy, it’s about transferring wealth to the highest percentile. That’s what it’s always been about.

      1. MyLessThanPrimeBeef

        Also, helping the economy (like GDP growth, albeit tepid) does not necessarily help those who want to avoid starvation.

        There is a way to salvation though – that is, new money created to go directly, immediately to the people.

        It’s the People’s Monetary Policy (PMP).

        Some call it heterodox MMT or HMMT, or MMT II, i.e. MMTII.

      2. Whine Country

        Jack – I live in a distinctly middle class neighborhood in Phoenix and my home would likely sell for about a two week time share in NYC. My neighbor owns a company that modifies the interiors of private jets. I saw him driving by in his Bentley recently and he stopped so we could chat (I’m not making this up!) I asked how business was. “Terrific”, he replied,”never better”. So, please don’t say that there has been nothing more than a transfer of wealth to the to the highest percentile. Some is indeed making its way to us regular folks. My model predicts, if things keep trickling down like they are now, most of the folks still lucky enough to be alive 50 years from now will be doing fairly well.

    2. Yves Smith Post author

      Huh? Bernanke was calling for reducing the deficit in 2010 in Congressional testimony, just not right away:

      I think it’s fair to say that deficits, structural deficits, longer-term deficits, at anywhere between 4 and 9 percent, anywhere in that range, is not sustainable because it leads to a debt-to-GDP ratio that grows essentially indefinitely and does not stabilize, which leads to higher interest rate payments which in turn feed back into the deficit. So I think it’s very important that we consider how, looking forward — not this year, because of many economic conditions that are moving toward higher spending and lower revenues — but over the medium term as we try to plan our fiscal policy going forward, we need to find a sustainable path, and that would require lower deficits than we are currently projecting, or at least CBO is projecting.

      And again in 2012, just not immediately:

      When will you stop making stuff up?

  13. washunate

    I generally agree about the silliness of focusing on monetary policy and interest rates and wish Krugman would be a bit more radical with the perch he has carved out. But it seems a little odd to so forcefully go after somebody who has been one of the most vocal establishment voices in favor of fiscal policy.

    What I find most interesting is this little aside (my bold):

    …rather than using money to produce something useful and increase household incomes, which is what fiscal policy usually does…

    The word usually strikes me as a revealing generalization about the mindset taken by the author toward government power broadly and spending specifically, especially in the US context. Most of the federal budget activity impacts four specific areas of our society:

    1) national security
    2) healthcare security
    3) income security
    4) indirect regulation (like mortgage guarantees, unfunded public school and employer mandates, non-dischargability of higher ed debt, ag subsidies, and the hodge podge of tax cuts, deductions, exemptions and loopholes that have eaten away at progressive income taxation)

    To make a claim that this money is generally producing something useful requires actually evaluating these programs. There is a very real case to be made that none of those four categories are too small. 1 and 4 in fact could be argued to be way too big, while a critique of 2 and 3 could suggest they aren’t so much an issue of size as poor allocation.

    And linking making something useful with increasing household income makes no sense. Household income is also increased when government spends money on things that are not useful. (That’s the whole point. A dollar is a dollar no matter who receives it, whether it goes to the multi-millionaire CEO of a hospital franchise or the housekeeping staff making subsistence level wages. This is just basic math and accounting. Holding net exports and private sector investments constant, an increase in public sector deficits increases private sector savings no matter what kind of spending the public sector does.)

  14. Rob Parenteau

    I cannot tell you how much it warms the cockles of my heart to see so many of you defending Paul’s support for fiscal policy as an effective and useful policy tool, especially when it comes to liquidity trap situations. But you, my dear readers, have been punked. There is Paul Krugman the NY Times columnist, and there is Paul Krugman, the MIT trained wunderkind, infant terrible economist…who actually is a monetarist, perhaps more of Irving Fisher’s Pre-Great Depression stripes than say Milton Friedman’s…and is not really a Keynesian, at least the Keynes we find after he shed many of his monetarist and Wicksellian skins from his writings in the 20s on his way to the General Theory…and if you allow him to do so, Paul would like to tell you that in his very own words, from the 1998 piece he believes we all need to seriously skim, but which apparently none of you have bothered to read, seriously or skim fully, before posting your comments. So hear we go – I will take you through his text step by step so we together do not miss a trick.

    1. JTMcPhee

      Lots of wonderful informed sophisticated snark out there, with carefully footnoted quotes and references, about this, that or the other pronouncement or model championed by this or that Leading Light of this or that economic school theory. These Serious People apparently drive “policy,” or at least provide a vanishingly thin patina of justification for the behaviors that get canonized as “policy,” or sit as back-benchers in the Opposition to offer their worldly, incisive and often funny cheers and jeers.

      Can anyone offer links or directions to the works or writings of ANYone who is honest and holistic and sort of correct about the basic nature and predictable behaviors of all the participants and rulers and victims of what I guess is supposed to be “the economy,” or what I recall reading somewhere might have once been styled “political economy?” Krugman’s an egotist, and a self-promoter, and just wrong? Well, who the hell is RIGHT? if that word has any meaning down here in the slave pits?

      C’mon — is it all just feckless, albeit trenchant and brilliant and well-spoken, sniping back and forth about “science” that is hardly scientific, and cannot predict or control anything, at least via any of the “wisdom” deemed mainstream? Or is it just TPTB unlimbering Bigger Notable Guns like the Named Greats and the successful gamers like Friedman and Bernanke and so forth who actually get to Move The Lever(s) of Interest Rates and stuff, while GINI goes south and ordinary people in places like Greece and Venezuela and Mississippi get increasingly impoverished while the world burns?

      It seems to this lowly old person that NObody in the Game has an honest and accurate set of notions to offer, just sophisticated, inventive and often devious critiques of tiny closets of a very large house, and apologetics for whatever “policies” will advance their own wealth accumulation and position.

      Maybe it’s inevitably thus, and we mopes, muppets and Dumb Money, those that still have any, just have to eat sh_t and die, preferably out of sight? Without regard to the survival of the species? That’s the nature of said species? (Of course, say the “successful…”)

      If that’s the object of the Game, just to be “the one who dies with the most toys after killing the most others and taking their stuff,” at least be honest and tell the rest of us right out front. Makes one wonder why ISIS is so scary — they have a very successful business model: The Banality of Islamic State
      How ISIS Corporatized Terror, Just like General Motors and the M-style.

      1. NoFreeWill

        Marx, Keynes, MMT, ecological (not environmental) economics are all pretty useful and correct from their various perspectives.

        1. JTMcPhee

          What does that even mean? “From their various perspectives”? The old chestnut about the blind philosophers arguing about the true nature of the elephant, from having fondled just one part? The ” sell” on economics is that it’s predictive of how to move the levers and what gear to be in or something. Looks like nothing but post hoc rationalizations and a lot of arcane lingo. And please, what is the goal of the game? Everyone assumes that there is one, but if so, it looks a lot like accumulate, consume, and die, taking everything down with us. Justified by citations from one’s preferred “experts.”

  15. Rob Parenteau

    p. 160 from Paul’s 1998 Opus on Everything You Ever Needed to Know about Liquidity Traps and Macroeconomics in General, linked here in case you need to verify any of this:

    Here, Paul tells us the Great Depression was not ended by a one of fiscal stimulus, as many seem to think. What was the Great Depression ended by then, in the Gospel of Macro According to Paul. Read it. It says it depended on what? Fiscal policy? No. It was inflation expectations. Specifically, inflation expectations that MADE REAL INTEREST RATES SUBSTANTIALLY NEGATIVE. So really, it was negative real interest rates the ended the Depression. Got it?

    “My point is that the end of the Depression, which is the usual, indeed perhaps the sole, motivating example for the view that a one-time fiscal stimulus can produce sustained recovery, does not actually appear to fit the story line too well. Much, though by no means all, of the recovery from that particular liquidity trap seems to have depended on inflation expectations that made real interest rates substantially negative.”

    1. susan the other

      And all that is nowimpossible now because we have reached a level of technology that could (if it wanted to) balance our consumption… but if our consumption were maintained there can be no consensus to maintain it because none of us understands this balance … we are lacking in a certain spiritual containment…so we just can’t get a handle on it… So, the world ended?

