The Ultimate Krugman Take-Down

[camberiu]

Keynesian "pseudo" economist and witch doctor Paul Krugman gets his ass handed to him by Spaniard Austrian Economist Pedro Schwartz during a debate. The spectacle really starts at the 39 minute mark of the video. Incredible.


http://www.youtube.com/watch?v=EX55BH97quk&feature=player_embedded

 

[kurtdillard]

Oh please, this guy is disingenous in the extreme. Krugman has clearly laid out the causes of the global depression in his blog, in various articles, and in speeches. Krugman doesn't propose re-inflating the real estate markets in the US and elsewhere, he proposes investing in schools, public works projects like highways, and other investments that will have long-term benefits for society and national economies across the west. Schwartz' whole arguement about supply side economics was proven to be a fallacy during Reagan's tenure as leader of the free world, were you alive back then? Supply-side economics aren't the solution to every financial problem. You can call Schwartz' speech a takedown, I choose to refer to it as a regurgitation of ideas that failed 30 years ago.

 

[kurtdillard]

On top of that, you blow off Krugman's response to Schwartz and the fact that Krugman received a more energetic and longer applause than Schwartz. Quite a takedown.

 

[el_expatriado]

Sorry, but Paul Krugman is a joke. This is a guy who applauds Argentina and the Ks as a model for growth and points out that they've grown more than Brazil. He (conveniently) remarks how much Argentina has grown since 2003, but he doesn't mention what happened to Argentine GDP in 2001/2002. It is easy to grow 8% per year if you just got out of one of the deepest depressions in your country's history and you have all your factories at a standstill.

Oh, and the fact that soy went from $185/tn (2002) to $636 (today) has nothing at all to do with Argentina's growth right? It is all K with their brilliant policies. A one-eyed monkey could run the Argentine economy just as well (if not better) with a 200% rise in commodity prices.

 

[scotttswan]

Oh, and the fact that soy went from $185/tn (2002) to $636 (today) has nothing at all to do with Argentina's growth right? It is all K with their brilliant policies. A one-eyed monkey could run the Argentine economy just as well (if not better) with a 200% rise in commodity prices.

I think a one eyed monkey would actually do a better job.

 

[ElQueso]

I thought Krugman was a bit of a weenie. I thought Schwartz was quite polite and respectful, went to great troubles to compliment Krugman on his well-written book (even though he said, quite nicely, that he didn't agree with the conclusions), as well as his well-deserved Nobel prize related to international trade - but that he thought that the Nobel prize did not necessarily lend weight to Krugman's work unrelated to the relatively narrow topic of the prize, such as was under discussion. I thought he was honest in his respect - I didn't see or hear any mocking in his voice or mannerisms.

I think he made a valid point and tendered it in an appropriate manner.

Krugman came across petty and unable to take criticism. He could have handled that a bit better, but it was obvious that he was enraged and unable to control it completely - at least he didn't yell and foam at the mouth. A self-deprecating comment, or a nicely worded barb about some particular area that he is in contention with Schwartz about would have put him in a much better light.

The problem would seem to be a bit of pride - I think it obviously wounded him to have his Nobel prize discounted in any fashion.

I thought he handled himself relatively well once he got control of himself. I liked how he put the main problems of the US economy on the political parties and not Keynesian theory, because he's right I think, to an extent. What the US government has done in terms of spending and future obligations, and the amount of borrowing and debt that has been accumulated as a result, I don't think is what Keynes was thinking - it has gotten completely out of control.

It still seems to me a misunderstanding of cause and effect when he talks about the "proper" way to inflate by spending and borrowing. That is, that it should be used only when things are declining to prop them back up again. As Schwartz put it, once programs get started they don't go away, it's human/government nature to continue the spending. Governments don't often balance their budgets when things are going good - they usually do keep spending.

But even then, the cause of the decline is not some mysterious cause that comes out of nowhere, it's some artificial factor that messes with the market and causes a bubble, which causes the decline when it's readjustment time. In the US, the Dot Com bubble ended in a relatively small recession, and was "helped to end" with interest rates being lowered by the Fed and with that, mixed with legislation and policy related to easy home financing and a swarm of regulators who don't understand enough about what they're regulating to find the huge fraud that was going on, etc, etc, caused a much bigger bubble of debt that it's a real problem now.

