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"if you see me quoted as saying something really stupid or outrageous, and it didn’t come from the Times or some other verifiable site, you should probably assume it was a fake." -- Paul Krugman

I do love how Krugman, in this quote, admits that he says things that are "really stupid". That is, in fact, what the sentence says.

Krugman said Japan was going to see good economic times because of the earthquake and tsunami, so it's not surprising everyone thought it was him. His macroeconomic ideas are so absurd and ridiculous he's beyond satire.

The screen shot won't come up for me. I would just take his denial at face value and forget it.

The following comment of mine appears at his NYT column:

"So that means the stuff you said in your column about 9/11 being good for the economy and that the threat of a space alien invasion would provide a nice stimulus are really stupid and outrageous things that were really you because they were at the Times and on TV? Just wanted to clear that up. I'll be sure to use those and only those as my examples of "really stupid and outrageous things" then."

While obviously fun to attack the Keynesian at their weak point (where they present obviously wealth-destroying things like war and earthquakes as good for the economy) I think it is important to bear in mind that if free-market economists are to win the argument they need to attack the strong points as well.

The Keynesian framework thinks it can explain the reason why we can have an equilibrium with unused resources and why in these circumstances additional spending (on non-destructive things) can address the causes as well as the symptoms of the recession.

I would like to see more articles addressing what is wrong with this framework and less time spent attacking the parody (which probably do not bother Krugman et al too much anyway, since, when pushed , they acknowledge the stock v flow point).

re: "since, when pushed , they acknowledge the stock v flow point"

They don't just acknowledge it, that's their whole point. Flows can move in one direction as stocks move in the other. That's the entire argument. It's usually the critics who claim to understand Bastiat that fail to make the distinction.

Bob Murphy's post is the only good one I've seen on this episode, and even he fails to realize that most of the people on "his side" don't have as careful an understanding of the issue as he does.

‎"So if you see me quoted as saying something really stupid or outrageous, and it didn’t come from the Times or some other verifiable site, you should probably assume it was a fake." --- Paul Krugman.

In other words, "So if you see [him] quoted as saying something really stupid or outrageous, and it [did] come from the Times or some other verifiable site, you should probably assume it was [real]." :D

the broken window fallacy theory would have been falsified only if the earthquake killed Krugman!

Daniel,

My observation is that Keynesian (especially in informal forums like blog posts) do not make the distinction very clear.

Krugman today says:

"Just to be clear: World War II was expansionary because it led to a large increase in public spending — and even so, that didn’t make war desirable!"

The emphasis is always on flow and thats what leads to this kind of discussion.

re: "The emphasis is always on flow and thats what leads to this kind of discussion."

Right, because the negative impact on the stock is blatantly obvious - it's practically definitional. You think this is worse than the preponderance of the critics who mix up wealth and income? Krugman is making precisely the distinction which you are saying we are only hesitant to acknowledge!

The state of these debates as far as I can tell is that a big share of the critics of Krugman completely mangle the stock v. flow distinction. An even bigger share mistakenly think he doesn't understand opportunity cost. A somewhat smaller share (although still shockingly large) say that he actually is advocating destruction or that he finds it "morally acceptable", and only a small portion get that the only real disagreement is over crowding out.

And I guess my original point is that the serious discussion needs to drill down on the "only real disagreement is over crowding out" thing.

Most free-market economists believe that even if stimulative spending is on things that (at face value) add both to stock and flow - they still lead to bad consequences due to the structural distortions they cause.

The URL that Steve pointed to addresses this point excellently.

In principle, it is possible for a natural disaster to increase increase wealth in the long run.

If an economy is depressed and has idle resources, and if the disaster creates an incentive for people to reduce their money balances, then it is possible that a natural disaster could help restore monetary equilibrium. In the long run, any temporary destruction of wealth might be outweighed higher growth rates in the future.

These are really big ifs -- theoretical curiosities rather than probable scenarios.

In modern econospeak, the broken window fallacy is about opportunity costs. Keynesian stimuli can create net new jobs in the short run, but what are the longer run trade-offs? Keynesians don't want us to think about those because in the long run we're all dead, right?

Rob R: “The Keynesian framework thinks it can explain the reason why we can have an equilibrium with unused resources and why in these circumstances additional spending (on non-destructive things) can address the causes as well as the symptoms of the recession.”

Many Austrians have addressed this over the last century. You haven’t seen much of it on blogs because it takes more space to cover than most blogs allow.

I don’t think any Austrian economist would deny that state stimuli can boost jobs to some degree in the short run. The main difference between Keynesians and Austrians is the time horizon. Keynesians don’t care about anything but the short run. Hayek said that Keynes never intended his theory to be a general theory, but a quick fix to a specific historical situation.

What Austrians disagree with is the Keynesian explanation of the depression and the long run consequences of their solution.

Yes, businessmen won’t invest in a depression no matter how low interest rates go. We have seen that over the past couple of years. But it’s not because of animal spirits are the marginal efficiency of capital, as Keynes wrote. It’s because the capital goods sector has been devastated by malinvestment during the boom.

And it’s because of the Ricardo Effect.

And while state stimuli will create net new jobs in the short run, in the long run it only steal jobs from the future by reducing investment. Roger Garrison’s PowerPoints do a good job of illustrating the investment/consumption trade offs. Increased consumption can happen only at the expense of investment, if the money supply doesn’t increase.

If you pump up the money supply in the middle of a depression, you can have both increased consumption and investment at the same time for a little while. When idle resources are gone, the economy hits its production possibility frontier and bounce back down into another depression. Again, that has to do with the Ricardo Effect.

Krugman's science fiction Keynesianism fits in with the original inspiration behind Krugman's study of economics.