  16. kevinearick

    The feudal critters have one process, extending RE credit in exchange for work with falling interest rates, and taking everything built with increasing interest rates, which is why they pretend to pay and most pretend to work, exploiting natural resources from the local community to feed the global city, more paper, until they can’t, and why you let them steal your second derivative, replacing automation with more efficient automation.

    The empire is now dependent upon dc electronics, as a replacement for labor, which doesn’t work in the real world, surprise, because what they cannot see, the universe, is growing, and what they can see, their own self-fulfilling prophesy of infrastructure make-work, is shrinking. The planet is rotating, just not relative to what they are looking at, themselves in the mirror.

    Yes, I’m one of the stupid ones, that moved Navy assets out and the university medical complex in, and the critters all think they are qualified to be my boss, because their parents told them so, and their teachers rewarded them for thinking so. Public education is about normalization, not learning. Feudalism has been kicking the can down the road accordingly for thousands of years.

    Clinton or Bush, $20/barrel from ISIS, $200/barrel from Saudi, or $45/barrel from North America, makes no difference to labor. Pick something you find interesting and explore, and sooner or later the future will pass through you, and on to your children, leaving the empire behind to pay interest and penalties, on the arbitrary debt it created, to hunt you down.

    For every force…the electron exists in many dimensions, and none at all. What Yellen, Pelosi and Brown do is irrelevant, to your future. Their job is to manage the past, the spoil pile of symptoms affecting symptoms, dressing the empire. Navy is much more than corrupt captains of global industry, the history of gravity, which is whatever you choose it to be.

    Politicians in Greece and Germany are like an old married couple with no children, arguing about the future, of the nation/state in a box, always a damsel in distress, looking in the mirror and seeing the enemy, a zero-sum game. The assumption that labor works for capital is false, no mater how loud the empire screams. Be at that interview, regardless of misdirection thrown in your path, license or no license, black, white or pink.

    1. kevinearick

      they have tried shock and awe in both directions, creating economic activity in growing make-work, so now they are trying distillation/isolation.

      careful, when you go looking for that electron, to exploit.

  17. Rob Parenteau

    But let’s play fair here. Because also on p.160 of Paul’s Gospel, you will find this:

    “If temporary fiscal stimulus does not jolt the economy out of the doldrums, however, a recovery strategy based on fiscal expansion would have to continue the stimulus over an extended period. Which raises the quantitative question of how much stimulus is needed, for how long-and whether the consequences in terms of government debt are acceptable.”

    Ok, so Paul says you might need more than a fiscal quickie. But if it is going to be more than a quickie, honey, it is going to cost you. And it might cost you big. And who are you going to have to pay. Well. that depends upon who you are going to ask “whether the consequences in terms of government debt are acceptable.” Which would be your Big Daddy Bond God Pimps, cuz they demand risk premia on their interest payments, bitchez. And if you are going to go big, long, and hard on your fiscal stimulus, you be better be prepared to pay big and long and hard too.

    1. washunate

      how much stimulus is needed, for how long

      You could tackle this one with specific advocacy and that would give us a reference point for future discussion.

      What is your proposed budget for next year (for the USFG)? How about the next five years? I don’t mean to the penny, just a general idea of what you propose in dollar amounts for receipts and outlays.

      Here is a link to the White House website for a variety of reports on budgets. For comparison, the President’s 2016 budget has about $4 trillion in outlays and $3.5 trillion in receipts.

  18. Rob Parenteau

    But let’s clarify the Gospel of Paul a little further here, because he seems to have introduced a slight ambiguity – are we supposed to do fiscal for more than a quickie, or is it all about the real interest rate level at the end of the day. So far, it is no that obvious. But if we dig a little deeper into the Gospel of Paul, here is what we find on p. 178.

    “There are two major questions about fiscal expansion as a remedy for Japan, one strictly economic, one political. The economic issue is whether an adequate expansion is possible without creating an unacceptable impact on the government’s long-term fiscal position.
    If one expects interest rates to stay near zero indefinitely, the level of government debt hardly matters. But if one ex- pects that at a sufficiently distant date real rates will become strongly positive again, the eventual size of that debt becomes an important concern.”

    Ok, the fog is lifting. If you chose to go big and long and hard on fiscal policy, it has to be “acceptable” in the long term. Acceptable to who, you might ask. Big Daddy Bond Pimps. Because the condition of acceptability of a prolonged fiscal orgy is all about the interest rates, once again. If they interest rates stay can be kept near zero in perpetuity, no problem, go for it. But hey, if you cannot sign on the dotted line with that one, you have no business going to the prolonged fiscal orgy room at this hotel. None. So you see, you cannot, by Paul’s own words, expect to do prolonged fiscal stimulus, unless and until you are prepared to get monetary policy to pin down zero interest rates. Forever. Fiscal policy is conditional upon monetary policy. Keynes is on a leash.

    1. Jonf

      Funny that. So why not keep interest at zero or near there? Or better yet break the leash and just create money as you need it to maintain full employment?

  19. Rob Parenteau

    Plus, remember, Paul noted there might be a prior constraint on doing the full Monty with Keynes’ fiscal stimulus. A constraint that show us before the monetary policy cum Big Pimping Bond Daddy one. That is the weenie constraint. Politicians might be weenies. Seriously. Read it yourself…and weep, all you closet Keynesian who are rising in Paul’s defense:

    “The political point is that Japan – like the United States during the New Deal – appears to have great difficulty in working up political nerve for a fiscal package anywhere close to that required to close the output gap. Exactly why this is so is an interesting question, but beyond the paper’s scopeThis surely does not, however, mean that fiscal policy should be ignored as part of the policy mix. On the general Brainard principle – when uncertain about the right model, throw a bit of everything at the problem – one would want to apply fiscal stimulus. (Not even I would trust myself to go for a purely Krugman solution)<e. But it seems unlikely that a mainly fiscal solution will be enough."

    Read it again. Politicians can be weenies…but we aren't allowed to talk about why…though maybe it has something to do with the political interests of the Big Pimping Bond Daddies. So yeah, sure, do a little jig for Keynes, but dancing around a little with Keynes, Paul says, ain't enough. You need the Krugman Solution. That's right, you read it here first. THE KRUGMAN SOLUTION…AS IN, IT IS NOT THE SAME AS THE KEYNES SOLUTION…right there…in Paul's own hunting and pecking on his laptop. In the Brookings Papers on Economic Activity. In his magnum opus. Seriously, you should skim this thing, like he told you to…but you didn't…because you already bought the labeling, and you know he's a New Keynesian, with the emphasis on Keynes. Who he just suggested you can dance with, and many take home for a hook up, but Jesus, Mary, and Joseph, do not under marry the bastard, unless Big Pimping Bond Daddy gives you the go ahead first, of course.

  20. Rob Parenteau

    So what, pray tell, is the Krugman Solution? Well, Paul starts to spell this out a little further on the next page. He concludes, after analyzing the slack created in Japan from the liquidity trap:

    “Therefore Japan probably requires a sustained period – at least a decade – of inflation, to reduce the real long term rate sufficiently to close the output gap…how about 4 percent inflation for fifteen years?”

    The Krugman Solution is all about the level of the real long term interest rate you see. Why? Because that is what Paul is proposing to use to close the output gap. Yeah, you read that right. The output gap is to be closed not by fiscal policy. Not by Keynesian fiscal stimulus at all. The output gap is to be closed by lowering real interest rates, which as we will see in a moment, is largely the purview of monetary policy, and a monetary possible that is aimed at creating expectations of rising inflations. Fiscal policy might be considered for a little pump priming up front, subject to the zero interest rate is nailed firmly down by the central bank, a constraint he already discussed above, but the heavy lifting is all around getting inflation expectations up in order to get real interest rates down. And that’s Irving Fisher. Or Wicksell. But not so much Keynes, who thought interest rates would not quite be enough, at least by the time he got to the General Theory.

