Paul Krugman: How Did Economists Get It So Wrong?

[oldhat]

http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?_r=1&hp=&pagewanted=all

How Did Economists Get It So Wrong?

It’s hard to believe now, but not long ago economists were congratulating themselves over the success of their field. Those successes — or so they believed — were both theoretical and practical, leading to a golden era for the profession. On the theoretical side, they thought that they had resolved their internal disputes. Thus, in a 2008 paper titled “The State of Macro” (that is, macroeconomics, the study of big-picture issues like recessions), Olivier Blanchard of M.I.T., now the chief economist at the International Monetary Fund, declared that “the state of macro is good.” The battles of yesteryear, he said, were over, and there had been a “broad convergence of vision.” And in the real world, economists believed they had things under control: the “central problem of depression-prevention has been solved,” declared Robert Lucas of the University of Chicago in his 2003 presidential address to the American Economic Association. In 2004, Ben Bernanke, a former Princeton professor who is now the chairman of the Federal Reserve Board, celebrated the Great Moderation in economic performance over the previous two decades, which he attributed in part to improved economic policy making.

Last year, everything came apart.

Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy. During the golden years, financial economists came to believe that markets were inherently stable — indeed, that stocks and other assets were always priced just right. There was nothing in the prevailing models suggesting the possibility of the kind of collapse that happened last year. Meanwhile, macroeconomists were divided in their views. But the main division was between those who insisted that free-market economies never go astray and those who believed that economies may stray now and then but that any major deviations from the path of prosperity could and would be corrected by the all-powerful Fed. Neither side was prepared to cope with an economy that went off the rails despite the Fed’s best efforts.

And in the wake of the crisis, the fault lines in the economics profession have yawned wider than ever. Lucas says the Obama administration’s stimulus plans are “schlock economics,” and his Chicago colleague John Cochrane says they’re based on discredited “fairy tales.” In response, Brad DeLong of the University of California, Berkeley, writes of the “intellectual collapse” of the Chicago School, and I myself have written that comments from Chicago economists are the product of a Dark Age of macroeconomics in which hard-won knowledge has been forgotten.

What happened to the economics profession? And where does it go from here?

[Puppycow]

The secret is out (http://gregmankiw.blogspot.com/2009/09/secret-is-out.html)

[NoZed Avenger]

Speaking only personally, I'd much more appreciate Krugman going back and tallying up his own success rate with predictions. It's been a couple years since I looked at that, but IIRC, his rate of success was pretty damn dismal.

Which is one reason I stopped paying much attention to him a couple years ago, coincidentally enough.

[themusicteacher]

Speaking only personally, I'd much more appreciate Krugman going back and tallying up his own success rate with predictions. It's been a couple years since I looked at that, but IIRC, his rate of success was pretty damn dismal.

Which is one reason I stopped paying much attention to him a couple years ago, coincidentally enough.

Wait, wait, don't tell me! It's a red herring...aha, I've got it! Survey says: genetic fallacy.

[NoZed Avenger]

Wait, wait, don't tell me! It's a red herring...aha, I've got it! Survey says: genetic fallacy.

Nope. Not making an argument.

Just my opinion on Krugman in general.

Also, incorrect usage of the term.

[Brainster]

Maybe, you know, they got it wrong because they were listening to Paul Krugman (http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html):

A few months ago the vast majority of business economists mocked concerns about a ''double dip,'' a second leg to the downturn. But there were a few dogged iconoclasts out there, most notably Stephen Roach at Morgan Stanley. As I've repeatedly said in this column, the arguments of the double-dippers made a lot of sense. And their story now looks more plausible than ever.

The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

[oldhat]

Maybe, you know, they got it wrong because they were listening to Paul Krugman (http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html):

Krugman giving background on Greenspan's role in creating both the dot.com bubble and housing bubble = Krugman created the housing bubble and ensuing crisis.

Gotcha...

I mean, did you even read the entire column or did you just skim the two paragraphs that sorta sounded like Krugman kinda maybe saying something that could conceivably lead one to believe he had something to do with the creation of the housing bubble?

[themusicteacher]

Nope. Not making an argument.

Just my opinion on Krugman in general.

