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"I had not realized Nobel Laureate Paul Krugman is this stupid"

71 Comments -

1 – 71 of 71
Anonymous Anonymous said...

Krugmans problem, beside his obvious arrogant, is that he is sharper than he is deep.

Unlike true intellectuals he argues like a politician, trying his best to win argument at any cost, usually by using strawmen. For impressive liberal undergraduates this works, his case seems very strong, and his opponents appear as morons. But he is gaining this by dumbing himself down as well, since he always ignores the strongest part of the argument he is fighting rather than try to face it.

So when people who actually know the issue and can’t be fooled by withholding the full argument read Krugman they often become angry at his combination of, quoting Steve, Smug stupidity.

In this particular case, I find it extra amusing that he is attacking Austrians for lacking stringency. Well, they do lack it, but this coming from an ultra-Keynesian?!? They don’t have any coherent model of the business cycle either. The only guys that have coherent models are the neoclassical, and their models are obviously wrong (newkensians have models too, but they are not very good, they get their results by cheating, such as assuming all firms are monopolies, rather than tying actual patterns we observe to their results).

Keynes has not explain any better than the Austrians why say’s law doesn’t always hold.

Obviously to anyone other than Krugman a theory doesn’t have to be complete to be right in some circumstances. I have gained a lot of respect for Austrian theory these last few months. It also seems these bubbles are extra likely when cheap money is combined with big innovations (IT, mortgage backed securities).

A simple test of wealth effect vs. Krugman will be the next stimulus package, which I predict people will stuff in the mattress. Regarding the last one Feldstein writes “Recent government statistics show that only between 10% and 20% of the rebate dollars were spent. The rebates added nearly $80 billion to the permanent national debt but less than $20 billion to consumer spending.”


PS.

Krugman didn’t really deserve the Noble prize (obviously he was a decent economists, but there are hundreds of people at his level). He got it because of self-promotion, and as a thanks from his palls in the committee for his political activism.

One effect, which I don’t mind, is that the decision de-based the economics prize as unscientific.

10/29/08, 2:30 AM

Anonymous tommy said...

Yes, Krugman is a bit of a dummy at times and a dishonest partisan at all times. He is a good example of the ideologue who uses his smarts to convince others of the correctness of his gut political instincts. The truth be damned.

Speaking of the Great Depression, an interesting study by two UCLA economists recently estimated that FDR's anti-competitive policies doubled the length of the Great Depression.

10/29/08, 3:29 AM

Anonymous Anonymous said...

As I've stated before the *only* 'fact' in economics actually worth something is that the price of any good or service is what the potential purchase is willing to pay for it.

Everything else is bullshit.

10/29/08, 4:19 AM

Anonymous Anonymous said...

The real estate bubble sure paid off for those who timed it right.

Bubbles really are like mini-lotteries for those who time them right. Invest on the way up, short sell on the way down. I bet Soros is laughing like a hyena somewhere.

Example: A pal of mine bought a house in the Hamptons in 1996 for 250K. It was supposedly appraised at 500K in 2000. It DOUBLED in VALUE in FOUR years. He got divorced and didn't get the benefit of cashing out of it at that time, but if he could have he would have pocketed a cool 280K or so with the equity he already had in it, and bought a 3,000 sq. foot economy-sized McMansion in Atlanta, Nashville, or Cincinnatti ex-urbs for cash.

My mortgage-officer-pal M, tells me that although he is doing alright (strong real estate market in Nashville ex-urbs due to white flight--sometimes laughably from other cities LOL), several real-estate agents are lucky to have one sale a month in these parts.


Of course, we all know what the real estate agents answer to this is: we need to just legalize as many new Americans as are willing to come here-----as long as they personally dont have to live around them. Boy are we going to pay for this "faux boom" we just had.


Think about what the past ten years or so have really been folks. We allow in tons of illegals to cheaply build excessive houses so builders and developers make a mint in profit margins, extend credit to our underclass and those new illegals and "create money" by lending it to them to buy some of the cheaper homes that they build and to buy some of the former working class-white homes of whites who have been "churned" to move to the ex-urbs to live amongst their own kind. Well it seems that after the ARM's went up, many of the underclass and "new" Americans (legal or not) can't afford their notes and now the package-mortgage-investments aren't returning a dividend that keeps place with inflation. We are printing more money to re-invigorate the economy, but it just adds to that inflation which means the mortgage-backed securities REALLY need to pay off.........so we bilk the taxpayer for 700 billion to make sure the "investor class" who politically hankered for the current bubble by backing all the new housing and new immigration, doesn't lose ITS PRECIOUS money.

Joe the average taxpayer, will be paying for all of this for a decade. When will a candidate emerge who gives a tinker's damn about Joe the average taxpayer, who is squeezed by illegals, sees his life chances dwindled by affirmitive action for everyone EXCEPT him, sees his home value dwindle because of the decline in his neighborhood, sees his friend's jobs outsourced, and is bailing out Wall Street's investor class with his taxes over the next two decades to save THEIR PRECIOUS jobs (but not his own). By the way, Joe's son's fights their wars--In Iraq, Afgahnistan, possibly Syria or Iran, all for William Kristol.


I think Thomas Jefferson said, "I tremble at the thought that there might be a just God", or something to that effect. Me too. M

10/29/08, 4:43 AM

Anonymous Henry Canaday said...

Actually, though I hate to acknowledge it, I think Krugman is right on this, which he usually is on the subjects he has spent a lifetime studying, as opposed to the topics to which he devotes ten minutes a week.

There was no necessity for the emergency easy money of 2001-2002 to turn into the housing disaster of 2007-08, if other features of our financial system had remained honest and functional.

I just got back from a conference in Vegas last week. Yeah, there is a skeleton and a few vacant lots on the strip, and housing prices are diving, but the town still looked booming and busy, and Vegas has to have the most flexible workers in the world, outside maybe Texas oil field workers. These people never expected a lifetime, secure job in one place. They can pack up and move out, and many are looking forward to getting out of Vegas, which becomes a little tiresome after a while anyway.

10/29/08, 4:45 AM

Anonymous rightsaidfred said...

Awesome takedown, Steve.

After arguing with leftists on the web, I don't think it is so much that they are stupid, but they get wedded to some narrow world view and spend their energy interpreting all things to fit that view.

10/29/08, 4:54 AM

Anonymous Anonymous said...

A death happens when, for whatever reason, a the heart stops beating. Yet, for all its simplicity, the insight that a death is about a heart no longer beating makes nonsense of the whole disease / trauma theory. For if the problem is that the heart isn't beating, why not simply increase the supply of heartbeats? You may tell me that it's not that simple, that the patient has died of bubonic plague or from falling off a cliff. Well, fine. Junk the bad heart and write off the bad organs. Why should this require that perfectly good productive capacity be left idle?