  21. Rob Parenteau

    But are we sure about this primacy of interest rates and monetary policy in the Krugman Solution (sorry, is that trademarked yet Paul)? Are sure Paul wants the Bank of Japan, or for that matter, any central bank, to play the lead role in generating inflation expectations? Can’t you do that by closing the output gap with fiscal policy? Oh, wait, we closed that door. Because the Big Pimping Bond Daddies are behind it. Don’t go there. Don’t even go there. So the inflation expectations thingy, well, that is a subject that has more to do with social psychology, and we economists really don’t talk about such trite and trivial things as that, but if we have to talk about, we know exactly who we can call to get the job done. The central bank. The BoJ. Not the Treasury. Not the Congress. The central bank. Read on:

    “If the central bank can credibly commit to pursue inflation where possible, and ratify inflation when it comes, it should be able to increase inflationary expectations despite the absence of any direct traction on the economy by means of current monetary policy.

    How in fact to create these expectations is, in a sense, outside the usual boundaries of economics. However, one obvious suggestion is that Japan deal with its inverted credibility problem through legislation giving the Bank of Japan an inverted version of the price stability targets now in force in a number of countries”.

    That is, in the Gospel of Paul, under the Krugman Solution, to get inflation expectations going, and then to validate them, you must “set my people free”. You’ve got get your legislative body to create an enforceable commitment from the central bank to pursue accelerating inflation at all costs, no holds barred. You do not go to your legislative body and create a credible commitment to a full employment fiscal policy. That would be too, well, Keynesian. Plus the Big Pimping Bond Daddy’s will tear you a new one if you do…unless of course the central bank has your back and is pinning the yield curve to zero, all the way out the curve. Are you listening, ECB? I knew you could – love me some Germany 5 year bunds, sub zero. Yeah, that’s what I am talking about baby, bring it on home to Momma, Mario.

  22. NOTaREALmerican

    This calls for a reading the “Keynesian” prayer, in honor of High Priest Krugman.

    We must borrow more money,
    To stimulate demand,
    So that jobs are created,
    And prosperity ensues,
    Then we pay off our loans.
    (Well, unless we don’t have enough prosperity. Which just means you haven’t prayed hard enough and borrowed enough).


    1. MyLessThanPrimeBeef

      Two, three thousand years later, it will still be ‘if you are a believer in Paul the high priest and his good news, you will be saved and will have saved a great fortune for your family.”

    2. yuan

      I see you are still upset that reality has a Keynsian bias, NaRm. I await your policy/economic suggestions for wealth inequality, wage stagnation, and erosion of democracy with bated breath…

  23. Rob Parenteau

    But wait, are we sure Paul is determined to put real interest rates as the main adjustment mechanism, and not fiscal stimulus? Are we sure he want monetary policy to carry the ball on this? Paul tries to get a little more granular with the Krugman Solution on p. 181. Seriously. Don’t just take a leap of faith. Skim this thing.

    “I would suggest the following series of leaps of faith: although Japan’s current output gap is probably well over 5 percent, the combination of fiscal stimulus and – if all goes well – clarification of which banks will be taken over and which will not, should reduce the gap by several percentage points. Therefore managed inflation would need to close a remaining gap of, say, 4 to 5 percentage points. …Recall that a policy of managed inflation is, in principle, simply a monetary expansion by other means.”

    Ok, so let’s do the math with Paul. Because, you know, economists are pretty good with math. Japan had an output gap of 5% of GDP when Paul did his back of the envelope calculations in 1998. That is a lot of slack. There is a big gap between potential output and actual output in Japan. This is going to take some heavy lifting. So let’s get to it. Yeah, ok, let’s have fiscal policy give it a go, and then let’s use the Krugman solution of managed inflation to close say 4-5%…of a 5% output gap. Wait, what? Do the math. Managed inflation, which is “SIMPLY A MONETARY EXPANSION BY OTHER MEANS”, is assigned to handle cover 4% or 5% of what is only a 5% output gap…which means fiscal stimulus will be tackling 0-1%. Yup. There it is. See. Paul is a Keynesian. A devout, frothing at the mouth Keynesian. Not a Monetarist. A Keynesian. Repeat it enough times. You might even to be able to make yourself believe it. Seriously. Skim this piece and you’ll see why I sometimes seem so frustrated. Just like Paul. Except even more so. Because he’s punked you, dear readers, into thinking he is a frothing at the mouth Keynesian. Well, only if the Big Pimping Bond Daddies don’t come around, maybe he is, but really, we can settle 80-100% of the problem just through the central bank. Using real interest rates. Which appear to have no inverse correlation with real GDP growth. According to a Goldman Sachs economist, and one of the few Wall Street economist I still respect, because he won’t do a Kudlow…nor will he do a Kruggie either.

  24. NOTaREALmerican

    Actually, I didn’t know Kudlow was an economist. I always thought he was a comic.

      1. MyLessThanPrimeBeef

        A mission accomplished economist will make you cry (at least the neoliberal kind) over your misfortune, while a good comic will make you laugh at the same.

        That’s my best guess.

  25. Rob Parenteau

    Let’s now close out our exegesis of the Gospel of Paul with the closing argument from Appendix C, appropriately entitled Creating Inflation Expectations, which after all, is at the heart of the Krugman Solution. Here, in summarizing the entire screed, we read the following:

    “SUPPOSE THAT one believes that Japan needs a negative real interest rate on a sustained basis, but also that a pure bootstrapping policy-in which the announcement of an inflation target generates the expansion that eventually creates the inflation is infeasible. Then Japan should apply some temporary policy that moves the economy to a position where monetary policy does have traction and use that traction to generate sustained inflation.
    In this case, the temporary fiscal jolt comes into its own. The strategy would work along the following lines: a large fiscal expansion would be applied, with interest rates kept at zero, and sustained even as the economy began to develop inflation. Ideally, the fiscal stimulus would then be phased out gradually, just slowly enough for rising expectations of inflation to take up the slack. The important point is that monetary policy would have to remain accommodating,

    What’s all about? Sustained negative real interest rates, not sustained fiscal policy stimulus, aimed at closing an output gap. The fiscal policy is subordinate and temporary. Keynes is kept in his closet. You can only let him out if monetary policy can pin interest rates down to zero…and only let him stay out until inflation expectations are rising, and can take up the slack…by lowering the real interest rate. This is Fisher. This is Wicksell. Maybe this is even Milton Friedman. But this is not Keynes. Not by a long shot. You’ve been punked, and not just by Larry Kudlow. Seriously, skim that 1998 piece by Paul, and you’ll see why I sometimes see so frustrated.

    1. Jonf

      Now you have gone and introduced a couple of extraneous variables– conservative politicians and elites. Now thems a pair of birds and they love high interest rates. So Paul is trying to trick them with high inflation and low interest rates. See it all makes sense.(I think)

      Paul looks more and more like the real idiot, except he is craftier than Kudlow. I bet he thought all this out in his basement too.

    2. Pepsi

      Why call himself a new keynesian at all if this is what he believes? Strange, isn’t it?

  26. Praedor

    Kinda curious if the measure of “real GDP” used in the charts is the same across decades? Seems economic terms like inflation and GDP are VERY squirrelly and tend to be re-defined as is politically convenient at any given time (depending on the political party in overall charge, the economic theory du jeur being used, etc). So, is GDP definition/content from, say 1935 truly the same thing as the GDP from 1950 in the chart?

    Remember, inflation today has no relation to inflation in the RW. Inflation gets redefined as much as GDP to make national economics as rosey as possible given current conditions. Thus, inflation today ignores things like energy and food, and even then does a two-step dance to redefine inflation within food, for instance, to be minimal (“if a good cut of beef gets too expensive, the little people will shift to a lower grade brisket. If Brisket gets too pricey, the little people switch to ground beef. If that gets too expensive, they switch to chicken”…ad nauseum down to …”when x gets too expensive, the little people switch to canned catfood but it’s all good. All equivalent. See? No inflation here!”). Is GDP immune to this fuckery?

    1. Jonf

      If there was a drought and food prices went up due to the shortage of food would you call that the same as inflation? Or is that a little different than say an increase in the price of cell phones? Same thing if Saudi increased the price of oil ( energy) ? Those items are supply shocks.

      1. Praedor

        I disagree. Food or energy prices go up for ANY reason and it negatively impacts the economy and people see no difference. Those two items, regardless of the WHY their prices go up (or down) are THE biggest drivers of all other economic activity. People need to eat first, heat their homes or move their cars second. The price of optional items like phones or jeans are a distant 3rd place in the scheme. If I go to the grocery store and see milk selling at $10 a gallon I don’t give a damn the reason, it is price inflation that immediately reduces any and all my discretionary spending.

