People Should Not Provoke the Krugman!

But people do. And he is annoyed.

He is annoyed at Reaganite commenters who have been misled by Republican "economists":

Reagan and revenu: Ah - commenter Tom says, in response to my post on taxes and revenues:

Taxes were cut at the beginning of the Reagan administration. Federal tax receipts increased by 50% by the end of the Reagan Administration. Although correlation does not prove causation the tax cut must have accounted for some portion of this increase in federal tax receipts.

I couldn’t have asked for a better example of why it’s important to correct for inflation and population growth, both of which tend to make revenues grow regardless of tax policy.

Actually, federal revenues rose 80 percent in dollar terms from 1980 to 1988. And numbers like that (sometimes they play with the dates) are thrown around by Reagan hagiographers all the time. But real revenues per capita grew only 19 percent over the same period — better than the likely Bush performance, but still nothing exciting. In fact, it’s less than revenue growth in the period 1972-1980 (24 percent) and much less than the amazing 41 percent gain from 1992 to 2000.

Is it really possible that all the triumphant declarations that the Reagan tax cuts led to a revenue boom — declarations that you see in highly respectable places — are based on nothing but a failure to make the most elementary corrections for inflation and population growth? Yes, it is. I know we’re supposed to pretend that we’re having a serious discussion in this country; but the truth is that we aren’t.

He is annoyed by Ben Bernanke's insistance that any recession will be effectively over before we are sure that it has begun:

Not so fast - Paul Krugman - Op-Ed Columnist - New York Times Blog: One assumption in Ben Bernanke’s testimony today was that if a recession happens, it will be over soon, so stimulus has to come fast or not at all. It’s by no means clear that this is right. To be fair, I think it’s right to caution Congress not to do anything now that won’t come in quickly. But both recent history and the nature of our current problem suggest that we may be in for more than a few bad months. It’s true that the 2001 recession was officially very short. But the economy felt weak for much longer than that. Here’s my favorite picture, the employment-population ratio, once again:

[The employment-population ratio] kept falling through the summer of 2003. And the Fed certainly thought the economy was weak, and needed more help; it kept cutting rates long after the recession was officially over, and didn’t start raising them until 2004.

So the last slump de facto lasted about 2 1/2 years. And I don’t see why the same couldn’t happen this time. After all, what’s supposed to take the place of weak housing and consumer spending. Exports, yes — but how much will come, how fast?

Anyway, the point is that the last recession was not, in reality, short — and this one might not be, either.

And he is annoyed by Anna J. Schwartz:

Great Depression blogging: Can’t resist. I see that Anna Schwartz is blaming the Fed for the subprime crisis; I have some sympathy for this view, but not for the reasons she gives. But anyway, the article mentions the whole “did the Fed cause the Great Depression” issue, and explains succinctly why the Friedman-Schwartz claim that it did matters:

“The book was a bombshell,” says British monetarist Tim Congdon. “Until then almost everybody thought the free-market system itself had failed in the 1930s. What Friedman-Schwartz say was that incompetent government bureaucrats at the Fed had caused the Depression.”

The trick here is the word “caused”. Everyone agrees that the Fed failed to do what it should have in an effort to prevent the Depression. But saying that it “caused” the Depression is like saying that FEMA, through its inadequate response, caused the devastation of Katrina. The market system did fail; government’s failure was in not doing enough to rescue the system.

On what basis do I say this?... The monetary base is bank reserves plus currency in circulation. It’s what the Fed controls directly: monetary base only gets created or destroyed through Fed actions. M2 is a broad definition of the money supply, including a wide variety of bank deposits, preferred by Friedman and Schwartz.... M2 plunged in the Depression--and the Fed should have tried to prevent that. But the reason M2 plunged was because of the banking crisis, which led people to prefer cash to bank deposits and led the surviving banks to hold lots of reserves. This reduced the “money multiplier”: the amount of money supported by a dollar of reserves. M2 did not plunge because the Fed sharply reduced monetary base, although there were occasions in later life when Friedman asserted that it did.

The point is that the Fed’s sin was passivity. What the economy really needed was more activism.

All three of these acts of annoyance seem to me to be highly justified.

Comments

[howard]

of course they are justified! sometimes it's hard to look at aspects of our public discourse and not be annoyed.

but what i really wanted to do was throw in an extra point to reader tom of the reagnite restoration. in the absence of bruce bartlett himself to make the point for me, i'm here to note that reagan in fact oversaw a series of tax hikes after '81, and while correlation is not causation....

[Matt]

“money multiplier"

Dunno which economist invented this term, but it is totally misleading and confusing. The monetary science is accounting technology, not much more.

Banks keep money reserves for the same reason carrot farmers, cows and Wal Mart does, to cover the uncertainty in the future value of their wealth.