Also, incorrect usage of the term.

It certainly seemed like an attack of this particular analysis based on his past analyses. I know that it isn't an exact genetic fallacy but you were, in effect, stating that because you believe his past analyses were largely incorrect than this one must be as well. Apologies, though. You were speaking of predictions, not analysis.

[NoZed Avenger]

It certainly seemed like an attack of this particular analysis based on his past analyses. I know that it isn't an exact genetic fallacy but you were, in effect, stating that because you believe his past analyses were largely incorrect than this one must be as well. Apologies, though. You were speaking of predictions, not analysis.

Yeah, we may well be right on other economists - I haven't looked at it enough to tell. His writing from up on high with no mention of his own past wrong predictions just grates a bit.

But my (minimal) post probably came off as an argument against his article, so that's my fault.

[Brainster]

Krugman giving background on Greenspan's role in creating both the dot.com bubble and housing bubble = Krugman created the housing bubble and ensuing crisis.

Gotcha...

I mean, did you even read the entire column or did you just skim the two paragraphs that sorta sounded like Krugman kinda maybe saying something that could conceivably lead one to believe he had something to do with the creation of the housing bubble?

Well, of course Krugman didn't create the housing bubble; nice strawman you've demolished there. Are you saying that Krugman wasn't endorsing the housing bubble? You'll have a tougher time proving that.

[oldhat]

Well, of course Krugman didn't create the housing bubble; nice strawman you've demolished there. Are you saying that Krugman wasn't endorsing the housing bubble? You'll have a tougher time proving that.

Yes, that's exactly what I'm saying.

You seem to have a tough time understanding the difference between reporting what people are saying and advocating an idea. Since this is so cut and dry to you, can you find the exact quote where he advocates a housing bubble? Are there any other examples of his advocating a housing bubble from other columns or speeches or is it just this one column?

Go ahead, I'll wait for you.

[oldhat]

http://krugman.blogs.nytimes.com/2009/06/17/and-i-was-on-the-grassy-knoll-too/

And I was on the grassy knoll, too

One of the funny aspects of being a somewhat, um, forceful writer is that I’m regularly accused of all sorts of villainy. I was personally responsible for the demise of Enron; my nonexistent son worked for Hillary; etc.. The latest seems to be that I called for the creation of a housing bubble — in fact, the bubble is my fault! The claim seems to be based on this piece.

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.

Here's Arnold Kling defending Krugman.

[Brainster]

Yes, that's exactly what I'm saying.

You seem to have a tough time understanding the difference between reporting what people are saying and advocating an idea. Since this is so cut and dry to you, can you find the exact quote where he advocates a housing bubble? Are there any other examples of his advocating a housing bubble from other columns or speeches or is it just this one column?

Go ahead, I'll wait for you.

From Krugman's column:

A few months ago the vast majority of business economists mocked concerns about a ''double dip,'' a second leg to the downturn. But there were a few dogged iconoclasts out there, most notably Stephen Roach at Morgan Stanley. As I've repeatedly said in this column, the arguments of the double-dippers made a lot of sense. And their story now looks more plausible than ever.

The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

In the first paragraph, Krugman points favorably to the double-dippers (Krugman's pet theory in 2001 that the economy was going to have back-to-back recessions. "Their story now looks more plausible than ever."

In the second paragraph, Krugman asserts (falsely) that the 2001 recession was not caused by rising interest rates. In fact, in late 2000 short-term interest rates were higher than long-term interest rates, which is a classic signal that slower economic times were ahead.

At this point Krugman gets into prescriptive mode. "To fight this recession the Fed needs more than a snapback; it needs soaring household spending..." Krugman does not say something like "To fight this recession, some have foolishly suggested the Fed needs more...." So it appears clear that Krugman is endorsing soaring household spending. And how does he think we can do that?

And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

If anything what Krugman expresses is that he doubts Greenspan will be able to pull off the economic recovery with a housing bubble; in that regard he was indeed proven wrong. But he should be used to that.

[boloboffin]

From Krugman's column:



In the first paragraph, Krugman points favorably to the double-dippers (Krugman's pet theory in 2001 that the economy was going to have back-to-back recessions. "Their story now looks more plausible than ever."