        No matter WHAT the reason for food cost increases, catfood is NOT equivalent to canned tuna is NOT equivalent to frozen chicken, etc, up the line just because (little) people may be forced to eat that due to a “price shocks” up the line. In any case, if various cuts of beef are too pricey so the little people are flowing into poultry or further downward, that is NOT a shock. That is a fundamental and core change. The only people who think one item of food protein is just as good as another and so doesn’t count for inflation are rich economists who are going to still be eating prime rib and caviar regardless of the tribulations of the little people.

        My point is the reason for price increases in food and energy are irrelevant. An increase in price of either immediately and negatively affects all other spending, unless you’re rich.

        1. Jonf

          I’m sorry.I don’t mean to imply other prices are unimportant. In the past food and energy outpaced other inflation. For last year energy prices went down rather substantially. Food prices were up 3.2%, energy down nearly 20% and the net of all was a small negative for the year. All items less food and energy were up 1.6%.

  27. Auburn Parks

    Let us not forget this beauty from Krugman:

    “Suppose, now, that we were to find ourselves back in that situation with the government still running deficits of more than $1 trillion a year, say around $100 billion a month. And now suppose that for whatever reason, we’re suddenly faced with a strike of bond buyers — nobody is willing to buy U.S. debt except at exorbitant rates.

    So then what? The Fed could directly finance the government by buying debt, or it could launder the process by having banks buy debt and then sell that debt via open-market operations; either way, the government would in effect be financing itself through creation of base money. So?

    Well, the first month’s financing would increase the monetary base by around 12 percent. And in my hypothesized normal environment, you’d expect the overall price level to rise (with some lag, but that’s not crucial) roughly in proportion to the increase in monetary base. And rising prices would, to a first approximation, raise the deficit in proportion.”

    First of all its impossible to not have T-bond buyers, Primary dealers must make bids and banks can only leave their excess $’s as reserves earning less interest or as securities earning more interest. Those are the only two choices and some bank will always choose more interest than less.

    Or the second bit about how you can increase the base (qe or open market ops) in a ‘normal” interest rate environment, which again is impossible. The minute the number or reserves (base) goes above what the banks need for reserve requirements + clearing + customer withdrawals, the FFR goes to zero. Thats the definition of “excess” reserves = zero % FFR.

    Krugman doesnt understand basic monetary operations.

    1. washunate

      its impossible to not have T-bond buyers

      Excellent, so we can unload the Fed’s balance sheet then?

    2. Rob Parenteau

      Auburn, better yet. You just provide the quote that identifies Paul as an Old Friedmaniac/Pre-Great Depression Fisherian, because look at what he is invoking with his inflation forecast in this hypothetical scenario. That is the old quantity theory of money equation, MV=PQ. Increase money stock outstanding, M, assume V is relatively constant, or at least a stable function of other unnamed at the moment variables as Uncle Milty preferred, so it does not jump around a lot, contrary to most if not all empirical and historical evidence by the way, and then for some reason Paul does not divulge, assume the quantity of output is fixed in the economy, even though you are clearly not operating at full employment or full capacity levels, because why bother with this money base expansion if you already are there, and then, presto, change-o, prices increase directly in proportion to the percentage increase in the money base. That is Milton Friedman. That is Irving Fisher, before he lost his fortune, and his house (yeah, he had to sell his house to Yale and rent it back he was so broke) in the Great Depression, which he never saw coming, but once it took him under, he got real and threw out most of his old theories, many of which have since become chapter and verse of the New Keynesian bible, and started to figure out things like the debt deflation process and the nature of money and credit and so on. It’s good stuff, after 1932 or so, but all the stuff the New Keynesians worship before them, he rejected, and would vomit over if he saw his name associated with it anymore. This is maybe Wicksell. This is maybe Keynes in 1923 with the Tract or possibly even still in 1930 with Treatise, but this is explicitly NOT Keynes by the time he gets to the General Theory, and thereafter. Kregel nails this in the paper linked to my essay. The quote about many slips between the lip and the cup, between money stock increases and price increases. But even more salient, and frankly more damning of Paul, is the footnote on p. 209 of the General Theory which reminds, starkly, “the Quantity Theory is a truism which holds in all circumstances, though without significance.” Why without significance? Because Q, quantity of available products for sale, is only fixed in the ultra short run. And V is essentially the remainder term that falls out of having M, P, and Q in hand. MV=PQ is an ex post accounting identity with no directly observable V, but a V that drops out from observing or estimating M, P, and Q. It is a truism. Paul wrote the intro for the 2006 reissue of the General Theory. He did not get to p. 209 I guess.

  28. Auburn Parks

    Or this moment of genius from 2011:

    “A question (to which I don’t have the full answer): why are the interest rates on Italian and Japanese debt so different? As of right now, 10-year Japanese bonds are yielding 1.09%; 10-year Italian bonds 5.76%.”

    How can you be a trained economist with a Nobel and not know the answer to this question. Japan issues the Yen, Italy is not sovereign over the Euro. I mean this is really embarrassing for the K-man

  29. Bobbo

    The main article and the comments make me laugh. I really appreciated the takedown of the Pompous Krugman, the consummate know it all economist. But 99% of the criticisms also made me laugh. True believers one and all! True believers that growth is the normal state of the economy. True believers that if only we elect the right people with the right enlightened policies that a top-down centrally planned economy is the best solution. True believers that debt — endless mountains of it — is the path to prosperity. I say it’s all nonsense.

    1. Auburn Parks

      Growth is necessary to increase financial standards of living and accomodate population growth. Govt is central planning, and we cant have a functional society without a collective decision making and enforcement apparatus aka Govt, so Im not sure what point you;re making with that bit. Debt is money, its how modern fiat money comes into existence, so are you saying we shouldnt have mountains of money? It is nonsense to you, you obviously dont understand anything about macroeconomics.

      1. MyLessThanPrimeBeef

        Money can’t buy you happiness.

        Less money is not always bad.

        Case in point: if we all agree to take a zero off all the currencies in the world, we will have 90% less money in the world. But nothing would have changed.

      2. Bobbo

        Growth is necessary? You miss my point. I question whether growth is the “normal state of the economy.” You claim it is necessary. But that does not answer the question. I submit that the last century of growth is a historical anomaly, a temporary feature enabled by cheap energy (cheap in the sense that exploration and production could be financed by market driven forces). If you say growth is necessary, and it it really is, then we are all in big trouble. As Ilargi asks: “What do we want to grow into?” What is your target for standards of living? At what point should population growth peak? Do you envision infinite growth? Growth is slowing down everywhere.

        On government: Yes of course we need collective decision making. But we need collective decision-making at the local level, where we can really and truly make collective decisions. Where people know their neighbors. Where there is some accountability for the collective good. Concentrations of power, particularly power over the monetary/financial system, only enable the inevitable looting, skimming, democracy-destroying, rent-seeking practices that we see exacerbating income disparity.

        Debt is money: I have no problem in principle with debt being money, but once you do that and put a centralized authority like the Fed in charge of running the system, when the Fed’s mission is to look out for the banks, especially the biggest banks, then you further enable more looting and skimming, the same looting and skimming that is going to make it impossible to ever see any return to real growth. I am sure you have seen the data. In the 1950s an additional dollar in debt resulted in a lot more growth than it does now. It just doesn’t work anymore. It just doesn’t work. The system is broken. All I can do is laugh. It is time to rethink all of our premises about everything. Until we do that, you should continue to expect all of these trends to get even worse. Then the laughing will turn to crying.

        1. washunate

          It is time to rethink all of our premises about everything.

          I wonder if anyone will actually offer a substantive refutation on this exchange?

          I don’t fully 100% agree with everything you’ve written (shocking, right!), but I find it bizarre that “you don’t understand” is the best response you got.

        2. Calgacus

          Bobbo, if your economy has money, it has centralized authority. That is what any sort of money is – a centralized accounting system for creditary relations used by some group. So somebody has to decide on how & when the basic money accepted by everyone in the group is spent. MMT used in a democracy with a JG proposes the most decentralized centralization possible, having everyone, both collectively & individually decide on the exercise of this centralized authority. MMT & its fellow-travelers & numerous antecedents have rethought the premises already at a much deeper, much more philosophical level than any critic I have ever seen.