Steve,

Are you trying to resuscitate the broken window fallacy? Or am I missing something here? That fallacy, for all its imperfections (it sometimes doesn't account for the chance to apply new technology to old circumstances) isn't taken serious by economists anymore. I still think it is a fount of wisdom.

AO

10/29/08, 5:00 AM

Anonymous Anonymous said...

Steve,

Great post. I've made up my mind that if I ever return to school for a PhD, this fusion of behavioral genetics and economics will be an easy field for generating new but old and obvious insights. After all, it's fairly obvious that economic theories can be improved if we analyze human capital and the mobility of labor with the insights garnered from evolutionary theory. It's just sad that no one has the temerity to do so.

AO

10/29/08, 5:00 AM

Anonymous jimbo said...

Ok, Steve - so the casinos in Las Vegas are useless. Why does that require auto plants in Detroit and Tokyo to be idle?

You should read your piece over again, keeping in mind that financial wealth and real wealth are not, in fact, the same thing, and see if you can spot the fallacies in your argument.

Frankly, I'm disappointed. You usually have a coherent and interesting alternative viewpoint. This is just drivel of the sort you can read on any rightwing nutjob's site.

10/29/08, 5:10 AM

Anonymous Anonymous said...

The thing to keep in mind here is that economics is a sham science. It's a bunch of political opinions backed up, purely for effect, with some math-like nonsense. I've always thought that the existance of a Nobel Prize in economics was a disgrace. In every real sceintific field there is broad consensus about large chunks of knowledge pertaining to that field. Sure, physicists can argue about the unified field theory, etc., but such things represent the margins of what is known about physics. There are oodles of volumes of stuff about which physicicts don't argue anymore, stuff that's been proven beyond a reasonable doubt to be true. Nothing like that is possible in a sham science like economics. You can have a Marxist and a Libertarian economist hold opposite views about everything that economics is supposed to be about, including the basics.

A good way to tell a science from a pseudo-science is to see if the field in question can provide useful predictions that cannot be made by people ignorant of that field. If you understand a process thoroughly, you should have a good idea of where that process is heading, right? Economists' predictions of the future direction of economies are the stuff of comedy. They never beat the proverbial monkey throwing nuts at a newspaper, and yet they rarely decline an opportunity to opine about the future anyway.

Steve, if you want to have more fun at Krugman's expense, dig up some specific predictions of his. He's writing a column, so he's bound to have made tons of them by now.

10/29/08, 5:11 AM

Blogger neil craig said...

He says "As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income"

Not on any planet where people save or borrow. As you point out there has been rather to much of the latter. Fear of inflation has seriously eroded the former.

10/29/08, 5:30 AM

Blogger curt said...

I find it amazing that they razed the STARDUST. It was one of the few old time Vegas places left. You know, the ones with sentimental value and diehard loyalists. A brand name that was recognizable. My guess also, a building that was paid off! People just get caught up in the bubble and suspend all logical thought. Vegas was overhyped anyway. America has to get back to creating,engineering, and manufacturing. It is what built us up as a superpower and is the foundation for a powerful country, not gaming(I like that little euphemistic work change from gambling). I have seen what casinos do to communities and it is not pretty. Even Lefty Rosenthal, the real person behind the Deniro character in CASINO who just passed away on Oct. 13th,has said in an articles that Casinos just suck money out of the economy. Here is the long link the frontline article, http://pbs.gen.in/wgbh/pages/frontline/shows/gamble/interviews/lefty.html

10/29/08, 6:00 AM

Anonymous dearieme said...

I have a request for all you American bloggers who write about your economists. It would help this forgetful foreigner if, after you name the rogue, you put in brackets some salient characteristic that would help me distinguish him - as in "worked for Enron", or "looted Russia", or "too odious even for Harvard". Just a suggestion. P.S there would be no need to do it when you come to disparage Broad deRound - his name is truly memorable.

10/29/08, 6:04 AM

Anonymous george said...

To paraphrase one of the clowns involved in perpetuating the entire government illusion: They create their own reality.

10/29/08, 6:10 AM

Anonymous dearieme said...

Steve, it is your bounden duty as a sceptic (or, if you must, skeptic) to point out that the Economics prize is a pseudo-Nobel, invented by the likes of Krugman, for the likes of Krugman.

10/29/08, 6:42 AM

Anonymous Mr. Anon said...

"Look, the hulk of the Echelon on the Strip isn't perfectly good productive capacity. It is, at present, perfectly no good productive capacity."

Moreover, if the it had been built, and was open for business right now, and was turning a profit, it would STILL not be productive capacity.

Gambling is an innocuous pastime, when it consists of a friendly poker game, an office basketball pool, or a day at the races. When it becomes the basis for whole regions, and sectors of the economy, it is a pernicious vice. There is a reason that gambling was traditionally considered a marginal activity - because it necessarily had to stay at the margins of society.

10/29/08, 7:11 AM

Blogger Matt Parrott said...

The problem with this economy is that guys who think like Krugman are winning Nobel Prizes and setting economic policy while guys who think like you are reviewing films. WTF?

What we need out of our technocrats is less theory and more "WTF". When the houses featured on the gangster movie Friday are selling at mansion prices and banks are offering people like me zero-down mortgages...WTF?

When there are more banks and payday loan centers downtown than fast food restaurants...WTF? When Indiana's population and economy are stagnant but McMansion farms are forming in every direction...WTF?

I remember when I first learned about money market accounts, and listened to the banker explain to me that money market accounts offer great interest rates without any risk of losing money, I asked myself...WTF?

If this decade gets its own label, I believe it should be "The WTF Decade", a surreal period which began with a froth of nonsensical groupthink in every direction and climaxed this month with a political and economic WTF so loud that it shook our political and economic institutions to their foundations.

10/29/08, 7:15 AM

Blogger Jim Bowery said...

In the long run, its wealth is mostly a function of its human capital (i.e., the population's ability to earn money). So, don't debauch the average human capital of your population.


All the more reason to replace taxes on economic activity with a use fee for net liquidation value of property rights (with a subsistence exemption including home and small family business):

The value of human capital gains will skyrocket.

10/29/08, 7:57 AM

Anonymous Anonymous said...

Good takedown, Steve. Krugman was of course awarded the Swedish Central Bank's prize for telling central bankers and their government enablers what they want to hear.

BTW, can anybody in Steveland tell me why GM and Ford are still breathing oxygen? I have to believe the institutions that own almost every share of these dying behemoths are just trading them back and forth to keep them from being de-listed.

--Senor Doug

10/29/08, 8:04 AM

Anonymous Chief Seattle said...

Absolutely brilliant, Steve.

Keynes wasn't completely wrong as an economist, because he specified that whatever deficits were run in a recession should be counterbalanced by surpluses in the boom times to slow things down. But in practice that has never worked, and all we've ever gotten are bigger and bigger deficits and the need for more and more debt to keep the withdrawal symptoms away.