In the second paragraph, Krugman asserts (falsely) that the 2001 recession was not caused by rising interest rates. In fact, in late 2000 short-term interest rates were higher than long-term interest rates, which is a classic signal that slower economic times were ahead.

At this point Krugman gets into prescriptive mode. "To fight this recession the Fed needs more than a snapback; it needs soaring household spending..." Krugman does not say something like "To fight this recession, some have foolishly suggested the Fed needs more...." So it appears clear that Krugman is endorsing soaring household spending. And how does he think we can do that?



If anything what Krugman expresses is that he doubts Greenspan will be able to pull off the economic recovery with a housing bubble; in that regard he was indeed proven wrong. But he should be used to that.

I think Krugman is recommending a housing bubble to Greenspan the way that we might recommend the Truth Movement come up with some new arguments for what they believe. Krugman goes on to say that "Mr. Greenspan needs one to avoid awkward questions about his own role in creating the stock market bubble." Is Krugman endorsing Greenspan avoid awkward questions about his role in creating the stock market bubble? Or is this just a cynical "walk in their shoes" moment?

[Brainster]

I think Krugman is recommending a housing bubble to Greenspan the way that we might recommend the Truth Movement come up with some new arguments for what they believe. Krugman goes on to say that "Mr. Greenspan needs one to avoid awkward questions about his own role in creating the stock market bubble." Is Krugman endorsing Greenspan avoid awkward questions about his role in creating the stock market bubble? Or is this just a cynical "walk in their shoes" moment?

I can see the argument that Krugman is being descriptive rather than prescriptive; there is a snarky undertone that I'm probably not paying enough attention to. But it is interesting to compare Krugman today (deficits don't matter, more spending is needed) to the Krugman of 2001 (deficits matter horribly and tax increases--or at a minimum no tax cuts--are needed). One would almost think his opinion on deficits varies based on the party in power.

Almost.

[GreyICE]

I can see the argument that Krugman is being descriptive rather than prescriptive; there is a snarky undertone that I'm probably not paying enough attention to. But it is interesting to compare Krugman today (deficits don't matter, more spending is needed) to the Krugman of 2001 (deficits matter horribly and tax increases--or at a minimum no tax cuts--are needed). One would almost think his opinion on deficits varies based on the party in power.

Almost.

No. One would think that if one had never heard of John Maynard Keynes. Which would be an epic accomplishment, because he's probably the most influential person on economic thought in the past century.

If one had heard of John Maynard Keynes (because one was not an idiot), one would know that Keynes avocates the government running surpluses when the economy is good, and using deficit spending to boost the economy when it's bad.

Therefore Krugman (a self-described Keynesian) calling for no deficit spending when the economy was doing well, and deficit spending when it is doing poorly is a little like, I dunno... oh right, a completely logical thing to expect him to do.

One would almost think you were entirely ignorant of economics. Almost.

Reality: 1 (but still liberally biased)

[BeAChooser]

If one had heard of John Maynard Keynes (because one was not an idiot), one would know that Keynes avocates the government running surpluses when the economy is good, and using deficit spending to boost the economy when it's bad.


If one really knew about John Maynard Keynes (because one was not an idiot), one would also know that Keynes put limits on using deficit spending to boost the economy. He ONLY recommended spending that would result in inflation UNDER 2 percent. Where is inflation now, GreyIce, and where do the experts say it is headed as a result of Obama's spending programs?

Keynes spoke ardently against the dangers of inflation, calling it a crime by politicians to steal the savings of citizens. Here are Keyne's own words:

http://books.google.com/books?id=B-iNoOEoSnkC&pg=RA1-PA101&lpg=RA1-PA101&dq=keynes+recommended+inflation+2+percent&source=bl&ots=4xlAA4fHqp&sig=9K8X-oSsbKoB1Yn3kDw1Nn81HdU&hl=en&ei=QuO-SbmVApmktQPH9LiwDA&sa=X&oi=book_result&resnum=1&ct=result


Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbtrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. ... snip ... Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.


So do you still agree with Keynes, GreyIce? :D

[Hindmost]

Anyhow, back on the OP.

