Krugman on supply side

By and large, the elite ignores the argument that our economic crisis is supply side, as if no one could possibly be so crazy, ignorant and stupid as to make such an obviously silly argument.

However, when Professor Pedro Schwartz argued that the problem is supply side, Krugman responded passionately rather than ignoring and mischaracterizing the argument.:

It has been exceedingly disappointing how many people on one side of this debate have resorted to attempts to pull credentials, to claim that people on my side of the debate don’t have the intellectual standing to weigh in on these issues. … This is not an appropriate way to argue.

This, of course, is total projection.  It is Krugman’s side that suggests that supply siders are gap toothed gun nuts hoarding beans and bullets and having sex with their sisters.  Of course, supply siders sometimes do hoard gold, beans and bullets, but they are not gap toothed, and are considerably less apt to have sex with their sisters than Krugman’s side.

At 13:41 in the video Professor Pedro Schwartz protests about this mischaracterization of his argument. Then Krugman starts making a relevant counter argument.

The main thing I would say is, that of the two views, that this is essentially a supply problem versus this is essentially a demand problem …

This is a big concession, Krugman admitting that there are two views, rather than the official orthodoxy being the self evident, uncontroversial, and uncontested truth. This is not the first time Krugman has wandered off the reservation.  Recall when he cheerfully acknowledged that death panels were an essential feature of Obamacare, deviating from the uniform orthodoxy that Sarah Palin’s reference to death panels proved that she was a retard whose father was also her grandfather.

In a way Nature had given us an excellent experiment  …  at vast human cost …  but we have just had an experiment. There were three predictions, three crucial predictions, that differentiated these two views of what the nature of the problem was

One was what would happen to interest rates, where … and lets leave aside the solvency issue …

Let us not leave aside the solvency issue, since supply siders are calling the current situation a bubble in taxpayer futures, implying that the demand side prescription is going to render nation states insolvent.

The question was would large scale borrowing on the part of the public sector in the face of a depressed economy. compete with the private sector for funds, and therefore cause interest rates to rise. And there were some very harsh debates about that in early 2009 with many people asserting with great confidence that those US budget deficits would lead to soaring interest rates.

Obviously not, right?

The crisis is precisely that the private sector has not been investing, does not want to use those funds to create wealth. The question then is what is deterring the private sector from building and creating. Lack of demand, or unpredictable regulation and regime uncertainty? Is the lack of private sector investment caused by demand side problems, or supply side problems. Krugman’s argument begs the point, assuming that which is to be shown.

There was the question what would large expansion of the monetary base do,to inflation?

And if you had a supply side view you said that there is a certain amount of production, and if we create more money it is going to chase more goods and this is going to lead to vast inflation.

And that has not happened.

Rather, the demand side view was that if we create more money, it is going to chase more goods, and this will elicit more goods, and a corresponding increase in investment and reduction in unemployment.

What in fact happened is that for the most part, it did not chase more goods, but, to the extent that is did chase more goods, more goods were not elicited.  We have had a substantial increase in nominal GDP, which is more money chasing more goods, and yet consumption per head of cars, meat, big macs, and electricity has fallen.  We don’t have vast inflation, because expansion of the money supply was far less successful in eliciting demand than anyone expected, but we do have inflation, which, on the demand side view, we should not have. Increasing demand has not increased production to meet that demand. This is the big failure of the demand side story, the acid test telling us that the demand side story is false, and the supply side story is true.

And then there was the question what would happen with governments that for whatever reason did sharp cuts in spending.  Would that be expansionary, because it released resources to the private sector, or would it be contractionary?

And unfortunately Europe has given us some clear evidence on all of that.

But no European governments cut spending, except for Estonia, and in Estonia, it was expansionary, and did release resources to the private sector.