Let's see how Krugman feels about firing government workers and shutting down programs during the next recovery. Hey, it's just Keynesian, right?

10/29/08, 8:30 AM

Anonymous Anonymous said...

Krugman on 'their' theory
Don't say that it's obvious—although investment cycles clearly are associated with economywide recessions and recoveries in practice, a theory is supposed to explain observed correlations, not just assume them.

Krugman on 'his' theory
A recession happens when, for whatever reason, a large part of the private sector tries to increase its cash reserves at the same time.

Now that's some handwaving! I wonder if it takes an epic intellectual journey to see those companies could be increasing their cash reserves to cover bad investments?

My theory: recessions occur when everything recedes. This whole post was hilarious...

10/29/08, 9:00 AM

Anonymous Anonymous said...

Milton Friedman was no advocate of the Austrian school - you wanna strip that dumb stupid moron (kidding) of his Nobel?

10/29/08, 9:02 AM

Anonymous Anonymous said...

Your analysis is missing a critical element that is formative to Mr. Krugman's perception of the world.

He's 4 feet tall.
I believe the psychiatric journals are chock-a-block with accurate predictions of what this does to the intellect.

10/29/08, 9:20 AM

Anonymous creepy dude said...

I think we'll still need whores, come what may.

10/29/08, 9:30 AM

Anonymous Brandon said...

It seems that Krugman isn't denying that "bad investments in the past lead to unemployment of good workers in the present," he's arguing that recessions aren't *necessarily* result of booms. As he argues later, the Austrian theory cannot explain the correlation between ups and downs in investment demand and ups and downs in the economy in general - rather, it takes that correlation as a starting principle. He's arguing against a theory that seeks to offer a comprehensive and even totalizing view of how economies function - not responding to the fiscal situation in 1998 much less the one in 2008. Ultimately, it seems unfair, not to mention intellectually suspect, to extrapolate arguments that Krugman made over 10 years against an already discredited economic theory to take him to task for somehow getting the current financial crisis wrong.

In defense of Krugman, he was one of the first journalists to even notice that there was a housing bubble. He's also been several steps ahead of the government in his assessment of the problems at hand, advocating for equity stakes when Paulson wouldn't even consider it. Moreover, the implication of the Hang-Over theory seems to be that governments shouldn't intervene to increase credit or money supply - which, I don't know, seems too laissez-faire.

10/29/08, 10:01 AM

Anonymous Anonymous said...

Steve,
Derb is giving you some publicity on "The Corner." Peter Schiff wrote about this in his book about how we desperately needed a moderate recession in 2001 to atone for our tech-bubble sins (remember Pets.com?) but Greenspan thought he could stand athwart history yelling stop by pumping trillions of dollars into the US economy. I live in Northern NJ and it is not nearly as bad as it is in Vegas, So Cal, Phoenix. Did the people in Vegas actually believe that they were generating wealth? Were they serious? No one is talking about this but Las Vegas and Phoenix are just terrible places to have large metropolitan areas. No infrastructure, no natural resources (water anyone?). I'm all in favor of blanketing the desert with solar panels but you aren't going to build is viable city with that....

10/29/08, 10:04 AM

Anonymous Anonymous said...

@Steve Sailer

Great fuckin' piece. Luv it.

-Patrik

10/29/08, 10:11 AM

Blogger Justin Halter said...

In short, he can't see the difference between wealth and money. He is also confusing the distinction between jobs and wealth creation. To be fair, almost nobody has been taught to think in those terms.

Don't forget also, we are getting less wealthy because of our massive spending on security, police, and military, all of which create jobs, but do not create wealth. Also, the massively expanding industry of health care. Taking care of the sick and dying employs a lot of people, but produces no wealth.

I don't think you should have the right to vote unless you can explain the difference between jobs, money, and wealth.

10/29/08, 10:24 AM

Anonymous Anonymous said...

Good read. The passage from "The tech bubble was stupid..." to "... never ever made any sense" was hilarious.

10/29/08, 10:31 AM

Anonymous Anonymous said...

Read your last three paragraphs again and you've got it right. What has happened now has nothing to do with the usual recession or overbuilding that happens in ordinary times. We all are paying for the completely false economy based on money that was NEVER there or would be there. These derivatives/credit default swaps produced an entire unregulated false global economy, not just a local recession to be worked out over a short period of time. Read Greenspan's testimony.
Krugmans theory stands.

10/29/08, 10:41 AM

Blogger kurt said...

The Austrian business cycle theory is the only economic theory that has ever made a lick of sense to me.

10/29/08, 10:44 AM

Anonymous Anonymous said...

Excellent!
An additional point:
Even had the Echelon opened it would be facing a shrinking market and probably be operating at a loss while stealing business from competitors. The fact that it did not open is not critical to your example. Operating at a loss is inefficiency, and the only cure is for the growth curves to only point up or a long recession while they catch up. (Or, conversely, destruction of assets to get capacity back in line with demand -- perhaps Krugman would advise hiring the unemployed as wrecking crews until they can resume constructing again?)

10/29/08, 10:45 AM

Blogger PrestoPundit said...

Krugman has never read a word of Hayek.

I'm fairly convinced of this fact.

He says himself he can't read more than a page or two of pre-mathematical economics, he simply doesn't have the stomach for it.

And all evidence of his writings on Hayek point to the fact that he's never read a bit of Hayek -- or even any of relevant secondary literature on Hayek, or Hayek's role in the development of modern economics.

Krugman is a "math jock" or "idiot savant" as the American Economic Association committee on graduate education termed such morons who excel at 3rd rate mathematization of long-known economic ideas.

So don't trust anything Krugman writes on Hayek -- or any other economist born before, say 1950. He simply does NOT know the material.

Never read it. Never studied it.

Never understood it.

Krugman DOESN'T know much economics, if truth be known, outside of some modern mathematical economics -- most of it build on deep scientific mistakes about the nature of pursuing a successful explanatory strategy in economics.

10/29/08, 10:48 AM

Anonymous pseudoerasmus said...

There is no contradiction between your take on events and Krugman's description of the causes of a recession. You say it's a wealth effect. But how does the wealth effect work ? People feel wealthy, so they spend on consumption and investment goods. When they stop feeling wealthy, they cut back on spending. But how are the retrenchments actually manifested ? Krugman's short sentence says it all :

" A recession happens when, for whatever reason, a large part of the private sector tries to increase its cash reserves at the same time. "

Banks attempt to collect (cash) on defaulted mortgages through foreclosures. Investors sell mortgage bonds and rush to own cash. Everyone hoards cash because they are afraid of the future prospects of the economy.

You see ? No contradiction between you and Krugman. You just didn't understand this because you are too obsessed with your hobbyhorses and thus misinterpreted a theoretical dispute in macroeconomics without knowing the relevant context.