I think the major reason economists fail is due to the fact that they don't take human nature into account. Economic theories are based on people following the theory. The equations don't follow ideologies and greed.

The current crisis was mainly due to wall street greed. They were asking for any mortgage, leveraging them at 25 to 1 and selling them to the highest bidder. (Iceland bid too often.) The wall street people took their commisions and didn't care about the leverage. Fannie and Freddie tried to play catchup when they lost their market share, and helped make things worse. The majority of the problem was due to people taking out second mortgages to finance new cars, additions to their home and vacation homes. Economic theory expects people to follow reasonable rules. A lot of people with a lot of power didn't because they didn't care--their money was in the bank and not in the mortgage packages.


Then isn't it remarkable that the politics of teacher's unions don't reflect that split?

The union's politics tend toward the people that give them support...just like any group. That typcially doesn't involve the republican party--such as with the No child left behind bill. However, the teachers did work uphold the bill despite no help.

glenn

Sidebar: Here in Ct, when Gov Roland was elected, he immediately cut funding teacher's retirement fund causing a shortfall for 8 years--about 2 billion dollars. It gave the budget a false surplus. You don't make friends that way.

[lomiller]

If one really knew about John Maynard Keynes (because one was not an idiot), one would also know that Keynes put limits on using deficit spending to boost the economy. He ONLY recommended spending that would result in inflation UNDER 2 percent.

Inflation is currently near zero…

[Yoink]

No. One would think that if one had never heard of John Maynard Keynes. Which would be an epic accomplishment, because he's probably the most influential person on economic thought in the past century.

If one had heard of John Maynard Keynes (because one was not an idiot), one would know that Keynes avocates the government running surpluses when the economy is good, and using deficit spending to boost the economy when it's bad.

Therefore Krugman (a self-described Keynesian) calling for no deficit spending when the economy was doing well, and deficit spending when it is doing poorly is a little like, I dunno... oh right, a completely logical thing to expect him to do.

One would almost think you were entirely ignorant of economics. Almost.

Reality: 1 (but still liberally biased)

Ouch.

[BeAChooser]

Originally Posted by BeAChooser
If one really knew about John Maynard Keynes (because one was not an idiot), one would also know that Keynes put limits on using deficit spending to boost the economy. He ONLY recommended spending that would result in inflation UNDER 2 percent.

Inflation is currently near zero…

Yes, but ...

"would result"

http://fintrend.com/ftf/images/charts/MIP/Moore_Inflation_Predictor.htm

http://forecasts.org/inflation.htm

And it may already be worse than that:

http://www.huffingtonpost.com/kevin-phillips/the-new-politics-of-infla_b_206551.html


Something else New York and Washington have enjoyed is finagled U.S. inflation data, which during this decade understated price-hike reality by about one half. Bill Gross of PIMCO, the world's biggest bond manager and a critic of Pollyanna statistics, pointed out in 2008 that over the decade, global inflation had averaged nearly 7 percent even while Washington proclaimed an official U.S. average of 2.6 percent. "Does it make any sense," said Gross, "that we have a 3 percent to 4 percent lower inflation rate than the rest of the world?"

Yes and no. No, it doesn't have much statistical logic, but yes it does make tactical sense if you are a Fed chairman running a low-inflation pretense for Wall Street leverage gamesters, G-7 central bankers and Washington budget pseudo-balancers. None of these power centers can afford the various inhibitions attendant on recognizing a Second Price Revolution. Moreover, despite the Greenspan-Bernanke pretensions that the decade's inflation was in the 2.6 percent range, in mid-2008 the International Monetary Fund let the cat out of the bag by candidly acknowledging the "broadest and most buoyant commodity price boom since the early 1970s."

The IMF's published data on country-by-country average consumer prices for the 1980-2008 period - charts are available on their website - underscores the Asian depth and sweep. In a nutshell, the data presents the 2000 price level in each nation as 100 and shows the earlier and later inflation rates as percentages of that amount. Here are the progressions for Asia seven biggest economies: China - 25 (1980), 100 (2000) and 158 (2008); India - 18 (1980), 100 (2000) and 144 (2008); Indonesia - 13 (1980), 100 (200) and 201 (2008); Japan - 75 (1980), 100 (2000) and 100 (2008); Korea - 33 (1980), 100 (2000) and 128 (2008); Pakistan - 21 (1980), 100 (2000) and 159 (2008); and Russia - 21 (1995), 100 (2000) and 266 (2008). Note that the 2008 figures were based on IMF estimates. The average 400-600 percent rise is roughly comparable to the changes in Europe during that continent's Price Revolution.


