Oracle smack down: Krugman vs. Laffer

[cthulu2016]

Macro-economics is not an experimental science. Economists cannot run twenty iterations of the Great Depression trying out different variables. The real world provides, as it unfolds, observations against which economic theory is tested, but there are so many variables that we seldom see "textbook" examples in the real world.

This mini-depression has been about as close to an experimental quality event as were are likely to see. In the space of only months we got to central bank interest rates at zero, mass lay-offs, almost unprecedentedly sharp drop in demand for credit and consumer demand, the collapse of a huge bubble and the collapse of the parasitic derivatives tied to the bubble.

Some economists (all liberals) made bold, credibility-risking predictions that were almost hard-science quality. Like Einstein predicting that the light of occluded stars would be visible during a total eclipse, these economists predicted effects so contrary to all conventional expectation that there was no way these effects were going to happen coincidentally. This was a real test of theory.

Their insight, which dates back to the 1930s but keeps getting forgotten, is that when interest rates hit zero you don't throw your hands up and fall back on folk wisdom. When interest rates are at zero that means, 99% of the time, that they are supposed to be somewhere below zero, but cannot get there. (It would be a coincidence of the artificial level of zero happened to be just right.) What does it mean that interest rates are supposed to be negative? How can fiscal policy approximate the effect of negative interest rates? You will get surprising results that people refuse to believe, but that are right.

When interest rates cannot be lowered any further deficit spending (in a country like the US) will not cause inflation or high interest rates unless it succeeds in creating real economic growth. Doubling the money supply will not create inflation. And there will be no self-sustaining rebound (at least for a very long time) that is not torched off by massive government spending. And that the only responsible course of action was to run up staggering short-term deficits... larger than what we have today.

It was a remarkable set of predictions. Smart but conventional players like Warren Buffet and Bill Gross lost big money by refusing to believe the economics of the situation. Neither man could accept that huge deficits and vast expansion of the money supply could be accompanied by interest rates under 2% on US bonds.

But that is exactly where we are.

Sadly, most people continue to bury their heads in the sand and try to make up ad hoc arguments to explain why the liberal view of the economy cannot be right. And an alarming number of liberals also reject what should be one of the great historical triumphs of the liberal viewpoint.

C'est la vie.

Anyway, I suspect it strikes some as petty when Paul Krugman rehashes the accuracy of the liberal analysis of this mini-depression, and the utter cluelessness of right-wing influenced theorizers, but it has to be done. This isn't physics where he can publish his results and count on them being accepted. Right wing economics is as much a PR operation as anything else and he, and others, are right to hammer away at the dramatically-proven superiority of their perspective until people accept it.

Which may well be never.

Paul Krugman
May 24, 2012, 9:06 pm
...

Here’s (Supply-sider Arthur) Laffer three years ago, "Get Ready for Inflation and Higher Interest Rates":

But as bad as the fiscal picture is, panic-driven monetary policies portend to have even more dire consequences. We can expect rapidly rising prices and much, much higher interest rates over the next four or five years, and a concomitant deleterious impact on output and employment not unlike the late 1970s.

OK, it’s only three years, so I guess there’s still time for the hyperinflation — but it had better get a move on. I think my take is doing a bit better:

Let me add, for the 1.6 trillionth time, we are in a liquidity trap. And in such circumstances a rise in the monetary base does not lead to inflation.

Also, my declaration at about the same time that

our current predicament can be thought of as a global excess of desired savings — which means that fiscal deficits won’t drive up interest rates unless they also expand the economy.

...
http://krugman.blogs.nytimes.com/2012/05/24/enter-laffering/

[Neue Regel]

1. The problem with Keynesian economics

Yes, deficit/stimulus spending is needed at times to pull the economy out of a tailspin. However, we as a nation have lost the political will to implement the second half of the Keynesian formula. In Keynesian economic theory, cutting deficit spending and paying off the debt that was incurred is supposed to follow the stimulus/deficit spending. Instead, our politicians just keep spending at the same level, making interest-only payments on the ever-increasing debt burden. Given this reality, I would prefer that we take our lumps now for a few years rather than continue to rack up debt like there is no tomorrow. Iceland's example is a good place to start.