Krugman's point was to criticise an incoherence in Austrianism. The chief problem with Austrianism is, it assumes that markets clear -- if investment spending falls, then consumption spending should rise to keep income level the same -- but this obviously does not happen in reality, at least not quickly. Austrians explain it away as frictional unemployment, the reallocation of labour from capacity building to production. The long-drawn out pain we will likely experience as a result of the mortgage crisis is not some f***king reallocation from investment to consumption. It's a general slump.

The only dispute is the policy response. You think the rot must be worked out of the system. But overinvestment in capacity in one sector (housing) should not mean that capacity in other sectors should be left idle. That is the bad thing about recessions, one sector may be responsible for the mess, but general credit conditions can affect all sectors.

10/29/08, 11:00 AM

Blogger PrestoPundit said...

Note well that your argument here implicitly attack's Milton Friedman's work on the "consumption function".

Friedman worked within the Keynesian framework to undermine it.

You are suggesting here that Fiedman's work fails to take into consideration systematic time structure illusions which are the building blocks of the Hayekian macroeconomic framework.

10/29/08, 11:21 AM

Anonymous testing99 said...

STeve, you and Krugman are both wrong.

The reason the tech bubble when it burst was not a depression starter, as due to cheap energy.

ENERGY is the basic input of the economy. People are not going to Vegas because gas and airfare costs too much, and the energy costs hit them in the pocketbook everywhere: going to work, school, food, etc.

Cheap energy is like "free money" and allows for all sorts of things and a lot of economic activity that gets choked off at high energy prices. One example: trans-Pacific container trade.

The Housing crisis by itself would have been no more destructive than the S&L crisis (which it resembles) or the tech crisis or any other bubble burst in cheap energy.

Make energy very expensive, and you have a recession-depression lasting years.

This is not "minorities fault" or "evil greedy bankers" ... it is the fault of policy makers dating back to Bush 1 deciding to pander to the Greens and not drill here.

10/29/08, 11:35 AM

Blogger Bill said...

That's a fine essay deconstructing Krugman's deconstruction of Hayek and the Austrian School. The concepts you illustrate so concretely remind me of Boudreaux's rants at Cafe Hayek when Krugman won the Nobel.

Considering all the fuss about job retraining in the past, you'd think the left wing would understand the fundamentals of coordination problems

10/29/08, 11:53 AM

Anonymous Anonymous said...

The Tech Bubble was stupid, but at least pouring huge amounts of money into Cisco Systems had a certain surface plausibility. Cisco actually made something (either switches or routers, I can't remember which, despite reading dozens of articles in 1996-2000 but how the world could never get enough switches and/or routers)

----------------------

Cisco makes both switches and routers, as well as hubs and other network appliances. It's not easy to explain the difference among these devices unless you are familiar with networking concepts and the OSI model.

To top it off, some manufacturers actually mislabel switches as hubs. The home user can't tell the difference, because a switch provides more network functionality, but networking specialists who need to reliably monitor and predict network routes notice the difference.

10/29/08, 12:12 PM

Anonymous travis said...

Mark Sanford has an op-ed in today's Washington Times about the mortgage fiasco.

10/29/08, 1:21 PM

Anonymous Anonymous said...

I think Justin Halter nailed it in his comment!!! Just look at New York City's budget, projected to be $69 billion in 2009! Vast amounts of money spent on what is essentially used to babysit NYC citizens. Vast amounts of money employing vast amounts of people, creating very little wealth. Now there is no one that is more pro-NYPD than I am. My best friend is an NYPD officer and they work their tails off. However, there are roughly 38,000 NYPD officers right now, whose primary function is to babysit NAMs. Yes, alot of jobs are created there but is much wealth being created? Money that could be used for savings, which leads to capital investment, which leads to wealth is instead spent on infinite bureaucratic make work programs. But remember what our philosopher king, Mike Bloomberg has to say, "America is committing mass suicide by putting restrictions on immigration." Because as we all know, the South Bronx, Corona, Queens and East Harlem are really the drivers of America's technology growth.

10/29/08, 1:54 PM

Anonymous tommy shanks said...

>>jimbo said...
>>Ok, Steve - so the casinos in Las Vegas are useless. Why does that require auto plants in Detroit and Tokyo to be idle?

B/c the marginal buyers of new cars were Las Vegas casino workers (and mortgage brokers, and Wall Street debt securitizers, and other boom-related occupations). Throw them out of work, and you don't need to build as many new cars -- hence, idle auto plants.

10/29/08, 2:12 PM

Anonymous Anonymous said...

t99,

Higher energy prices caused the tech bubble to burst? You mean the dot-coms just couldn't cover the costs for coal to shovel into their boilers or to power their steam locomotives? Townhomes plopped down anywhere there was spare acreage would still be worth $600K if gas were $3/gal?

Do you read ANYTHING besides Jane's Defense Weekly?

--Senor Doug

10/29/08, 2:18 PM

Anonymous Scott said...

He may be *stupid*, in the sense that he gets it all wrong, but I would be very suprised (in fact I do not think it is possible that he could be of average intelligence) if he did not have a very high IQ.

PhD in econ.? Not easy.

10/29/08, 3:46 PM

Anonymous eh said...

I find it amazing that they razed the STARDUST. It was one of the few old time Vegas places left.

It had a great sports book -- best in Vegas.

Las Vegas has turned into a caricature. Of itself.

10/29/08, 4:00 PM

Blogger Glaivester said...

Okay, I like most of what Steve wrote and will try to deal with the nay-sayers.

(By the way, I did my oiwn deconstruction of Krugman here.

henry canaday:There was no necessity for the emergency easy money of 2001-2002 to turn into the housing disaster of 2007-08, if other features of our financial system had remained honest and functional.


But the whole point of easy money is to make the various parts of our financial system dishonest and dysfunctional. If not the housing bubble, then something else.

anonymous (AO): Are you trying to resuscitate the broken window fallacy?

No, Steve's point is that all sectors of the economy are interrelated; you can't excise the bad loans and bad investments without doing some damage to other parts of the economy. That is, there are no painless corrections.

jimbo: Ok, Steve - so the casinos in Las Vegas are useless. Why does that require auto plants in Detroit and Tokyo to be idle?

Well, perhaps because at this time people don't want to buy cars, or maybe they do not want to buy the cars that are currently available? Maybe people do not have a lot of available wealth right now and they would rather use their resources for something else. Maybe various factors required for the production of automobiles are absent or in short supply.

Trying to make these atuo plants run through government subsidy could have the effect of impoverishing other sectors of the economy that are competing for the same resources, or result in the produciton of large numbers of cars of a sort that people really don't want.

It seems that Krugman isn't denying that "bad investments in the past lead to unemployment of good workers in the present,"

He is arguing that there is no reason why they should, and that the correct policy can make good workers immune to the effects of bad investments.

he's arguing that recessions aren't *necessarily* result of booms.

Austrians never claimed that all economic downturns are the result of booms. The Austrian model explains why there is a business cycle with more or less predictable ups and downs rather than a smoother economy with ups and downs being sporadic.