:D

[lomiller]

"would result"



You really need to present more evidence for that then pictures posted by random crackpots or non-sequitur quotes. Arguments that require you to assume large scale conspiracy or reject all legitimate sources really don’t cut it.

[GreyICE]

If one really knew about John Maynard Keynes (because one was not an idiot), one would also know that Keynes put limits on using deficit spending to boost the economy. He ONLY recommended spending that would result in inflation UNDER 2 percent. Where is inflation now, GreyIce, and where do the experts say it is headed as a result of Obama's spending programs?

Keynes spoke ardently against the dangers of inflation, calling it a crime by politicians to steal the savings of citizens. Here are Keyne's own words:

http://books.google.com/books?id=B-iNoOEoSnkC&pg=RA1-PA101&lpg=RA1-PA101&dq=keynes+recommended+inflation+2+percent&source=bl&ots=4xlAA4fHqp&sig=9K8X-oSsbKoB1Yn3kDw1Nn81HdU&hl=en&ei=QuO-SbmVApmktQPH9LiwDA&sa=X&oi=book_result&resnum=1&ct=result



So do you still agree with Keynes, GreyIce? :D

He was talking about hyperinflation, Bloody. It was clearly about post-WWI germany, with inflation rates in the range of 100% or higher. You can't possibly justify your insane 2% inflation figure, because every economist since... ever... has accepted a solid, low rate of inflation as a fine thing.

Since our inflation rate is currently too low, nevermind hyperinflation, can you possibly justify this insane statement?


Also, I repeat: A Keynesian calling for deficit spending in bad times and surpluses in good times is as predictable as it gets. The fact that some potatoes might not like that because Milton and the wibbly-wobblies get their knickers in a twist when someone suggests the government might be able to do something doesn't mean Keynesians need necessarily share that viewpoint.

[BeAChooser]

He was talking about hyperinflation, Bloody. It was clearly about post-WWI germany, with inflation rates in the range of 100% or higher. You can't possibly justify your insane 2% inflation figure, because every economist since... ever... has accepted a solid, low rate of inflation as a fine thing.

Are you claiming that the trillions of dollars in debt Obama is now adding won't be inflationary?

Are you claiming that the rapid expansion of the money supply since Obama took office isn't inflationary?

Here's what Keynes thought:

http://www.richmondfed.org/publications/research/economic_review/1981/pdf/er670101.pdf


Keynes On Inflation

Thomas M. Humphrey

... snip ...

Of these four variables Keynes paid particular attention to the expected rate of inflation, pointing out that its inclusion in the money demand function means that money demand is not completely independent of money supply. For, according to him, rapid increases in money supply may generate expectations of future inflation (expectations that constitute the anticipated depreciation cost of holding money) and thereby lower real money demand. This, he noted, implies that money growth affects prices both directly and also indirectly through the price expectations variable in the money demand function. The indirect effect magnifies the initial impact of money growth on inflation, causing prices to rise faster than the money stock itself.


So do you agree with Keynes that increasing the money supply is inflationary?

And read what that article states about the many negative aspects of inflation noted by Keynes? Are you going to completely ignore that?

Keynes did identify one area where inflation seemed to be good. And what he said is something that is interesting in the light of Obama's efforts to stimulate the economy and reduce unemployment:


First, only profit inflation has the power to stimulate output and growth. "It is the teaching of this treatise," he said, "that the wealth of nations is enriched, not during income inflations, but during profit inflations ... at times, that is to say, when prices are running away from costs" [9; p. 137]. More precisely, profit inflation stimulates both current and long-term real output. It stimulates current output by raising prices relative to wages thus lowering real wages and increasing employment. And it stimulates long-term real output by shifting income from wages to profit thereby permitting faster capital accumulations and a higher rate of economic growth. In short, the effects of profit inflation include "the spirit of buoyancy and enterprise and the good employment which are engendered; but mainly the rapid growth of capital wealth and the benefits obtained from this in succeeding years" [9; p.144]. These benefits, however, are only when prices are outrunning costs, leaving a substantial margin of profit to finance investment and growth. They cannot occur in income inflations where wages rise as fast as prices and thus annihilate the very profits that constitute both the means and the inducement to economic growth. ... snip ... In this connection, he advanced the hypothesis that the early industrialization of England and France had been powered by profit inflation. "It is unthinkable," he declared, "that the difference between the amount of wealth in France and England in 1700 and the amount in 1500 could ever have been built up by thrift alone. The intervening profit inflation which created the modern world was surely worth while if we take the long view.


Now isn't that an amazing assertion given how anti-profit Obama and the democrats seem to be? They rail against profit at every turn. So do many of Obama's supporters on this forum. They seem to disagree with Keynes about the goodness of profit, don't they? :D

And finally, regarding my 2 percent claim, we come to this in the same above source:


Lest one wrongly conclude from the foregoing that Keynes of the Treatise was an out-and-out inflationist, three cautionary observations should be made. First, he was referring to gently rising prices and not to the rapid double-digit inflation that is unfortunately so common today. More precisely, he was referring to slow creeping secular inflation of no more than 1 to 2 percent per year. Today such mild inflation would be viewed as constituting virtual price stability. Second, his analysis of beneficial inflation refers chiefly to capital-poor preindustrial societies and not to wealthy modern capitalist economies. ... snip ... Under these conditions it is conceivable that slowly-creeping profit inflation might indeed have spurred industrialization not only by diverting resources from consumption to capital formation, but also by breaking feudal bonds, stimulating enterprise, encouraging market-oriented activity, and widening the scope of the market. These latter benefits, however, are no longer available in wealthy, market oriented modern capitalist economies that are more likely to find secular inflation a curse rather than a blessing. For this reason Keynes refrained from recommending even slightly inflationary policies for modern economies.

Finally, it should be remembered that Keynes was referring to profit inflation characterized by prices persistently rising faster than wages and not to modern inflations in which wages sometimes rise ahead of prices or at least follow them without delay thereby wiping out the profits generated by the price increases. As previously mentioned, Keynes held that inflation stimulates growth only if wages lag substantially behind prices leaving a large and persistent margin of profit to finance capital formation. This wage lag, however, is hardly characteristic of modern inflations in which wages rise swiftly not only to restore real earnings eroded by past inflation but also to protect real earnings from expected future inflation. The clear implication is that Keynes would have opposed these modern inflations, which according to his analysis are income rather than profit inflations.

Accordingly, it is not surprising that Keynes, at the end of a long passage extolling the historical accomplishments of profit inflation, nevertheless declared, "I am not yet converted, taking everything into account, from a preference for a policy today which, whilst avoiding deflation at all costs, aims at the stability of purchasing power (BAC - i.e., zero inflation) as its ideal objective" [9; p.145]. There is no reason to believe that he ever changed that position. On the contrary, there is strong evidence that he remained a determined foe of inflation and an adamant proponent of price stability even to the extent of warning of the potential danger of inflation in 1937 when the unemployment rate was in excess of 10 percent of the labor force.

Articles in The Times (1937)

The most convincing evidence of his continuing strong opposition to inflation in the 1930s, even after his publication of his celebrated General Theory, appears in four articles he wrote for The Times in early 1937. There in discussing policies for dealing with unemployment at the business cycle peak of 1937, he made it abundantly clear that his primary concern was preventing inflation. In particular, he argued that the 1937 unemployment rate, although very high ("indeed, as high as 12.5 percent"), was nevertheless at its minimum noninflationary level at which demand pressure must be curtailed to prevent inflation. Accordingly, he recommended a sharp cutback in government expenditure on the grounds that the economy was rapidly approaching the point where further increase in aggregate demand would be purely inflationary. "I believe," he said, "that we are approaching, or have reached, the point where there is not much advantage in applying a further general stimulus at the centre" [4; pp. 11, 44, 56].