In most of Europe, “austerity” has meant increasing expenditure by amounts that were merely extraordinary, astounding, and unprecedented, instead of extraordinary, staggering, stupendous, and astounding, while increasing taxes to levels that were far beyond the Laffer limit on the rich, and often beyond the Laffer limit on the poor.  Supply siders point out that raising taxes was contractionary in the past, and predicted that raising taxes would be contractionary, and threatening further tax rises is contractionary, and threatening further taxes on capital is especially contractionary, and so they have proven to be.

Increasing government spending is observed to be contractionary, in that the infamous Keynesian multiplier is observed to be less than unity for spending, while increasing taxes is also contractionary, in that the famous Keynesian multiplier is more than unity for taxing.

Conversely, decreasing government spending is expansionary, even without decreases in taxes, and decreasing taxation is expansionary, because, at the margin, most government spending is destructive and disruptive. The US government would have achieved better results had it spent money bombing its own cities, rather than spending money building housing through HUD projects. No one wants HUD spending money near where they themselves live. The more money the government spends, the harder it is to spend it productively. Even if the first dollar of government spending produces something useful, builds roads, collects garbage, protects people and property, helps widows and orphans, the last dollar of government spending bulldozes neighborhoods, creates garbage, and funds whores and muggers.

The one and only European government to implement austerity for the public sector, rather than the private sector, was Estonia, and in Estonia, austerity worked.

3 Responses to “Krugman on supply side”

  1. Anonymous says:

    There was a Columbia U econ professor who was recently found to be having sex with his 20something daughter.

  2. Bruce Charlton says:

    Interesting stuff – thanks.

    *

    Here in the UK all the above applies – plus there are extraordinary levels of (ahem) ‘unskilled’ immigration (much of it by ‘asylum seekers’) – which situation is not (deliberately not) being monitored or counted by the government.

    (I checked this personally by an e-mail to the migration watch group.)

    So we can only go by what we observe. e.g. The native birthrate is very low, but state school numbers are expanding by some 2-3 percent per year, apparently.

    In round numbers it may be that the population has been increasing by in excess of half a million, nearly 1 percent, per year – and that this population is essentially entirely composed of dependents (the women do not work; men do not work, or work part time or at very low level jobs and there are large families). Yet it looks as if the arrivals are living at a pretty high standard of living – at least 25 000 pounds per year per family in total benefits by the look of it.

    So – as well as the economic factors you mention above – there is probably in excess of 12.5 billion per year being subtracted from the productive sector – which in round numbers is some 1000 or more pounds extra subtracted each years per productive household.

    And there is no end in sight for this process – all this in addition to the standard economic recession.

    *

    What economists neglect is that governments have learned how to disguise the situation – for example the (literally) incredible levels of UK immigration have been achieved by dispersing the arrivals very evenly throughout the country, so that every town has its ‘share’ – of some few percent every few years, but nowhere has has the kind of avalanche which would be likely to trigger a political response.

    And of course national statistics are 1. worse than lies, 2. the only admissible evidence for public discussion.

    So things will need to get very bad – economically speaking – indeed before anything happens. Until that point, the problem will be, and is, deniable.

    • jim says:

      In round numbers it may be that the population has been increasing by in excess of half a million, nearly 1 percent, per year – and that this population is essentially entirely composed of dependents (the women do not work; men do not work, or work part time or at very low level jobs and there are large families).

      Pretty much the same situation in the US. No enforcement against movement across the Mexican border, extraordinarily generous welfare for illegals.

      In the period 2005-2007 in the Bay area, the vast majority of million dollar mortgages were to unemployed or marginally employed illegal Mexican immigrants (personal observation, statistics appear to show otherwise). In the ensuing crisis, ninety nine percent of the mortgage defaults in the bay area were by non asian minorities (no statistics are available, but this conclusion confirmed by the locations where the defaults occurred, for which we do have statistics). This is not entirely because whites were cautiously reluctant to take on excessive debt, it is in substantial part because whites were able to take advantage of affirmative action by unloading over mortgaged houses onto non asian minorities.

      However the problem is not primarily that the government is importing an underclass, but that it is making white people underclass. The fix is not to keep the coloreds out, but to deprive the underclass of votes – possibly by depriving everyone of votes.

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