As he argues later, the Austrian theory cannot explain the correlation between ups and downs in investment demand and ups and downs in the economy in general - rather, it takes that correlation as a starting principle.

The reason for the correlation is simple - investments are what fund the means of production. What you nd Krugman are arguing is equivalent to wondering "why does a reduction in the demand for seed corn result in a famine? People are still eating corn, and demand for corn to eat goes up, which should offset the decrease in demand for seed corn." The problem is that no seed corn means no corn next year, no matter how great the demand.

He's arguing against a theory that seeks to offer a comprehensive and even totalizing view of how economies function - not responding to the fiscal situation in 1998 much less the one in 2008.

The Austrian theory of the business cycle is not comprehensive; it explains one phenomenon in the modern economy.

Read your last three paragraphs again and you've got it right. What has happened now has nothing to do with the usual recession or overbuilding that happens in ordinary times. We all are paying for the completely false economy based on money that was NEVER there or would be there.

To the contrary, what has happened now is just a much more severe example of the usual recession or overbuilding that happens in "ordinary times." It's just that the "completely false" section of the economy (which has existed for a long time) was allowed to grow far more than in previous cycles.

pseudoerasmus:There is no contradiction between your take on events and Krugman's description of the causes of a recession. You say it's a wealth effect. But how does the wealth effect work ? People feel wealthy, so they spend on consumption and investment goods. When they stop feeling wealthy, they cut back on spending.

They cut back on spending because they have little left to spend, which corresponds to the fact that there is less to spend it on. Getting them to "feel" wealthier and to spend more will not make more goods and services materialize out of the ehter.

But how are the retrenchments actually manifested ? Krugman's short sentence says it all :

" A recession happens when, for whatever reason, a large part of the private sector tries to increase its cash reserves at the same time. "


While technically he is just noting that the recession and the cash hoarding are occurring simultaneously, it is clear from the context that the assumption Krugman is making here is that the attempt to hoard is what causes the recession. Steve's point is that the "hoarding" represents the facts on the ground resource-wise. It is not an independent development causing the recession, it is a symptom of the recession.

Banks attempt to collect (cash) on defaulted mortgages through foreclosures. Investors sell mortgage bonds and rush to own cash. Everyone hoards cash because they are afraid of the future prospects of the economy.

Yes, but this is an effect, not a cause, of the recession.

You see ? No contradiction between you and Krugman.

Except that Krugman believes that the hoarding is an irrational response that causes the recession and that you can end the recession by getting rid of the effects of the hoarding. That's like trying to make a room warming by removing a layer of clothing.

The chief problem with Austrianism is, it assumes that markets clear -- if investment spending falls, then consumption spending should rise to keep income level the same -- but this obviously does not happen in reality, at least not quickly.

Austrianism does not assume that income levels must remain the same. Rather, they assume that during the boom, that investment and consumption both rise to the point where they exceed the resources available to sustain them. Consumption need not rise when investment falls, because the total resources available have fallen.

Austrians explain it away as frictional unemployment, the reallocation of labour from capacity building to production. The long-drawn out pain we will likely experience as a result of the mortgage crisis is not some f***king reallocation from investment to consumption. It's a general slump.

Unemployment occurs as the economy tries to build up resources and capacity in the underfunded sectors in order to provide the raw materials to the other sectors. As Bob Murphy said, you need the wheat before you can make bread. A computer factory will and a computer factory worker will remain idle until all of the materials necessary to build the computer are available again.

The only dispute is the policy response. You think the rot must be worked out of the system. But overinvestment in capacity in one sector (housing) should not mean that capacity in other sectors should be left idle.

But that "overinvestment" has left "underinvestment" in the other sectors. The other sectors will not be running at full capacity until all of the resources being shunted into the "overinvested" sector are liquidated and invested into them. Even then, most of the other sectors do not run independently of one another. Some sectors will have underutilized capacity until all of the sectors that it needs to propoerly function are running at full steam again.

10/29/08, 4:31 PM

Blogger Ronduck said...

The problem in the Great Depression was the sharp contraction of the money supply due to bank runs, which is why we now have FDIC insurance.

The only reason the money supply contracted when depositors took their money out of the banks is because the banks were *fractional reserve* banks, and therefore did not actually have their depositors money, having lent it out.

10/29/08, 6:48 PM

Anonymous MQ said...

You have to hand it to Steve for calling a guy stupid immediately after he wins the Nobel prize. However, in this post Steve is the stupid one and Krugman is the smart one. Actually, this post would flunk you in intro macro. You don't get macroeconomics unless you understand why this analogy is false:

Yet, for all its simplicity, the insight that a death is about a heart no longer beating makes nonsense of the whole disease / trauma theory. For if the problem is that the heart isn't beating, why not simply increase the supply of heartbeats? You may tell me that it's not that simple...

Yes, Steve, it IS that simple. Or, it can be. We can increase the supply of economic "heartbeats" just by increasing the money supply and getting bad debt off the books. Economic "heartbeats" are social creations, not creations of nature like the human body. So we really can wish them into existence through a political decision, as we can't do with heartbeats.

This is not true if there is a *real* resource shock to the economy -- if we no longer have physical access to a real production process we had access to yesterday. E.g. in testing99s example, if we run out of oil, or can't get access to oil any more. That's real business cycle theory. But in the case of a pure financial shock, nothing in the real physical world has changed, the problem is social, and can potentially be solved socially. (Whether we can iron out all the political and social problems in the way of such a solution is another question, of course).

To put things another way: there were no illusory resources or wealth in the current U.S. economy. All the resources to build those houses and hand them out to people really existed...we know that because the houses were actually built. The illusion was the implicit beliefs about *future* wealth growth that underpinned the various committments that were made. But there is no physical or natural reason the economy has to shrink, if we can rearrange those committments then there's no reason we can't absorb the change in beliefs about the future with no reduction in current wealth.

That's not to say the Austrians are wrong. They have their arguments as well. It's just that the issues here are deep, Krugman gets them and Steve apparently just doesn't. So he's not engaging with the force of Krugman's arguments at all.

10/29/08, 8:30 PM

Anonymous MQ said...

Krugmans problem, beside his obvious arrogant, is that he is sharper than he is deep.

No, Krugman is very deep. In fact, he's so good at explaining very deep concepts in a simple and accessible manner that people sometimes miss how deep he is. That's what he's doing here -- he's explained a very deep concept about Says Law that took economists a century to understand, and that Keynes never fully unpacked in non-technical terms, and Krugman does it in a very accessible manner. But Steve just doesn't get it.

10/29/08, 8:33 PM

Blogger Steve Sailer said...

MQ asserts:

"But in the case of a pure financial shock, nothing in the real physical world has changed, the problem is social, and can potentially be solved socially. (Whether we can iron out all the political and social problems in the way of such a solution is another question, of course). To put things another way: there were no illusory resources or wealth in the current U.S. economy. All the resources to build those houses and hand them out to people really existed...we know that because the houses were actually built."