[exboyfil]

2. Lets start by not spending on stupid things

like 4-5% of GDP on defense. Elimination of fraud in the entitlement programs would also be a start. Stop the pork barrel crap. Treat the people's money like your own. Use a scalpel and not a meat cleaver.

[Jim Lane]

3. You're painting with too broad a brush.

The Clinton administration moved the budget into surplus and did begin paying off the accumulated debt, until Dim Son turned a record surplus into a record deficit.

More broadly, the debt burden -- total accumulated federal debt expressed as a percentage of GDP -- was declining fairly steadily from the end of World War until Reagan took over. If our last three Republican presidents had continued that decline, the debt would be gone by now. If they'd merely curbed their deficit spending to align with GDP, the debt would be several trillion dollars less. Your indictment of "our politicians" really applies only to Reagan, Bush, and Bush.

[quaker bill]

6. It is not a problem with Keynes

It is a problem with the elected officials that refuse to implement it. It is not natural and inevitable for politicians as a class to fail to take the country's best interest into consideration, but it is consistent conservative Republican behavior since Reagan.

When Cons attempt to run the economy, they leave half the tools out of the box. Deficit spending and tax increases to pay off the debt are very important tools, one to heat the economy up, the other to cool it off if it gets too hot.

[cthulu2016]

10. Please specify the bad effect of the debt

You would prefer we not rack up debt. Okay. But shouldn't you identify some real-world ill associated with that debt?

What is the benefit of taking our lumps?

Also, the political problem with Keynesian economics is one political party's problem.

The last time we had a boom economy Bill Clinton was President and the budget was in surplus -- exactly how it is supposed to work.

[CTyankee]

4. I've been reading Krugman ever since he started writing for the NYT.

In my experience, he has been right about everything. Sometimes I would read his column and go away hoping he was wrong. But then, once again, he would turn out to be right on target.

I heart Paul Krugman but I also fear and tremble when he writes, because I know he knows what is up with the state of our economy, and more ominously, the state of mind of clueless Americans who can't think themselves out of the proverbial paper bag.

[Amster Dan]

5. Jeremiads are Tough to Read

But if Krugman had been listened to years ago, we wouldn't be on this Titanic right now.

[CTyankee]

8. Titanic is right. I would get a sinking feeling back then when I read his columns and I

still do. But at least now I know to trust his wisdom and plan accordingly (to the extent you ever CAN plan accordingly)!

[JHB]

7. He's not always right...

...but it's usually a function of his underestimating how far conservatives and "fresh water economists" have gone 'round the bend, and the degree "centrist" Democrats have have bought into the same (bad) economic assumptions.

[CTyankee]

9. What has he been wrong on, in your opinion?

I've never seen him peg things wrong...but maybe I missed something...

[cthulu2016]

11. He is always right about the liquidity trap, but

has not always been right about everything throughout his career.

Krugman has his critics for some of his views on trade and regulation in the 1990s, but his understanding of the current lesser-depression, which stems from his work on the Japanese lost decade, has been peerless.

Also, people learn things. Bush II radicalized Krugman in an intellectually productive way.

I would say he has been more right about things since about 2004 than any other public figure.

[CTyankee]

15. I didn't start reading him until he started writing his column for the NYT.

He taught here at Yale but I never heard about him as being a rising star, but mostly I only knew Law School and Yale Drama School folks.

Obama should pay more attention to Krugman, IMO. Maybe he will now that he has seen that the repukes want nothing more than his utter failure (and the failure of this country). Let's hope...

[hifiguy]

12. Paul Krugman, Robert Reich, James Galbraith, Joseph Stiglitz

and Nouriel Roubini have all been vastly more right than wrong for the last 10-15 years. That is not an opinion, that is a fact.

[hfojvt]

13. not Dean Baker?

[hifiguy]

14. Him, too. I don't see his work as much since

I stopped trying to cut through the hordes of trolls over at HuffPo, so I forgot about him.

[hfojvt]

16. well he is at CEPR

but I stopped reading him too, for some reason

http://www.cepr.net/index.php/beat-the-press/