"Stimulus package"

When Reagan/Volcker; Clinton/Greenspan; Bush/Ben stand together and align government and central bank policy, all they do is guarantee the next recession 8 years down the road. Both are monopolies, both are cyclic, if they align then you get unstable feedback.

There are plenty of reason why the fed screwed up in the late 20s, one of them was that fed policy and US foreign policy was aligned, big mistake. Our initial support for the British pound caused a very bad start to events.

[nemo]

That failure to adjust for inflation is all over the place. It's frustrating to see in business and economics journalists. But it really makes me crazy to see it in economists who should know better.

The most glaring example is the failure to adjust the S+P 500 for inflation, or at least caution that comparisons between the twin peaks of 1,550 in 2000 and in 2007 are meaningless without an inflation adjustment.

A more esoteric example, but one close to my heart, is all the blather about the farm land price bubble in the Midwest. Or more accurately, the failure to identify the current price bubble (driven by ethanol subsidies) as a bubble.

If you take data on the price of Iowa farm land going back to 1910, and apply a inflation adjustment from bls.gov to turn nominal prices per acre into real prices per acre (for example, adjust all prices to year 2000 dollars), you will find that the price of an acre of Iowa farm land in 1910 and 1999 were identical: a little under $2,000 in real terms (i.e., year 2000 dollars).

In other words, zero real growth of your capital in 90 years. Virtually all your return was in the form of income, approximately 4% annually. Iowa farm land behaved like an inflation-protected bond paying 4% interest. Certainly a better return than real bonds, but still not as good as the Dow or the S+P 500 or whatever over the same era.

There was a lot of volatility in the price -- it swung up in the 20s, way down in the 30s, which then took until the late 50s to recover its equilibrium price. There was a bubble in the late 70s and early 80s, a crash in the late 80s, then back to equilibrium in the 90s. Since 1999 we have had an ethanol-fueled bubble that doubled the price in real terms. That bubble again will eventually burst.

People tend to think the price of farm land (like real estate in general) is not volatile because it doesn't go through wide swings in a matter of week and months the way the stock market does. But in reality, farm land (and real estate in general) is just as volatile. The waves just roll over us much more slowly -- slowly enough that the waves tend to be disguised by inflation, and slowly enough that people lose their memories of the manias of past decades.

As far as I can determine, I am the only human being who has ever applied an inflation adjustment to historical records of Midwest farm land prices. I first did it 3 years ago, and I continue to be astounded that no one else has ever taken this obvious step. And I am not even an economist or a journalist, much less an agricultural economist.

I'm just a biochemist turned computer scientist turned software developer, who thinks his family should unload at least of few acres of our inherited Iowa farm land while the suckers are paying top dollar.

Just go to northwest Iowa and listen to all the boosters on the ethanol bandwagon repeat the four most dangerous words on Wall Street: "This time it's different."

[green apron monkey]

Don't forget Barack Obama!

Mild policy difference leads to a month of columns.

[Neal]

This recession hit the Bush administration like a rock through the window. That's how far behind they are. The benefits of the real estate inflation blinded them to the accumulating danger and have left them with few tools to battle the recession.

Did the Fed cause the recession? No, but the foreseeable and verifiable consequences of their rate cuts and lax oversight of the progress of the inflation allowed it to progress where too much of the economy was dependent upon an unsustainable process lay much blame on the Fed's doorstep.

Let's see, at a neighborhood mid-summer party, the dad set the can of gasoline and box of matches on the porch for the kids to start the bonfire in the back yard. The dad then goes back into the house, and holds a long discussion with the other parents about how wonderful and trustworthy the kids are, and how well they did in school and how proud he is of them. Then WUUUMPH! The back door blows in and is filled with flames. The dad didn't start the fire...

How serious is this? How long will it last? Much more serious and much longer than Bernanke can admit at this point with GWB trying to create his "legacy". It is the "Katrina" of the financial world. GWB now has his nose pressed up against the window of the plane flying high over.
Once again, the "faith-based" nature of this administration is brought to the fore-it is best to believe it will be a hiccup, so we will treat it like hiccup.

And, corporate and upper earner tax cuts will be called for, because that is merely reflex in the republican world--that's where all of jobs are created, as "everyone knows". But this time they are entirely, verifiably wrong. The jobs and money came from middle and lower class demand via low rates and sloppy standards for house and house speculation that created the ocean of money and debt that the economy is drowning in now.