These houses were to a large extent built out of manufactured items from China bought, in essence, on credit. (We sent them checks and they turned around and bought Fannie Mae stock and T-bills with the dollars.) The Chinese expect to get their money back from us at some point. If they don't get it back, well, then they won't ship us as many manufactured goods. Moreover, they won't be as wealthy as they thought they were either, so they'll stop going to Las Vegas, too, and the Echelon will just sit there unfinished even longer.

10/29/08, 10:48 PM

Anonymous Paul said...

Hi Steve,

Seems like you have a lot of angst. If he is so stupid an you the opposite, where is your Nobel Prize?

Paul

10/30/08, 1:21 AM

Anonymous John of London said...

Steve, by the basic principle of Stevism you can't call a guy with a very high IQ stupid. I can, because I don't believe there's a thing properly called "intelligence" that IQ tests measure, but you can't.

10/30/08, 2:48 AM

Anonymous pseudoerasmus said...

Glaivester said :

They cut back on spending because they have little left to spend, which corresponds to the fact that there is less to spend it on.....While technically he is just noting that the recession and the cash hoarding are occurring simultaneously, it is clear from the context that the assumption Krugman is making here is that the attempt to hoard is what causes the recession. Steve's point is that the "hoarding" represents the facts on the ground resource-wise. It is not an independent development causing the recession, it is a symptom of the recession."
This is obviously false, because in a financial bubble there is always more money -- either through easy monetary policy, or through capital account surpluses (i.e., Chinese money). What changes is perception : there is a sudden EXOGENOUS change in the perception about the sustainability of the bubble. But if people keep believing that real estate prices will keep going up, then the money is there to keep borrowing against the real estate and spending on goods.

But where are the real resources ?

Apparently it has escaped your notice what the US current account deficit represents : it represents both the net value of goods that the rest of the world is selling to the USA AND the net money flows from the same source which are financing those purchases. In other words, both the money and the real resources are there, it's only a matter of investor perception whether these keep flowing.

Getting them to "feel" wealthier and to spend more will not make more goods and services materialize out of the ehter.

The wealth effect is Sailor's argument.
"Rather, they assume that during the boom, that investment and consumption both rise to the point where they exceed the resources available to sustain them. Consumption need not rise when investment falls, because the total resources available have fallen."

You're just assuming what you need to prove : there are fewer resources as the spur to the recession.

10/30/08, 4:52 AM

Anonymous Anonymous said...

John of London said:

"Steve, by the basic principle of Stevism you can't call a guy with a very high IQ stupid. I can, because I don't believe there's a thing properly called "intelligence" that IQ tests measure, but you can't."

How do you know Krugman has a high IQ? Did you guess that he has a high IQ because he writes in complicated sentences, looks smart in photographs and on TV, etc.? But, if you don't believe that the concept of IQ is valid, then shouldn't you stop yourself from equating a complicated writing style, etc. with high IQ? In other words, aren't you being inconsistent WHILE accusing Steve of being inconsistent?

Unlike Steve I don't think that Krugman is stupid. Krugman has a political position to push, and, since he has a lot of verbal intelligence and few scruples, is able and willing to demagogue, over-complicate and mislead in support of this position. His reasoning doesn't work, but that's because he's dishonest, not because he's stupid.

John, the most authoritative book out there on the science of intelligence is "The g Factor" by Arthur Jensen. I recommend it highly.

10/30/08, 5:00 AM

Anonymous Anonymous said...

As I've said before all economics (apart from the tautological basics as expounded by the 18th century classicists), is a load of bollocks (to coin a fine English phrase).
As the great mathematician Stanislaw Ulam once stated, there is no 'true uncontested fact' in economics that is not trivial.
Case in point is the rise to economic superiority of modern China.Cast your mind back 30 years - China, such an unpromising land, the North Korea of its day, all Mao suits, bicycles and impoverished peasants.The only natural resource the talent and hard-work of its people.
- And that's just it. The only determinant of economic success isthetalent and industry of the particular people of a particular nation.All the rest is nonsense.
I do realise that state Marxism did dampen the natural entrepeneurship of the Chinese previous to 1978 - but that'san argument against academic theory rather than for it.

10/30/08, 5:26 AM

Blogger Glaivester said...

To put things another way: there were no illusory resources or wealth in the current U.S. economy. All the resources to build those houses and hand them out to people really existed...we know that because the houses were actually built. The illusion was the implicit beliefs about *future* wealth growth that underpinned the various committments that were made. But there is no physical or natural reason the economy has to shrink, if we can rearrange those committments then there's no reason we can't absorb the change in beliefs about the future with no reduction in current wealth.

Except that much of our wealth takes resources to maintain. True, if we just forgave a bunch of mortgages, everyone could keep their houses, but we will have to reduce our levels of consumption a great deal, a much larger percentage of our income will go into maintenance of these houses, we may drive older, decrepit cars a lot longer, and when we have problems with our big, fancy TVs, we may have to go without instead of repacing or repairing them.

10/30/08, 5:37 AM

OpenID poperatzo said...

Meow.

Jealousy is not healthy.

10/30/08, 11:31 AM

Anonymous Wade Nichols said...

The astute Walter Williams in his latest column delivers a good blow against Krugman also:

Wackonomics isn't just practiced by the uninitiated. This year's Nobel Laureate, Princeton University Professor Paul Krugman, after the terrorist attack on the World Trade Center, gave one rendition of wackonomics in his column "After the Horror," New York Times (9/14/01). Krugman wrote, "Ghastly as it may seem to say this, the terror attack -- like the original day of infamy, which brought an end to the Great Depression -- could do some economic good." He went on to point out how rebuilding the destruction in New York and Washington, D. C., would stimulate the economy through business investment and job creation. For practitioners of non-wackonomics, this reasoning doesn't even pass the smell test. If Professor Krugman's vision is correct, and extending his logic, the terrorists would have made an even larger contribution to our economic well-being had they been able to fly a plane into the White House and destroyed buildings in other cities.

Wackonomics isn't all bad. There's an upside to it. It spares people the bother of having to understand the complexities of the world.

10/30/08, 12:11 PM

Anonymous Mr. Anon said...

"MQ said...

You have to hand it to Steve for calling a guy stupid immediately after he wins the Nobel prize."

There is NO Nobel prize in economics. We should stop calling it that.

"-- he's explained a very deep concept about Says Law that"

It is always amusing when economists try to talk about their field as if were a real science.

"Anonymous said...
t99,
Higher energy prices caused the tech bubble to burst?"

You've misread Testing99. He is saying that the tech bubble burst did not cause a general economic downturn because energy was still comparatively cheap at the time.

There is a lot of truth in what Testing99 says here (an unusual circumstance for him). Energy is the single most important input into the economy. It is the real source of wealth. When it becomes scarcer, we all become poorer.