          The usual problem is getting the critic to go slow enough, to get him to be as philosophical and (self-)critical as MMT is already. And then to see that the criticisms are usually filled with wild leaps of logic, dubious concepts and presuppositions, and confused ideas of what MMT is saying.

      3. hunkerdown

        And why are we catering to population growth? The biosphere didn’t ask for that 70-year debt.

    2. craazyman

      how can debt ever be a problem.? they say debt is money borrowed from the future. Since the future is infinite, there must be an infinite amount of money there to borrow. And since you have the future to pay it all back, you can pay all of it back since you have forever.

      debt is never the problem. Money’s not the problem either, since there’s always an infinite amount of it there in the future all the time waiting to be borrowed and spent. It’s like time itself. It never runs out. Somebody is always in it somewhere. If they’re in the future at some point, they can borrow from the future too. The future never stops.

      the problem is what happens when people don’t understand the logic of infinity. that’s always a potential problem no matter who borrows or spends the money. Nobody really understands this stuff except a small group of professers and its so hilarious we can’t stop laughing

  30. steelhead23

    While I agree that PK shamelessly touts his own book and tends to denigrate other theories and analyses, I think there is another buggaboo at work – loyalty. I believe, but am not certain, that Ben Bernanke was the chair of Princeton’s economics department when they hired Krugman. What is clear is that Paul worked for Ben for years and likely looked up to him. I believe that in his defense of easy monetary policy as a remedy to recession (very un-Keynesian) he was more defending Bernanke than Irving Fisher.

    I think that among the reasons readership is defending PK is his early support for large-scale fiscal stimulus. He both supported a huge federal stimulus program and was at least lukewarm regarding the debt-free concept of the trillion dollar coin. Few of us read his 1998 paper (Is that the paper for which he got the Nobel?) and thus fail to see the tracks he laid between Keynes and Fisher. Let’s speak frankly. The principals at NC are strongly behind modern monetary theory (MMT). I see this as a post-Keynesian concept in that it explicitly uses fiscal policy to manage the economy and uses taxes to control inflation. In my experience (as a blogger), PK is not a supporter of MMT and I think he thinks its too trivial a concept to spend much time arguing the fine points. Several times I asked him to comment on MMT concepts through his blog and to my knowledge, he never has. This is maddening. Like him or not, the man has the cachet to move the issue if he so chose. Hence, I find it unsurprising that he gets skewered here – he deserves it.

  31. Rob Parenteau

    And Keynes knew we would have a cult deprogramming problem on our hands, as he did back during his day:

    I remember Bonar Law’s mingled rage an perplexity in the face of economists, because they were denying what was obvious. He was deeply troubled for an explanation. One recurs to the analogy between the sway of the classical school of economic theory and that of certain religions. For it is a far greater exercise of the potency of an idea to exorcise the obvious than to introduce into men’s common notions the recondite and the remote.”

  32. Rob Parenteau

    Or try this one on for size from FOMC transcripts I believe:
    Presidents should get the power to declare economic emergencies along the lines to declare war, said former Federal Reserve Chairman Ben Bernanke on Monday.

    It might make sense to give “the president some ability to declare emergencies or take extraordinary actions and not put that all on the Fed,” Bernanke said at a conference. “The constitution gives the president significant flexibility to respond to military situations,” in part because they are chaotic, he noted.

    “I am sure it is not politically possible, but it would be worth thinking about,” the former Fed chairman said.

    – From the MarketWatch article: Presidents Should Be Able to Declare Economic Emergencies: Bernanke

    And remember, this is the Fed Chair begging, or rather whining, that not all the heavy lifting be left up to the Fed during an economic crisis. Because why do you want the President to have emergency powers? Certainly not to tell the Fed what to do – as Fed Chair, you will never, ever bend over for that, because it is all about the central bank independence, you see, and you cannot have any inflation expectations related credibility unless you have that independence, and unless you keep it relatively unchallenged. So what does the Fed Chairman want the President to do with emergency war like powers in an economic crisis? The Fed Chairman wants the President to be able to do FULL EMPLOYMENT FISCAL POLICY, not monetary policy, and not bank supervision either, because those two are clearly Fed turf. And because fiscal policy is precisely what history teaches us is what we need to use to stabilize an economy going through a crisis. Bernanke, in other words, is implicitly acknowledging the operational and the empirical/historical superiority of fiscal policy over monetary policy, at least in situations of extreme economic crisis. And eventually, we know that in those times, “irresponsible” government spending and tax cut is also what it will take to stabilize a fiscal balance too. Because cutting taxes and increasing government spending have this funny way of increasing household and business income flows, and some of that gets spent on other goods and services produced by the private sector, increasing private sector income further, raising tax revenues (without any necessary tax hike – yeah, that is how we “pay for it”) and reducing the need for future fiscal spending through things like unemployment compensation.

    So here we have one of the most honorable members of the New Keynesian Camp, one that has sat at the top of the policy perch, from a camp that has placed a priority on monetary responses to economic issues over fiscal responses, and who’s theory and policy recommendations tend to consistently prioritize the management of inflation expectations and real interest rate related policies over fiscal approaches telling us, in no uncertain terms, wouldn’t it be lovely if it was not all on the Fed’s back to carry the economy during a crisis. Which either means that is something he believes the Fed should not be doing, or at least should not be doing alone, or it may indicate he believes that is something the Fed cannot hope to succeed at doing. Take your pick. Either way, you have a New Keynesian central banker saying something is rotten in the state of Newkeynsia.

    1. Jonf

      So why not really have a full employment policy? Let the government guarantee everyone a job. That way there is at least some hope of eliminating cronyism.

    1. Rob Parenteau

      circuit: Love what you are doing, and you are definitely barking up all the right trees. Let me know when you see a squirrel, and I will come bark along with you. On your point in the linked essay about inflation expectations, let me offer a teachable moment from my own direct experience. I consult to a large German investment management firm, owned and operated by an even larger German insurance company, who for the purposes of this discussion, shall remain nameless, and faceless, and fingerprint-less too, while I am covering my tracks here. Anyway, it was six years after I had first signed my contract with them, so I went back to them with a request to raise my consulting fee by the cumulative increase in the CPI inflation rate in the SMSA where I live, which was some 22% or something. I figured my real output to them had not fallen in the last six years, and so I deserved to be paid the same real compensation that my services were worth 6 years prior when I first signed the contract. Reasonable, right? Nein. Nein. Nein. Moral of the story: yes, inflation expectations matter, but if you do not have the bargaining power, you may not be able to enforce your expectations on other agents, and well, then your expectations are dashed, and nothing else has really changed. At all. Do expectations matter then? Yes, if you have the bargaining power to impose them on others, but otherwise, not so much. I am still doing the same amount of work, just getting paid three quarter of my original renumeration, in real consumable terms that is. And if anything, that makes me consider wanting to find more ways to shirk, by, oh, say, 22%, on my real output offered to them, by wasting my day blogging to all of you on Naked Capitalism…for free. But then if I shirk by 22%, the probability of job loss goes up, and so this expectations thingy is a little more tricky in practice than the New Keynesian high priests might lead you to believe. Ability to impose expectations is as much if not more important than the expectation itself. But you might have a hard time getting them to talk about that, because then they have to start talking about things like power, and economists don’t do power. Thats the political science department, down the hall…and oh, by the way, unlike economics, that is not truly a science, is it.

      1. Clive

        Interestingly (and related) too is that in Japan Prime Minister Abe is asking business to please, please pretty please, pay your workers a bit more. To which the reply is generally いいえ いいえ いいえ (actually, it’s been more of a typically Japanese “we will review the matter and give it our most careful attention; which amounts to the same thing — although to be fair a couple of the bigger, more politically connected conglomerates made some token gestures but SMEs really didn’t do anything).

        So it is indeed all about respective influence and bargaining power between the two parties (employees and employers — but we might want to include a third party in the form of government as they do actually hold the largest amount of sway, if only they’d use it).

        Britain’s David Cameron is making the same sort of noises (but is even more ineffectual, not least because he manages to amazing feat of making even Abe look not quite so bad) — with the same results: Corporations blowing him a raspberry and/or trying to find the next tax dodge and SMEs being too concerned about not heading to the bankruptcy court due to feeble demand.