[Robert Waldmann]

Paul Krugman is too honest. Well not too honest for a pundit but too unwilling to accept necessary misleading by public figures. Bernanke is clearly trying to prevent (other) Republicans from using the threatening recession as an excuse to cut rich people's taxes forever. "Short term" means don't make the Bush boondoggles permanent. Bernanke's policy recommendations are reasonable given the extreme dishonesty and irresponsibility of other major policy makers including the President. While fighting the good fight he said something which was technically true but not the whole story. Krugman shows his valuable integrity by calling Bernanke on it. However, if he was sincerely irritated, he is too good to ever be allowed to be a policy maker.

Paris is worth a mass. Paris is certainly worth a mildly unhealthy snack of untransformed wine and crackers.

Krugman showed this before when he got angry with Obama for saying that the FICA ceiling should be adjusted to improve the actuarial balance of the Social Security pension and disability trust fund. Obama did not claim that said actuarial balance was a critical problem or comparable to the actuarial insolvency of the general fund or say anything false at all. He recommended a reasonable tax increase on the rich but not super rich. This is probably necessary and politically almost impossible (soaking the super rich should be easy but given the deficit and the AMT both are needed). Again Obama didn't lie, he just emphasized the politically useful fact (the trust fund might hit zero) and didn't mention the politically harmful fact (He wants to raise taxes on the upper middle class to balance the budget and get money for more social programs and even, shudder, foreign aid [I suspect]).

[Leila]

Hey, I'm just a bystander to all this economics theory, but it's clear to me that the best "quick fix" for our economy (and our public welfare) is to fix our damn infrastructure.

http://bedouina.typepad.com/doves_eye/2008/01/the-best-quick.html

I mean, why can't we spend serious money on bridge repair, new public transport systems, SF to LA high speed rail, public school construction and maintenance, and dam maintenance/clean water infrastructure? The Amerian Society of Civil Engineers said back in 2005 that we get a failing grade on our infrastructure investment and maintenance.

You don't have to have a Ph.D. in econ to know that spending all that money on such public works would create jobs and roll over dollars into the system. And unlike spending the money on the war in Iraq, infrastructure investment would give us something tangible in return, like clean water and nice public schools and bridges that don't fall down during rush hour commute.

What happened to this country? We spend money on Wifi for all but not for schools or bridges. WTF?

[Monte Davis]

St. Ronald To Krugman (shaking head slowly with a compassionate, avuncular smile]

"There you go again, Paul, with your 'facts.'"

[knzn]

Leila's economics sounds pretty good to me. Infrastructure projects give more bang for the buck than (even permanent) tax cuts, because 100% of the money will be spent. And in most cases they're also self-limiting (and therefore can be expected to be temporary). Obviously once a bridge has been repaired, it doesn't need to be repaired again for a while, so such projects should not be an ongoing budget-buster. They're also useful and likely to enhance productivity (though probably only a tiny bit) over time. The one concern would be with timeliness, since it takes time to decide and agree on which projects need to be done and to set things up for doing them. But I find Krugman pretty convincing on the point that timeliness is not as important as Bernanke (and Brad in his Morning Coffee video) thinks. The only major problem I see is a political one: for any stimulus to actually happen in 2008, it needs the President's signature, and President Bush may take a fairly hard line on anything that looks like Democratic big spending (hypocritical as that hard line may be after the Iraq War and Medicare Part D).

[knzn]

I like the last paragraph of the first Krugman passage. It's kind of a shame, though, that Paul Krugman had to be the one to write it, because, to the undiscriminating ear, it just sounds like the type of thing Krugman says all the time, and as a result it loses much of its force. He often says things that have a similar sound but that seem to me to be unfair. In this case it's hard to think of any reasonable objection. (I would say that commenter was something of a straw man, but such straw men seem to populate the entire Republican Party today.) I guess it's an inherent problem with having a regular column that you apply the same rhetorical techniques whether or not you've thought of something to say for which you really have an extremely strong case.

[knzn]

On the third passage:

This is an old argument, and to people who have followed it, the counterargument to Krugman's position is well known. The problem, so the counterargument goes, is that bureaucrats were assigned a task that could have been (and was, essentially, in 1907, and Schwratz would argue, on several occasions in the 19th century) performed well by the private sector. If you think the private sector is saintly, then a sin of omission by the public sector is still a sin. Of course the counter-counterargument (one of them, anyhow) is that the effective performance of that task by the private sector in 1907 required a concentration of power that rather contradicts the idea of a free market. Or, to put it differently, J.P. Morgan was simply another government, and just happened to be a more effective government than the one that controlled the money supply in the early 30s. (I guess the other counter-counterargument is that the circumstances on the prior occasions Schwartz would cite were never as severe as those the gave rise to the Great Depression.)

Actually, one could have a similar argument about FEMA, although in that case the issue is not so much government vs. private sector as federal vs. state & local government. FEMA clearly did not cause Hurricane Katrina, but arguably it did "cause" Hurricane Katrina to be a much more devastating event than it otherwise would have been. If it had not been considered FEMA's responsibility, the relevant state and local governments would have felt forced to take a much more active role than they did, and quite possibly would have done a much better job than FEMA did.