10/30/08, 12:20 PM

Anonymous miss marple said...

"To put things another way: there were no illusory resources or wealth in the current U.S. economy. All the resources to build those houses and hand them out to people really existed...we know that because the houses were actually built. The illusion was the implicit beliefs about *future* wealth growth that underpinned the various committments that were made. But there is no physical or natural reason the economy has to shrink, if we can rearrange those committments then there's no reason we can't absorb the change in beliefs about the future with no reduction in current wealth."

I haven't seen anything like Krugman's depiction of the Hangover Theory in my brief exposure to the Austrian School. Really, with the libertarian underpinnings, any hellfire and damnation slant on the Austrian explanation is suspect. Their focus is often on the miracle of fractional reserve banking which seems to be operating on the basis that wealth we expect to have in the future is money we have in the here and now. Making unwise investments just further undermines an economy already compromised by operating as if future wealth is already in existence.

I think real estate is the most tangible evidence of the problem of malinvestments. For instance, I know of strip malls from the last building boom some 20 years ago, that have sat empty much of the time and/or have rarely been even half occupied. Buildings deteriorate, styles change, a natural disaster might wipe it out in the decade or so before it becomes a profitable endeavor. How is this not evidence of money that could've and should've been invested in a different way. (I've even considered government intervention to insist that these behemoths be bought or leased before more acres of forest are allowed to be levelled for newer behemoths in more desirable locations but that would probably make me a heretic.)

Developers mistakenly thought that lowered construction costs - cheap loans, cheap illegal labor, cheap land - equated to a good investment. Feedback in the form of the free market setting the cost of borrowing was distorted due to the FED interfering to encourage the housing boom/minority homeownership. The potential effects of this malinvestment are numerous. Money was spent on homebuilding that could've/should've been spent elsewhere. Creating alternatives to fossil fuels for instance.

Many economists had no idea what the unintended consequences would be this time, the last time or the time before. I don't understand why you would hold any of them in such high esteem that you would attack anyone who challenged their theories. And, unlike science, the decisions of economists can directly and negatively impact your life. Stop worshipping Krugman because he gets prizes and learn how to evaluate his advice. It's not out of the question that he is both very smart and very wrong.

I mean really are we all supposed to move to those neighborhoods built miles away from shopping malls, hospitals, and jobs like colonists and start civilization anew? Or maybe people can start businesses dismantling the useless structures to be sold for scrap and plant trees to cover the land cleared for streets and foundations decades too soon. Seems to me it would be a lot more efficient and productive to avoid making mistakes on such a grand scale in the first place but we could create a boom cleaning up the mess made by the last one. Sure, why not? : )

10/30/08, 12:49 PM

Anonymous Michael T said...

ENERGY is the basic input of the economy. People are not going to Vegas because gas and airfare costs too much, and the energy costs hit them in the pocketbook everywhere: going to work, school, food, etc.

Checked oil prices lately? Problem solved, I gather.

mq,

But there is no physical or natural reason the economy has to shrink, if we can rearrange those committments then there's no reason we can't absorb the change in beliefs about the future with no reduction in current wealth.


"Rearrange those commitments" as in borrow more or print money? You plan on doing that indefinitely, do you?

john of london,

Steve, by the basic principle of Stevism you can't call a guy with a very high IQ stupid. I can, because I don't believe there's a thing properly called "intelligence" that IQ tests measure, but you can't.


If you don't believe there's any such thing as intelligence, how can calling someone stupid have any meaning at all? (How much longer do you plan on being offended by reality, John?)

10/30/08, 1:23 PM

Anonymous Michael T said...

And that's just it. The only determinant of economic success isthetalent and industry of the particular people of a particular nation.All the rest is nonsense.

Market economy + Human capital. Cool, I'm not the only one who believes this. (Monetary policy's another biggie, but just varies the growth rate.)

Growth is created by the production and consumption of increasingly higher value products. An economy's ability to do so is determined by its human capital.

We could have had a high tech economy with domestic fruit pickers making $20/hour. Impatient capitalist pigs decided to import cheap labor for the short term gain and now we'll never have the high paying economy.

Nothing is so egregious as leftwing economists' failure to scream bloody murder over wage-killing immigration.

10/30/08, 1:38 PM

Anonymous Anonymous said...

"But overinvestment in capacity in one sector (housing) should not mean that capacity in other sectors should be left idle."

The other sectors suffer during investment bubbles because the easy credit draws human and material resources away from productive (wealth producing) activities and into the unproductive (wealth-consuming) activities of the bubble. It is the misallocation of these real resources which inevitably leads to the "hangover" as people eventually must stop engaging in unprofitable, wealth-consuming activities and go back to working in productive activities and repairing balance sheets (i.e. accumulating capital).

The cure for a hangover is to stop drinking and get back to work, not to take the hair of the dog and go back on a bender.

10/30/08, 2:00 PM

Blogger Glaivester said...

pseudoerasmus:This is obviously false, because in a financial bubble there is always more money -- either through easy monetary policy, or through capital account surpluses (i.e., Chinese money). What changes is perception : there is a sudden EXOGENOUS change in the perception about the sustainability of the bubble. But if people keep believing that real estate prices will keep going up, then the money is there to keep borrowing against the real estate and spending on goods.

True, as long as the Chinese are willing to trade us goods for money.

The point is, though, is that people trade with the concept that you will give them something of value in exchange. If we have nothing to give the Chinese in exchange for their products, i.e. if they can't spend the money we pay them to get stuff from us, then they have no reason to keep providing us with products.

You are suggesting that we artificially inflate housing prices to maintain the boom. The problem with that is that it relies on the Chinese (and other countries with whom we have a trade deficit) being willing to give us their products without receiving anything in return.

Unless we can enslave China to give us stuff and ask for nothing in return, or unless they are either stupid or overly generous, eventually our perception of what our houses are worth will mean very little.

You're just assuming what you need to prove : there are fewer resources as the spur to the recession.

I have explained why there are fewer resources - because the resources that have been saved aside for later use have all been used up due to the malinvestment of the bubble. The point is, the "prosperity" of the bubble is financed by people eating their savings. If people spend more than they save, they do so by consuming previous savings. If this continues, at some point the savings are gone - at this point, no amount of money printing can stimulate more investment, just increase the prices of whatever goods are available.

10/30/08, 7:33 PM

Anonymous AS said...

Some links on Austrian cycle theory-

http://www.lewrockwell.com/podcast/index.php?p=episode&name=2008-10-22_053_he_predicted_the_great_depression_ii.mp3

http://mises.org/story/3064

http://mises.org/story/3151

10/30/08, 7:38 PM

Blogger Glaivester said...

Yet, for all its simplicity, the insight that a death is about a heart no longer beating makes nonsense of the whole disease / trauma theory. For if the problem is that the heart isn't beating, why not simply increase the supply of heartbeats? You may tell me that it's not that simple...