        I guess that’s what happens when you remove the last vestiges of labour bargaining power…

        1. financial matters

          Yes, that’s a big step and seems to require political fiscal power. I think this is one of the key components of a good job guarantee program which would be to set a minimum standard here.

          Polanyi: “To take labor out of the market means a transformation as radical as was the establishment of a competitive labor market. but the basic wage itself, are determined outside the market.’””

  33. mpr

    This post is an embarrassing collection of snark, straw manning, and shoddy logic.

    I won’t rehash Krugman’s support of fiscal stimulus which has been covered in other comments. Some of the quotes Yves and RP are using correctly reflect that he *used* to think that the balanced budget constraint was more binding, but I’ve seen and read him as saying that this is one of the few things which he changed about his model at some point after the 2009 crisis. Maybe that’s why he says 80%. His exchanges with the MMT crowd were probably one factor in this.

    As for the chart, its completely spurious to claim that the lack of correlation is evidence that monetary policy is not effective at influencing GDP. That would be true if the CB set monetary policy by randomly announcing a rate every three years. In fact interest rates are set in *reaction* to prevailing economic conditions, which might have many other causes. To continue the steering wheel analogy, this is like saying that my steering wheel being turned to the right is not correlated with my car being on the right side of the road, and therefore my steering wheel doesn’t work. In fact its likely to be anti-correlated, because I’m using it to steer back to the center.

    It would have been more interesting to look at *changes* to GDP, and see if that was correlated to interest rates with a say a six month delay. That might not have worked either, because there is so much noise, but at least it would have been logically coherent.

  34. Rob Parenteau

    mpr, your are of course 100% correct. This has been a snarkfest. With enough straw manning to make the Scarecrow from the Wizard of Oz feel right at home (though I did try to directly quote Paul, again and again, with page references even, from a document that he really, really, really still wants you to read, I gather, as in “Seriously, skim that piece”). As for the shoddy logic, well we are dealing in economics, aren’t we, and the history of economic thought, if you really take the time to look at it, as some of us have (and you should too, though I hear they have stopped teaching it, because there is not enough differential calculus involved), reveals we basically keep having the same stupid debates over and over again, with some variations on a theme (like in a Brahms concerto, though played by a 7 year old non-virtuoso with a Tiger Mom from Shanghai) from time to time, and some actual progress being made at other times, which are then typically followed up by distinctly retrograde periods, periods where the forces of fear and ignorance seem to spread like Ebola through the profession. Yes, mpr, to be logically consistent, we should be looking at a graph of changes in real policy rates versus real GDP growth…but that is not how the central bankers really talk about it, is it? And to be honest, as I reflected to Peter Dorman above, I am much more interested in the ongoing results we are getting from looking at real time experiments in using real interest rate reductions to get us out of whatever quagmire the mature economies have sunk into, as in up to their nostrils in pig feces, in recent years. And frankly, I am not very impressed with the results in Japan, or the eurozone, though US and maybe UK look a little better on the surface, perhaps because they used fiscal policy a little bit more as well – I will let the armies of econometricians sort that out, for the next 40 years or so.

    But here is the rub. I met Paul Krugman back in 2009 or so, when we were both speaking at the Levy Economics Institute Annual Minsky conference, which I highly recommend, because it is a good mix of policy people and heterodox thinkers and even a few stray dogs from the financial sector like me. I have nothing personal at all against Paul, though he seemed a little high strung and insecure when I introduced myself, and I had to remind myself that comes with the role he is playing, and the region he abides in, and anyway, I believe Robin was trying to get him to go to yoga classes back then, so who knows, maybe he is mellowing in his old age.

    When I met Paul in person there, I had one goal in mind, and it was not to get his autograph on a copy of his book Depression Economics. Rather, I humbly implored him to consider pushing forward with some work he had begun to do that was moving in a direction I thought was really very promising, and would be beneficial to him, and to all the people who listen to him, which may include some Very Serious People Sitting in Positions of Policy Making Power.

    Here is the essay I handed him. It was published on a different blog than NC, because I felt it was too “wonky” for you guys.

    So lest you conclude I am just another hack trying to do a hack job on Krugman, please read the piece I wrote 6 years ago. I have no personal vendetta with this guy at all. I think, like most of us, his heart is in the right place and he is just trying to do the best he can given the constraints he perceives he faces. But he was on to something big in that diagram he published in the July 15, 2009 NYT – a diagram that I even affectionately dubbed Krugman’s Cross, rather than Parenteau’s Penance, or some such self-glorifying abomination.

    Unfortunately, he didn’t take the bait – even though the bait was placed on his very own hook! And while several of us heterodox economist riff raft types like Eric Tymoigne and Scott Fullwiler and others did take Krugman’s Cross up and tried to run with (go to New Economic Perspectives website, type in sector financial balance, and you will see where Scott ran with it), it really didn’t matter what we did with it, because who the hell listens to heterodox economists, most of whom have been banished to the whatever is the equivalent of Siberia in US academia.

    Now that has not stopped people like Scott from trying to engage with Paul, and yes mpr, as you suggest, and as Scott reports in this piece from 2014 (, some real progress has occasionally been made…with some inevitable back sliding, a little bit of back stabbing, and so on. But it can, and has been done. So maybe it can be done again, who knows?

    So, dear Naked Capitalism readers, I am not out to get Paul. But I am out to get Paul to step up his game. And I did it in admittedly obnoxious and snarky fashion this time, because that ain’t how I did it last time…and that went nowhere. Nada. And I harbor this admittedly quaint illusion that maybe if Paul had actually gone somewhere with Krugman’s Cross, a whole lot of unnecessary human suffering could have been avoided by twiddling around with inflation expectations and real interest rates – all of which we should be willing to agree to agree, or agree not to disagree if you prefer, is not working out so well, regardless of how you decide to interpret Jan Hatzius’ charts (and by the way, Jan also did some very good work with Krugman’s Cross, and I hope he revisits it one day too, because he really seems to get a lot of this macro financial balance stuff).

    The snarkfest above was snarky because maybe it takes a good snark to get Paul to want to bite sarcastically right back at all this stuff. Maybe – though I will not be holding my breath. And the snarkfest above really had not so much to do with who is Keynesier than thou. Truth in advertising is long gone, and we live in a marketing driven culture – I get it. But if ideas matter to possible outcomes in the world we inhabit, lets drop the labels and analyze them on their own merit, paying close attention to what actually goes on when we pursue the kinds of live policy experiments that we wittingly or unwittingly engage in. Because you know, not just the quality of people’s lives are at stake, but so too are their very lives themselves. Check the suicide rates in Spain, Italy, and Greece if you think this was all just some pointy headed circle jerk. This sh*t matters. Seriously, skim that piece. Best to you all, and I hope this was worth at least a few chuckles – snark, snark.

    1. Lambert Strether

      Krugman is a great blogger. A corollary is that Krugman knows how to throw snark, and I assume he can put on his big boy pants and take it, in good spirit.

      And if Rob got a little “shrill,” then so much the better, say I.

  35. DCR

    Negative real rates support bubble economy GDP increments, such as housing no one lives in or trading department activity front-running central banks. While eventually GDP contracts as a critical mass awakens to the reality of the emperor without clothes, until that moment it appears negative real rates are positively correlated with “real” GDP. But they are not positively correlated with sustainable, durable, real GDP. Believing you can purchase something where the only utility to you is the likelihood you can sell it to a greater fool is not real, durable economic activity.

    All loan agreements imply being paid back in real purchasing power greater than the real purchasing power lent. When people finally realize they will definitely not be paid back in real terms, lending ceases, and the current financial system collapses. Who in their right mind purposefully lends current purchasing power they don’t expect to get back? Anyone who thinks they are doing so is mistaken … they are not “lending”, they are making a “charitable gift” to the supposed borrower.

    One would have thought that after we came so close to the collapse in 2008 somebody might have learned something. But like the monetary crack addicts we have become, we continue to up the dose of bad paper claims on limited real wealth creation.