Krugman tells us that he was inspired to become an economist by Isaac Asimov's idea of push-button solution to social problems using the technology made possible by an imagined science of psycho-history.

See Krugman's interview with Jim Lehrer & Krugman's interview in the New Yorker on this topic.

Not trying to be all things to all people, but I think both Steve Horwitz and Daniel Kuehn are making valid points.

Steve is right that this whole episode is absurd. We have Krugman, fresh from talking about space aliens on national (?) TV, objecting because someone had him saying a completely noncontroversial (for a Keynesian) statement.

But Daniel is right that a lot of people take a statement by Krugman and then "paraphrase" it as "Krugman says it would be good if aliens attacked us." Krugman never actually said that, though some of his statements about World War II are very ambiguous in this regard.

SCARE 20.12.2012


(Stop Corruption And Repression Effective 20.12.2012)


Banks were given a very important privilege to create money in the form of extending credit. This function requires diligence and careful consideration in regard to individual credit risks as well as to overall credit levels in the system. The financial crisis revealed that the banks were operating at too high a leverage and with too much risk. They were used to be saved by the Central Banks and certain that in times of difficulties the Central Banks were there to save them. They were like trained dogs and their master Greenspan or Bernanke would always be there to rescue them when unforeseen difficulties arose.


That may be true but that does not absolve them from their obligation to monitor overall debt levels in the system as well as being diligent in evaluating the debtors ability to not only service a debt but to be able to repay it over time. The banks clearly failed in this function that is the core function of banking but focused mainly on their compensation packages. The way these bankers enriched themselves in the process of driving the financial system into a wall was appalling and the average income earner was never able to comprehend their schemes but preferred to simply ignore them. Of course, the bankers explained their outrages income levels with free market principles of supply and demand, where the best simply could be hired with those kinds of benefits only. In hindsight those superior managers seem to have missed their mark considerably. The most interesting aspect of all of this is the fact that, after we have been more than 3 years in this financial crisis, the bankers continue to loot the system as if nothing ever happened.


True to form the Central Banks “saved” the financial system by saving those great financial institutions without whom the system would have collapsed, as was argued. Hardly were we out of the danger of collapse, the banks immediately went back to their old ways and were certain that this was a problem that would occur just once in a lifetime and now all was clear again. The real problem, however, had not been addressed but had simply been muddied.


In actuality, the losses produced of extending unsustainable levels of credit by the banks have been transferred to the public. Different ways were chosen to achieve this task in the form of free money for the banks, injection of government funds into some institutions, increase of basic money supply and so on.


The threat of system collapse would have been labelled blackmail if it would have occurred in another setting. However the bankers were able to influence the media, the legislators and regulators in their favour with all the financial resources available to them. Nobody was made to take any responsibility and no one was taken to account.


This represents a serious violation of the spirit of the Rule of Law that is the basis of western society. It seems that now the new rule is Might is Right. This changes many parameters in the compass of the social system within the western world. No one can be sure on what level and when one will be subjected to the financial abuse of those elites. Presently, the people in charge are trying to enhance financial repression of which one form is to keep interest rates below the level of inflation which affects mainly those that lived within their means over the past many years; another clear violation of the spirit of the Rule of Law as it transfers losses from bad investments to the innocent and decent part of the population. In addition, the increased level of government debt puts in doubt all those benefits promised by governments the world over.


It is interesting how the banks were able to confuse the public who was/is unable to grasp the actual situation. But considering the banker’s great financial resources, it seems not that much of a miracle to influence the media and the legislator and having politicians do their bidding. The question is what the heck can WE, THE PEOPLE do about it.


Usually, we could address such things on a political level as we are a democracy, right? But it seems that the system has been corrupted by all the money sloshing around and it is extremely difficult to find any electable person that will act against those powerful interests. In addition, it will take many years until sufficient numbers of persons with the new thinking and with integrity not to be corrupted by those lobbying efforts will be elected to office that will implement the changes needed. So, what should we do? Start a revolution?


Well, the blackmail used by the banks may be the only way to address the injustices that have occurred over the past few years. They showed us how to leverage one’s limited resources to achieve one’s goal. Therefore the following proposal to start the movement “SCARE 20.12.2012” should be seen in this context. The idea is that if by that time (20.12.2012) some serious injustices have not been removed from the system, people will start to withdraw their money from all financial institutions driving them into default. And it might work, because those who hesitate to support this threat may be left with no money as the banks will have to close down before all has been paid out.


Now, what demands are made if that scenario is to be avoided.


1. Bankers and past Bankers (all those working in the financial industry that earned in excess of $500k plus annually for more than 2 years during the past 15 years and this without any downside risk i.e. risk of financial losses, except the possibility of losing their job) have to be made personally accountable for their past activities and be removed from any such position that might directly or indirectly have influence on the money creation and lending aspects of the economy (this includes regulating agencies and politics) before 20.12.2012.


2. Present and past regulators have to be made personally accountable for their past activities and be removed from any such position that might directly or indirectly have influence on the money creation and lending aspects of the economy (this includes financial institutions and politics) before 20.12.2012.


3. Politicians that accept any financial support from institutions that are involved in the money creation and lending aspects of the economy will have to face a jail term of no less than 2 years without the possibility of parole.


When these 3 points are implemented before 20.12.2012, we the public will not destroy the financial system but support the way to find back to the RULE OF LAW and away from the idea of MIGHT IS RIGHT.

There's one way that a disaster can at least theoretically cause more long-run prosperity (this is the tiny kernel of truth in the argument)--it's extremely expensive to replace badly-designed infrastructure, and can be to the point where it's not recognized as a problem until it's been retarding development for a long, long time...at which point it is even more expensive to replace (because even more capital has grown up around it).

But that sort of thing is probably the exception rather than the rule.

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