And I doubt anyone would dispute the point that the Fed did not cause there to be a depression, any more than FEMA caused there to be a hurricane. (Prior to the 1930s, economic downturns were generally called depressions; for some reason, in the subsequent time, we have only had "recessions" although some of those recessions have been more severe than some of the depressions of earlier times.) What the Fed can (rightly or not) be accused of causing is the "Great" in "Great Depression".

[howard]

to follow up on leila and knzn, it is certainly true that once upon a time, infrastructure projecs were regarded as perfectly standard keynesian counter-cyclical fare, but that was then: nonetheless, it is an excellent strategy, especially given the mammoth backlog of deferred maintenance (not to mention hardening of various infrastructural targets).

knzn, FEMA didn't come into existence in a state of nature; it came into existence because people had seen what state and local government were capable of in the face of overwhelming disasters. and surely, being a sensible soul, you'll acknowledge that while, as a theoretical matter, it is of course possible that the governments of louisiana and new orleans would display heretofore unimagined levels of efficiency, in practical terms, an argument that relies upon such a presupposition is resting upon a very thin reed indeed.

[wood turtle]

Re: Increase in revenues in Reagan years

Didn't the Reagan era also raise defense spending, which would have a positive effect on the economy?

It goes against logic that decreasing taxes would increase revenues. If there is an increase, it is probably from some other source. Lower taxes on the wealthy means that they save more of their money, that the government would have spent and added to the economy if taxes on the wealthy were higher.

Increased defense and R+D spending are not always wasteful spending- they bring about many new developments that the private sector is unable to provide, such as computers and GPS.

[Bruce Webb]

"It's frustrating to see in business and economics journalists. But it really makes me crazy to see it in economists who should know better."

nemo here is a secret. Generally all three do know better. Once you understand that a great deal of business and economic reporting is fundamentally ideological and only as analytical as needed to support the desired ideological conclusion there actually is a sense of relief. George Will is not an economic imbecile that doesn't understand the difference between nominal and real. He is a very intelligent and well read man who is paid to as necessary lie to you knowingly mixing up nominal and real numbers. And without naming names (not wishing to pick a fight) certain professional economists spouting obvious nonsense understand exactly who is paying their paycheck and why.
__________

On knzn's point. The history of public services is by and large the history of private market failures. In Franklin's Philadelphia both fire protection and libraries were privately run, and roads were largely private as well, supported by tolls. Well all of that ended up being pretty inefficient as a way of actually controlling fires, distributing information and distributing goods. I had a little spat with a wingnut who asked if Social Security was so obviously a good thing why we couldn't trust private markets to deliver it. And my answer was short "Hmm, History?"

People sometimes posture as if history simply began with Teddy Roosevelt's Trust Busting and define Progress as Deregulation. Well there was a 'before' and in a lot of respects it wasn't pretty. The market had centuries to deliver universal education, retirement security and poor relief. Well in those areas and many more the market failed and government ended up stepping in. We know what a largely unregulated economic and social system looks like, or I do and if necessary could lend people a book. The world didn't appear out of nowhere in 1900 or 1932, the twentieth century shaped itself from the centuries that actually occurred before it. And the lesson of those centuries is pretty clear: rarely do excess and inequity cure themselves, it almost always comes down to regulation.

There is a reason why teenage boys are drawn to Libertarianism, who wouldn't want to live in a world where by and large there were no rules. Most grownups understand why rules are necessary, some people have very little interest in equity and if left unhindered will manipulate any system for personal gain. Indeed most grownups look around at the world and see that that has always been so. From elephant seals to lions to magpies you see brains programmed to understand that simple concept 'Mine!!!' Unfortunately a lot of people haven't evolved to grasp the advantages of 'greatest good for greatest number' solutions for those multiple cases where 'Mine!' doesn't automatically deliver via the Invisible Glove.

[wood turtle]

"He is annoyed by Ben Bernanke's insistance that any recession will be effectively over before we are sure that it has begun.."

It would be interesting to know how Ben Bernanke formulates his opinions.

[christofay]

Ben Bernanke is another philospher king of the econ department. You can read about it in the recent NYTimes magazine. Everything was fine until this recent economic unpleasantness started which is resisting his orthodox salves so far.

[John Q]

Of course revenues went up when Reagan and Bush 1 were pres. They borrowed about $4 trillion (looking at national debt figures before & after). That money went (mostly) to arms contractors and their employees, and they paid taxes on it. So if you take an average tax of 20% on the borrowed $4 trillion pumped into the economy, that alone would account for a $800 billion jump in tax revenues.