Add on to that the cost of the 21st century US wars to spread democracy to places that simply aren't ready for it, the baby boomers retiring in swarms and the new health care legislation that can only put a heavier burden on an already overly-burdened business economy (just to name a few big ones), and I think even the Keynesian economists have to be terrified.

I liked both Schwartz' and Conthe's statements overall. What I really liked was both of them talking about the changes that Spain is trying to accomplish related to cutting and reforming their government. I don't know what the reality of that is, though, because I don't follow much in the way of Spanish politics. Although I might change that if I can find the time...

 

[ElQueso]

Oh, forgot to add:

I was a little confused about what Conthe said related to deflating (I don't remember the term he used) where the government would cut income tax but raise VAT. Of course, as he said, you'd have to raise VAT quite a bit to compensate for a smaller income tax cut. It would put a bit more money in people's pocket, but it would raise prices significantly. I suppose the idea is to force austerity - keep people from spending because prices are high, and in return probably cause them to save. But wouldn't that tend to create inflation as well, because I think the reality is wages would end up increasing to take into account the higher prices, and then of course prices would rise to account for additional cost, etc.

Can anyone add to that?

 

[el_expatriado]

As Schwartz put it, once programs get started they don't go away, it's human/government nature to continue the spending. Governments don't often balance their budgets when things are going good - they usually do keep spending.

This is the problem with Keynesian theory. The governments only follow half of the theory -- the part about spending to prop up a sluggish economy. They never cut spending and save during the boom cycles, which inevitably leads to overheated demand, asset bubbles, and the inevitable bursting of said bubbles.

 

[bsas]

Oh, forgot to add:

I was a little confused about what Conthe said related to deflating (I don't remember the term he used) where the government would cut income tax but raise VAT. Of course, as he said, you'd have to raise VAT quite a bit to compensate for a smaller income tax cut. It would put a bit more money in people's pocket, but it would raise prices significantly. I suppose the idea is to force austerity - keep people from spending because prices are high, and in return probably cause them to save. But wouldn't that tend to create inflation as well, because I think the reality is wages would end up increasing to take into account the higher prices, and then of course prices would rise to account for additional cost, etc.

Can anyone add to that?

I think he was referring to a drop in taxes that companies have to pay for their employees - known as 'cargas sociales', not a drop in income tax. In the US this cost is about 7% - not sure what the percentage is in Spain. This would not translate into a bigger check for employees, but would mean that the cost of employees to the company would drop, making these companies more competitive internationally.

I don't know how much they would have to raise the VAT to balance the books, but I don't think you'd get rampant inflation. Inflation comes when you put more money in the hands of the people across the board. Instead, higher prices from an increase in taxes would mean a drop in domestic demand, because you're not putting more money in the people's pockets. However, if Spanish companies have lower costs, then supposedly this should mean more sales overseas, higher earnings, and eventually more hiring.

Just my best guess.

 

[ElQueso]

This is the problem with Keynesian theory. The governments only follow half of the theory -- the part about spending to prop up a sluggish economy. They never cut spending and save during the boom cycles, which inevitably leads to overheated demand, asset bubbles, and the inevitable bursting of said bubbles.

Exactly. Keynesian to me seems like a reasonable theoretical system, better than Marxist economics as comparing two theories (in that it follows human nature better than Marxism does by far). But as practiced, we will still have to see. If the US comes apart, that pretty much says something about Keynsian theory right there. You're right, you can blame Keynesian economics, but not because the economic part of it doesn't work necessarily, but rather because it fails to take human nature into account more than just an abstract input. Booms and busts (theoretically, Keynesian-caused if you follow Austrian) are one thing, but the hole we're in now is related to pure unbridled greed.

That's what I like about what I understand about Austrian theory. It takes into account the most important thing in economics - human nature. If left alone by control and regulation, that greed is controlled by the necessity of working within the market.

The only thing that Austrian economics doesn't take into account, to me, is the part of human nature that loves to corrupt and change things for specific advantage. It would take a strong, yet very small and limited government (a bit of a contradiction in terms, at least as things are done today), plus an enormous amount of education and understanding of both politics and economics on the part of the populace to make it work. That's the only way you can keep the system from corrupting it would seem to me.

But it seems to me that the Austrian school is closer to a better system than Keynesian.