    1. Rob Parenteau

      DCR: Sympathetic to your linking low real interest rates and asset bubble blowing. Just one nuance. Loan contracts are in money terms, and money, at least as we know it these days, is not convertible on demand into a fixed number of units of real goods and services. Yes, we enter into these monetary contracts with some idea about what we think the principal might just buy when we get it back at maturity…but we never really know, do we, until we actually get to that day. Now if you look into the history of economic thought, which takes some initiative, because the economics profession has deemed this is something no longer worth teaching, you will find there once was this concept called productive debt (Google it, I guess). Which meant what ever you were borrowing the money for was expected to produce future income streams that would both cover the interest and the principal payments, and maybe even leave a little something for you at the end. That is, lending was supposed to be tied to putting income producing assets in place, or maybe holding inventories until sale. Not for buying a car that depreciates the minute you drive it off the lot. Not for maintaining the middle class lifestyle you became accustomed to but can no longer afford. It might make some damn good sense to revisit that idea, but first you will have to kill all the bank/gangsters and half of Wall Street because they want you to be addicted to debt in every which way they can cook up. So yeah, I think you are largely right, and for the life of me, I do not understand why this is not obvious to everyone, except some people are well paid to make a living off of other people’s financial ignorance – which, by the way, may not be their fault, because we really do not teach people basic financial literacy in our education system, do we? Just like every one needs to be able to read and do at least algebra, every body needs to be able to read an income statement, a cash flow statement and a balance sheet, preferably by the end of senior year in high school. But the scam artists and the control fraudsters in the corner office don’t want you to know that stuff. At all.Ever. I had to get a CFA to learn it, and I went to a really good public high school and an elite private college back east, and never saw a financial statement, never mind learned how to read and interpret and create one. Should be basic literacy, especially these days.

      1. DCR

        I agree with most of what you say. The one general exception is that for people who actually work and produce goods and services, a car is more of a capital asset enabling wealth creation rather than a form of consumption, despite the fact that the depreciation rate of the auto may be faster than certain other capital goods.

        Other than that, the important point I want to emphasize is that a huge fraction of current borrowing is not deployed in either capital assets, or in real knowledge enhancement to increase the productivity of labor assets (i.e. people). The borrowing supports only consumption beyond the production of the borrower, or rank speculation in asset prices, primarily financial “assets”, with zero incremental capacity to support the incremental debt in either case. This is why the Federal Reserve is panicked to perpetually keep real interest rates at negative levels, penalizing saving and real investment. However, the more they follow this path, the further we get from equilibrium, and the less real savers and capital providers will invest in real capital formation. This is the road to economic ruin.

  36. Ancaeus

    “just ask Reinhart and Rogoff”

    I thought that their paper had been completely debunked. When their errors and data cherry-picking were fixed, the claimed effect (critical threshold in the debt to gdp ratio) disappeared.

  37. Jordan from Croatia

    What Krugman wants the most is to lower real interest rates so he is clamoring for inflation to go up to 4% or to be more precise to show the signs of wage increase. What he is missing to connect those two is to say “wage push inflation” not any inflation that can be created by QE that will raise nominal GDP but not give any benefit to people. So many new-keynesians are starting to push to implement NGDP targeting in monetary policy. What are they missing?

    They are missing the part where Robert point out that corporations have turned to savings instead of being spenders/ investors. But how to be profitable but not have positive net profits?
    The trick is in negative real interest rates FOR borrowers not only positive RIR for investors as new-keynesians think of real interest rate and at the same time.
    Here comes Steve Keen with his radical aproach that credit is the source of profit for corporations and it becomes calculated in the middle of the cycle of production so that it becomes the part of the profit.
    This is the only way that RIR can be positive for lenders and negative for borrowers at the same time.
    So, inflation is important part of having this paradox possible.
    But such inflation can not come easy and be sustainable as QE is trying to achieve, so QE is only affecting nominal growth and wealthy that will not invest in the real economy due to lack of investable opportunity which is due to lack of purchase power of population.

    Another problem that affects purchase power is slow down in credit growth whare now old credits become unpayable due to borrowers having positive RIR which destroys purchasing power. This is the cause of balance sheet problems. The Only solution is to grow wages, but how when there is so much slack to make an upward preassure on wages? There is minimal wage that can be affected by political means. Minimal wage has to grow to provide negative RIR to borrowers.

    Krugman skips all this connection to his occasionaly asking for rise in minimal wage that will start to solve this problem of secular stagnation. That is why Robert is critiquing Krugman. Krugman skips explaining why while Robert and Yves are only hinting at it and not clearly as i give because this only adds confussion to already contested topic. I hope some will be able to grasp it.

    1. Rob Parenteau

      Jordan: I want to chew on some of your ideas more, but a couple of thoughts. On your first point, look at what happened in Abe’s Japan with this New Keynesian approach. Yes the BoJ got inflation up by trashing the currency. And it looks like the trade balance is finally improving, but with a very long lag. But consumption is not driving growth, because wage inflation did not keep up with price inflation, especially import price related inflation, in essential products like energy. See, New Keynesians do not like to talk about profits and profitability. Those are dirty words. Yet in the old days, economists still realized the profits, especially profit expectations, were essential to growth in any capital system, because they are what incentivized production and intelligent risk taking, and because profits helped finance the capital spending that would drive growth. And this is all in Keynes by the way, even if it is difficult to find in New Keynesian models. So the inflation expectation that matters is really a relative price or markup related one, the one that influence profit margins of businesses. And those businesses have to invest if employment is going to increase, if wages are going to increase, and if households are going to have the income streams that are large enough to validate (i.e afford) the higher prices businesses are expecting to achieve. Otherwise you get just what Abe got. A temporary blip in CPI from an import price surge, a further decay in wage growth, stagnation or low growth at best, and the whole thing is a flop and a waste of valuable time that you needed to be getting on a sustained recovery path. So none of this needs to be kept hidden, and I am quite explicit about it in some of my other scribblings. Profits, power, class interests – these all matter, but you will rarely find them mentioned in mainstream macro. I have some real problems with Keen’s work on credit, though I love the fact he is trying to do modeling of Minsky dynamics and other heterodox economic ideas, and I wish him luck as he tries to build a bastion of heterodox teachers and students in the UK.

    1. Rob Parenteau

      circuit: Always glad to hear that something I have done or written is found to be inspiring to someone else, as usually, it is more like the message in a bottle thing, and the time I take to cook this stuff up seems wasted and it all gets a little futile looking. Vickrey understood some of this stuff (his fundamental fallacies essay is crucial, though slightly flawed). On your right way to budget the balance, piece, again, very clear that you get this stuff. I would suggest looking into legislation South Korea passed in the last year with tax and other incentives to force companies to either pay out or reinvest in productive capital goods their retained earnings and free cash flow. Initial indications are it is working well, though mostly going to dividend payouts so far if I understand correctly. It can be done, if there is the political will to do it. I am also linking a recent piece by Jan Kregel that uses the financial balance map I came up with in 2009/10, applying it to the eurozone predicament. I highly recommend using some version of this map to make the financial balance approach even more clear to yourself and your readers. Happy to answer any questions on it at Keep up the good work!

  38. Steven Greenberg

    Let me see if I can bring this discussion back to reality by quoting Greenberg’s Law of Reverence

    Principles are not great because a revered person spoke of them. A person is revered because he or she spoke of great principles.

    The argument about what Keynes did or didn’t say is not useful in proving or disproving the correctness of any economic principle. The economic principle is either correct (or applicable) based on reality. To the extent that Keynes is revered, it is because the principles he espoused were correct (applicable). Pretending or interpreting an idea as something that Keynes said is not proof of that idea.

    The upshot of this understanding of Greenberg’s law is that it is a blind alley to pore through the writings or sayings of Keynes to find out if he did or did not say something, when what we should really be after is whether or not an economic idea is both correct and applicable to the current situation. This talk about economic experts is devolving into an almost Biblical discussion of whether or not you can find something in the Bible to support your argument.

    The graph of economic growth versus real interest rates should not be surprising. The economy (society) is so full of competing forces that it is foolish to think that you can find a single measure that will always correlate with (much less be the cause of) one single other measure.

    Besides the complexity argument, you have the idea of reflexivity (credit to George Soros, not reverence for him). The actors in this complex system read about what is said about how the system works, and they make judgments on how others will behave given this knowledge. No physical system of inanimate objects bases its behavior on what it thinks the other objects know. So thinking you can ever make a model of the system the way physicists do in purely inanimate systems is going after a fool’s errand.

