Paul Krugman is the toast of the New York Times elite. They just love the fact that he won a Noble prize, and also that he constantly pushes for more deficit financed “stimulus”, and government spending. The fact that he supports the FED is also seen as a plus. The reality is the Krugman is delusional as this Mises institute report shows.
Krugman’s Intellectual Waterloo
Mises Daily: Monday, June 22, 2009 by Daniel James Sanchez
To fight this recession the Fed needs…soaring household spending to offset moribund business investment. [So] Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.
Krugman. 2002. Calling for a housing bubble.
What’s more, by explicitly calling for a new bubble to replace the recently burst one, he anticipated by 6 years the Onion‘s hilarious “report” that “demand for a new investment bubble began months ago, when the subprime mortgage bubble burst and left the business world without a suitable source of pretend income.” Except Krugman was being serious.
The quote caught on in the blogosphere, to such an extent that Krugman actually responded in his New York Times blog Wednesday morning:
Guys, read it again. It wasn’t a piece of policy advocacy, it was just economic analysis. What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened.
So with a deft little two-step, Krugman paints himself as a doctor who gave an excellent diagnostic, and not a disastrous prescription. One of his ditto-heads posted on his blog that saying Krugman advocated or caused the housing bubble was “Like saying Nostradamus caused the rise of European fascism.”The Lone Gunmen
At the same time, with his headline of “And I was on the grassy knoll, too” he paints his critics (especially the Austrians) as conspiracy theorists, akin to the Lone Gunmen (the Kennedy-assassination theorists from the X-Files TV show). Just like with the matter of Jekyll Island and the events leading up to the creation of the Fed, an obvious conclusion from a matter of public record is portrayed by establishment sophistry as unmoored crankiness. And once again, it works: another ditto-head dismissively remarked “no need to reason with those folks.”
Even economist Arnold Kling bent over backwards to interpret the column in a benign light:
He was not cheerfully advocating a housing bubble, but instead he was glumly saying that the only way he could see to get out of the recession would be for such a bubble to occur.
Krugman thanked Kling for his “gracious, sensible explication”. I can just imagine Kling running around his office in glee at having been nodded at by a celebrity Nobel Laureate, exclaiming, “He likes me! He likes me!”
Mark Thornton on the Mises blog followed up with a devastating collection of 2001 Krugman quotes clearly documenting his support for inducing a housing bubble. The most damning of this batch is the following from a 2001 interview with Lou Dobbs:
Meanwhile, economic policy should encourage other spending to offset the temporary slump in business investment. Low interest rates, which promote spending on housing and other durable goods, are the main answer. [emphasis added]
How the hell can anyone spin that as a purely academic musing, and not a policy recommendation for artificially inducing housing spending?
Ignoring the other quotes for a moment, and just judging from the 2002 column, did Krugman support pumping up a housing bubble or not? Given that, even in his recent blog defending himself, he explicitly stated his belief that “the only way the Fed could get traction would be if it could inflate a housing bubble,” there are only two possibilities:
- He did not support inducing a housing bubble, and wanted the Fed to not fight the recession.
- He did support inducing a housing bubble.
Anyone even somewhat familiar with Krugman’s attitude toward Fed activism should know that proposition #1, that Krugman supported a do-nothing policy, is preposterous. So, especially after bringing back in the quotes gathered by Mark Thornton, the case for proposition #2 is overwhelming.
And what about his strawman protests that he didn’t cause the housing bubble, much less the Enron scandal or Kennedy’s assassination? The man is willfully missing the point. What is damning about these quotes is not that he necessarily causedanything. What is devastating about them is that they expose the intellectual bankruptcy of his economic principles. Those who look up to him like the second coming of Adam Smith should realize that the neo-Keynesian principles that lead him to advocate aggressive interest-rate cuts and mammoth public spending now, are the very same principles that led him to advocate inducing a housing bubble then. He would himself affirm that his economic principles haven’t fundamentally changed since then. So the conclusions and policy prescriptions he infers from them are just as wildly wrong now as they were then.
Keynesian keeps failing, and yet the elites continue their blind faith based belief in it. The Austrian School makes a lot more sense, but the elites ignore it. Now Europe has a new plan to “stimulate” the economy with phantom money. Europe is in trouble because its deficits are too big and its economies are distorted and uncompetitive. Increasing the deficit by having the government waste more money is not going to fix the problems of uncompetitiveness of the southern European economies or convince bond holders.
Since the crisis began Europe has talked about plan after plan to avoid dealing with the basic issues. Instead of freeing up their economies, dealing with government waste and unions, as well as letting banks fail, instead they have tried to keep the status quo, and used financial trickery to “fix” the problem. Nothing ever gets solved and the plans go nowhere. This latest “stimulus” plan is more smoke and mirrors. Mish Shedlock has a few choice words about it in his blog.
Germany, France, Italy, and Spain have agreed to spend 1% of GDP on new stimulus measures.
Where is the money coming from? They will not say. Most likely from somewhere else, better known as nowhere.
The Guardian reports Eurozone big four pledge 1% of GDP to underwrite banks and stimulate growth.
The leaders of the eurozone’s biggest economies announced on Friday night that 1% of the European Union’s GDP was to be set aside to help the continent grow its way out of the financial crisis. But doubts were immediately expressed as to what share of the package – said to be worth €130bn (£105m) – would be genuinely new money.
After several hours of apparently tense discussions, there was no immediate agreement on a plan outlined by Italy’s prime minister, Mario Monti, on Thursday, aimed at stabilising Europe’s banks and protecting countries under attack in the markets.
“There was an agreement between all of us to use any necessary mechanism to obtain financial stability in the eurozone,” said Mariano Rajoy, the Spanish prime minister, afterwards.
But the German chancellor, Angela Merkel, insisted that the EU must take full advantage of the instruments already at its disposal. Her remark suggested she is wary of two new funds – to guarantee bank depositors and as a lender of last resort to ailing banks – understood to have been on the agenda at Friday’s talks.
In a sign that tempers are becoming increasingly frayed before next week’s crucial summit, the normally gentlemanly Monti used his closing remarks to attack France and Germany publicly.
Nicholas Spiro, of Spiro Sovereign Strategy, said: “The pact has a shuffling of the deckchairs feel to it.”
Meaning of “Necessary”
I added emphasis to the word “necessary” in the above clip. However, I cannot take credit for it.
Instead, credit goes to Financial Times writer Martin Wolf for his column The G20 on the eurozone and fiscal policy
This week’s G20 communiqué dealt with the eurozone. Let us examine it closely.
“Euro area members of the G20 will take all necessary measures to safeguard the integrity and stability of the area, improve the functioning of financial markets and break the feedback loop between sovereigns and banks.”
The crucial word here is “necessary”. We can safely say that agreement on what this means is altogether lacking.
There is no stimulus plan. It’s a shell game. No new funds have been promised for stimulus. Rather, previously earmarked funds will simply be given that label.
Bear in mind that I am not in favor of stimulus plans anyway, at least monetary ones.
The best stimulus plan Europe and the US could possibly do is modify work rules making it easier to fire (and therefore hire) workers, scrap prevailing wage laws, end collective bargaining of public unions, scrap tariffs, and eliminate farm subsidies.
Instead, France is taking a giant step backwards as noted in Hollande About to Wreck France With Economically Insane Proposal: “Make Layoffs So Expensive For Companies That It’s Not Worth It”