Yes, Steve, it IS that simple. Or, it can be. We can increase the supply of economic "heartbeats" just by increasing the money supply and getting bad debt off the books. Economic "heartbeats" are social creations, not creations of nature like the human body. So we really can wish them into existence through a political decision, as we can't do with heartbeats.


Put another way, mq is saying the recession is simply a crisis of perception and psychology. There is no underlying reality to the recession.

He is wrong.

This is not true if there is a *real* resource shock to the economy -- if we no longer have physical access to a real production process we had access to yesterday.

The problem is that you need a lot of different resources working together in the right way to produce the goods that people want.

If you want to start a pizza delivery joint, you need the space (a building or part of a building), an oven, access to electricity (or some other source of cooking power), a means of communication (phones for people to make orders), all of the necessary ingredients to make pizza, a means of delivering the pizza, and people with the relevant skills to take orders, cook pizzas, and deliver them. If one of these things is not available, your business cannot open until it is (I suppose you could open a walk-in pizza joint if you didn't have the delivery vehicle, but that might not work if you have determined that ou cannot sell enough pizza to make a profit without delivery.

What causes a recession is the fact that a misallocation of resources has caused shortages of one or more of the necessary factors of production for various businesses. In the case of the pizza business, perhaps too much land where wheat could have been grown was left fallow as the farmer had decided to take a year off and live off the equity value of his house.

So there's not enough wheat for you to make dough for your pizza (at least not so that you can make a profit). But you've already bought the property - why does it have to sit idle?

Because you've already fitted it for pizza making, and the costs of re-fitting it for something else (and of finding out what you could re-fit it for) or the costs of running a pizza business that will not sell enough pizzas to make a profit are much greater than the costs of the building sitting idle for a year until wheat prices come back down.

But in the case of a pure financial shock, nothing in the real physical world has changed, the problem is social, and can potentially be solved socially. (Whether we can iron out all the political and social problems in the way of such a solution is another question, of course).

The financial shock could be the results of the real physical world effects of the previous financial situation. For example, people living off the equity in their homes might have resulted in fewer hours worked and less produced, or in people consumption patterns changing and subsequently in production patterns changing to meet cosumer demand. This change may have to be reversed to get the economy back on track, and this change-back is neither instantaneous nor costless.

To put things another way: there were no illusory resources or wealth in the current U.S. economy. All the resources to build those houses and hand them out to people really existed...we know that because the houses were actually built. The illusion was the implicit beliefs about *future* wealth growth that underpinned the various committments that were made. But there is no physical or natural reason the economy has to shrink, if we can rearrange those committments then there's no reason we can't absorb the change in beliefs about the future with no reduction in current wealth.

Translation: The problem isn't that people built houses they an't afford. The problem is that their creditors expect to be paid back. Screw the creditors. Either erasethe loans, or just print money and give it to them [which amounts to screwing both the creditors and anyone else who has dollar-denominated assets].

This ignores the fact that the changes in production patterns as a result of the housing boom may have impoverished sectors of the economy that we need to keep our current standard of living going. It also ignores the deleterious effects on future investment that a message of "loan money and don't get it back" will have. It also ignores the fact that we do not have legal leverage over some of our creditors (i.e. we cannot simply command China to forgive our debts), and that if we declare the debts null and void those creditors could lower the boom on us (i.e. stop exporting or export things at much higher prices).

It's just that the issues here are deep, Krugman gets them and Steve apparently just doesn't.

Right. Consume and more will magically appear.

10/30/08, 7:57 PM

Anonymous hcl said...

Krugman's essentially correct in that Keynesism works in the ways others in this thread have explained.

You're also essentially correct that malinvestment is malinvestment, independent of macroeconomic policy.

Both of you are correct, per core arguments anyway.

Major problem lies with Krugman, though, for arguing his position sloppily and erroneously, leaving it open to attack. (This is one of his weaker articles.)

10/30/08, 10:18 PM

Anonymous Anonymous said...

What it all boils down to, is that you have to save before you can produce, and you have to produce before you can consume. This requires frugality and low tax rates, which derails the bold, visionary schemes of liberals like Krugman. Thus, he advocates monkeying around with the supply-demand curve for loanable funds, and printing money to support consumption. This is an unsustainable process, as Keynes himself admitted, but airily dismissed by saying in the long run we are all dead. Thus, modern economics and political theory continues to be warped by the present-centered bias of childless homosexuals.

--Senor Doug

10/31/08, 6:44 AM

Anonymous Anonymous said...

The fact is that there is just one source of 'wealth creation' - namely technological innovation.
Think about it.At the time the first primitive Homo Sapiens started to knap flints (they probably couldn't even speak at that time), the world population of Homo Sapiens was probably only a few hundred thousand - that was all that could be supported by the hunting/gathering of the time and the injury/mortality toll.
Of course other breakthroughs followed - the smelting of copper and then iron (woods could now be cleared for farming), the invention of agriculture, domestification of wild beasts, crafting of boats, wheels, ploughs textile weaving etc etc until we get close to the modern period in which the steam engine was inveted (muscle power was no longer, apart from wind and water power, the the main driver), modern iron ships, electricity and artificial fertilizers and pesticides, to name but a few examples.
The point of that little lecture was to illustrate the point that 'wealth' or the ability of the planet earth to support a whole host of Homo Sapiens surplus that it could in man's 'natural state' was entirely developed by the engineers, technologists, inventors and scientists of the day - economics professors had absolutely nothing whatsoever to do with it then as now.
In fact most of the big breakthroughs - and a highly stratified, productive cash economy existed before the rudiments of 'academic economics' were ever dreamed up in 18th century France.
I think the moral is that a free market solution should be given to all academic economic departments.Close them all down and allow the savings accrued be spent by the general consumer on something of real utility to him or her.

10/31/08, 7:28 AM

Anonymous Anonymous said...

Should be "...a childless homosexual." Keynes, that is, not Krugman.

--Senor Doug

10/31/08, 8:08 AM

Blogger Buford Gooch said...

This whole bubble thing reminds me of my hillbilly cousins back in Illinois. They raised coon hounds. One of them would trade one of his hounds to the other. The first dog would be valued at $2950. The other dog would be valued at $3000. $50 would actually change hands. At that point, though, one of them had a hound worth $30000 and the other one $2950, established by the market. Some suckers would eventually buy the dogs for between $2000 and $2500, and think they were getting a real deal. The bursting of that bubble didn't cause much of an uproar in the financial market, but my cousins did end up with a lot of rich people's money. Sort of like the whole MBS fiasco. A few people got very, very rich.

10/31/08, 4:53 PM

Blogger Steve Sailer said...

Here we are in 2010, a couple of years after I posted this piece, and the Echelon complex is still sitting there with nothing happening on it. The owners announced in 2009 that it would be 3 to 5 years before it opened.

8/16/10, 12:01 AM

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