    1. Jordan from Croatia

      Even tough you are corrrect in your comment, i want to add something.
      Keyness was covering both sides of an argument in his writings, the trick is to find exactly which meaning should be taken and what conditions he describes that apply, economy is sometimes trending this way and other times the other way, so exactly which aplications should be considered is first to look and see what type of economy is at the present and then what applys in such environment.

      About reflexivity from Soros. It is the description of feedback loop in system dynamics. And Keyness was also using system dynamics description in his writings. Also Karl Marx. Full description of system dynamics is writen in 1950′ and it applys in all sciences but most economists try to avoid it. Only MMT fully implements system dynamic thinking with stock/ flow, internal feedback loop and time delays.
      I like to call it 4D because it is 3 dimensional plus time, hence 4D thinking/ looking/ describing.

  39. Rob Parenteau

    Steven, I completely agree with you, as you should know from what was my closing comment on March 4 at 11:10 (see above). Economics is not for Talmudic scholarship. Question the logic of the ideas, and whether they actually work in practice. Pay less attention to who said them. And watch what they do, more than what they say, too. Reflexivity is a very big deal and every economist doing macro should be trained in thinking that way before they learn any econometrics. This is not chemistry. The things to be found on the periodic table have fairly well defined and stable characteristics. These elements have no conscious will as far as we can tell (though quantum physics gets all weird pretty fast). There are catalytic reactions in macro which we will probably never quite decipher. So if you are going to do macro, you better know how to deal with complex adaptive nonlinear system dynamics that, by the way, are always evolving, sometimes with very punctuated equilibria, and very dynamic disequilibria as well. Until economists like Paul and the policy makers they teach and advise get this, the profession is going to keep going retrograde. Keynes did think this way. Look at the beauty contest allegory in Ch. 12 of the GT. Read it not because he wrote it, but to see if it makes sense. Soros basically is elaborating on that theme with his reflexivity stuff. And Keynes put this reflexivity at the core of his macro thinking. He continually pointed out the fallacy of composition that economist fall into by reasoning from the point of view of one person maximizing utility, and then aggregating that up and calling it macro, as if the choices of one person never really effected the opportunities and choices available to others. This is insane. It needs to change. Or the profession has guaranteed its own increasing irrelevancy to the world we actually inhabit.

  40. P Fitzsimon

    My take on Krugman is persistent advocacy for the big I, inflation, when there is insufficient demand in the economy. Just threaten consumers with the big I and they will respond by buying everything under the sun before prices go up. That includes buying money (borrowing) before its price rises with interest rates.

    1. Rob Parenteau

      P Fitzsimon: Right about Krugman’s solution is “managed inflation” aimed at increasing consumer spending but also at lowering real interest rate. Inflation itself does not cause growth in capitalist economies, as we should have learned in the ’70s stagflation episode, when Paul was starting out in the business. But he forgot all that, probably because he loves the theory stuff too much. Capitalist economies grow when producers and entrepreneurs and financiers expect profits to grow. Profits support growth if they are taken as a signal to hire more people and to reinvest more of those profits in capital equipment that increases productivity, production capacity, and new products. Inflation does not guarantee profits – again see the disco era. Profits are about relative prices and relative bargaining power, not CPI rate of inflation per se. And now, unfortunately, we have let corporate governance get so skewed that profits do not lead to reinvestment so much anymore. Just redistribution of income. In one direction. Upward. How’s that working out so far? Not so good.

  41. BadBentham

    “One man`s pain is another man`s gain”.

    Well, I must confess I am far too simple-minded to come up with a complex solution here. However, my basic stance of what I understood from Marx, apart from Mainstream or Keynesian economics, is that he sees the history of economy as the history of externalizing costs. ( As a short side-note here: Capitalist Thatcher`s statement that “Socialists live from other people`s money” … – At least they are in good company,here ) The “classic” basic models reach from Master and Slave to Capitalist and Laborer, where one side in general tries to impose all its costs to the other one, via means of “exploitation” (seeing the stronger side benefitting from the precarious situation of the weaker part), leading to and defining Class Struggle.

    However, as an evolving system, capitalism invents ever new externalizations. Yves mentioned that inside a closed national economy , consisting of the state, enterprises, and private households, the total bilance sum is zero. While the households try to improve their savings , capitalist enterprises naturally want to realize profits, after all it is the name of the game, in the long run, as well.

    It is at this point where classically Keynes comes up, who realizes that the state (rather similar as in Stamocap, however with other implications) has the fine role in the game of amassing deficits (if you want, an “internal” externalization of costs, on the time axis, almost guaranteed to back-fire in the future ) , to even out the bilance, for the dubious benefit of the system- actually to no avail.

    Without the state, -the strange “dream” of capitalist liberalism -, or in debt-burdened economies like Japan or Greece, Marx`s blunt analysis seems, as far as factual empirical evidence goes, to hold true that the capitalistic system falls from a certain point on into an endless state of delirious deflation, as there are simply no more available means … of externalizing costs: Stand-still, and crumble.

    However, economic common sense actually suggests that amassing debt, from the state-side, to infinity, as the common heroic story of economic growth would demand, is actually pretty unsustainable, leading in the long run to break-down (welcome, Hellas!) ; – and even as long as it works a means to transfer massive amounts of wealth from the vast majority of have-nots , who have to shoulder the stuff, to the creditors of the state. (What again is just another beautiful example of socializing costs, and privatizing profits, – of course.)

    However, clearly the story, as is known, of Big Business and thus big cost externalization still does not end here, as naturally the “capitalist centres” try to use their economic power as good as they can to externalize their intrinsic costs, needed for the need of ever-expanding profit, elsewhere, – to stay alive themselves. (While attempting of not falling into this devious debt trap, rather obviously) -“Globalization”, ya know. (And the basic idea of imperialism as well . “Neo-Liberalism” and “Neo-Conservatism” are here imho only two sides of the same coin, really: Expanding externalization to prevail. )

    The four major economies of the planet all have “mastered” this “art”; – although Japan already clearly seems to be on the declining side,only living from its future in the present, here. “The Global Minotaur” -the USA- by Varoufakis is even just as title speaking for itself. The reserve currency petro-dollar in itself is externalizing about trillions of costs for the US economy (more exactly: their owners, that is) yearly, imposing it with a funny smile put on , and full of true exceptionalism, onto the rest of the world. While the German business model of exportism (possible through classical race-to the-bottom salary dumpings inside the suit of an undervalued currency) strongly builds up on the supremacy of the US, although it goes, as factual economic adaption, into nearly the opposite direction. (While the US extracts “value” by printing money for goods, for a profit – e.g. through financial “speculation”, mercantile Germany rather classically extracts value by selling goods for money, leading logically to huge amounts of debt in foreign economies. – Maybe, only possible due to the, e.g. monetary, dominance of the US)

    – In my really narrow-minded totally over-simplified Marxist narrative, the whole story of cost-externalization (be it through labor exploitation, “Keynesian” state debts, or globalization) , no matter which economic or political system (-although that strange “expansive” and dynamic “zero-sum-game”, aka capitalist system, is certainly the highest -) at some stage, after all systemic “progress” and no matter how “dynamic” the system, absolutely back-fires in reality. No matter how “successful” it was before. (Even more like: The more success, the more back-firing potencial later on) While it certainly can be easier seen in processes in the natural environment, e.g. by the aridisation of soil in agriculture, it still in my honest opinion holds true in the very complex sphere of politic economy.

    -While clearly ideas that want to end cost-externalization as the sheer base of the global economic system are to be condemned as being totally-evil “socialist”. – Or, even worse: A then-democratic “communist” society that freely decides how the existing ressources shall be appropriated in a meaningful way, and what the fundaments of the economy of that given society shall actually be.

    – Finally, I want to paraphrase Keynes ironically, who might have a clear understanding of what his theory in the face of the capitalist practice of cost-externalization actually translates to:

    “In the long run, we are all debt.”

  42. Knute Rife

    Let’s face it, any theory that in any way calls itself “Keynesian” (New, Old, Whatever) and includes Greg Mankiw is either a bald-faced lie or a freakin’ joke.

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