In short, you folks have it all wrong. Keynes wouldn't have agreed with Obama's inflationary policies. Far from it. :D

[lomiller]

You are the one making the claim that current policies are inflationary, you are the one responsible for backing up that claim. At present that claim remains totally unsubstantiated by any reliable source. While there is agreement that it’s important for the Fed to get the exit strategy right that’s true of any recession, and you haven’t given any evidence they are getting it wrong other then your generic hatred of Obama and centrist economists in general.


As an extra, here are some facts and figures:

Since Obama took office in January M2 money supply has increased by 2.8% which is only slightly higher then the long term rate required to satisfy the demands of economic growth.

Spending under Obama has remained consistent, most of the projected deficit comes from the drop in revenue and spiraling Mandatory spending he inherited from Bush. As I pointed out in another thread, an apples to apples comparison of discretionary spending shows Obama’s 2010 budget has only a $50 billion increase over Bush’s 2009 budget.

http://www.federalreserve.gov/releases/h6/Current/

http://en.wikipedia.org/wiki/2009_United_States_federal_budget
http://en.wikipedia.org/wiki/2010_United_States_federal_budget
Keep in mind that Bush’s budgets, including the 2009 budget kept the cost of the Iraq war off the books so it’s over an above the spending that shows up here. Obama put it back on the books so it does show up under discretionary spending. This accounts for ~$150 billion in discretionary spending.

[mhaze]

You are the one making the claim that current policies are inflationary, you are the one responsible for backing up that claim. At present that claim remains totally unsubstantiated ....Nonsense. You are not applying a reasonable time frame to your assertion. It is as if someone lit a fuse to a firecracker and you stood there watching the fuse burn saying...

You are the one making the claim that a firecracker will go off, you are the one responsible for backing up that claim.

For your statement to have merit you need to rephrase it something like...

"Inflation has historically kicked in n monthes after big spending increases. We are now at n+5 and..."

You have not done this because you cannot.

[billydkid]

Well, not all economists got it "so wrong". Of course, these people - the one's who foresaw it - are all fruitcakes and whackos. And, of course, all the mainstream economists have it right, now. The recession is over. Starting jacking up those cards again.

[Darat]

Split about economists being more likely to be democrats or liberals or both moved to: http://forums.randi.org/showthread.php?t=153289. Please keep to the topic of the opening post and discussion that follows from that.

[lomiller]

Nonsense.

The requirement to back up the claims you have made is not nonsense. You have provided absolutely nothing in the way of evidence that current policies will result in inflation you have simply plugged you ears, stamped your feet and insisted it must be so because you hate anyone who isn’t an extreme right wing conservative.

[mhaze]

The requirement to back up the claims you have made is not nonsense. You have provided absolutely nothing in the way of evidence that current policies will result in inflation you have simply plugged you ears, stamped your feet and insisted it must be so because you hate anyone who isn’t an extreme right wing conservative.Let me guess: "This time it's different?"

You ignore over a hundred historical cases of currency inflation and the time frames illustrated therein.

I believe my prior criticism of your logic is valid :
For your statement to have merit you need to rephrase it something like...
"Inflation has historically kicked in n monthes after big spending increases. We are now at n+5 and..."
You have not done this because you cannot.

[GreyICE]

Are you claiming that the trillions of dollars in debt Obama is now adding won't be inflationary?

Are you claiming that the rapid expansion of the money supply since Obama took office isn't inflationary?

Here's what Keynes thought:

http://www.richmondfed.org/publications/research/economic_review/1981/pdf/er670101.pdf



So do you agree with Keynes that increasing the money supply is inflationary?

And read what that article states about the many negative aspects of inflation noted by Keynes? Are you going to completely ignore that?

Keynes did identify one area where inflation seemed to be good. And what he said is something that is interesting in the light of Obama's efforts to stimulate the economy and reduce unemployment:



Now isn't that an amazing assertion given how anti-profit Obama and the democrats seem to be? They rail against profit at every turn. So do many of Obama's supporters on this forum. They seem to disagree with Keynes about the goodness of profit, don't they? :D

And finally, regarding my 2 percent claim, we come to this in the same above source:



In short, you folks have it all wrong. Keynes wouldn't have agreed with Obama's inflationary policies. Far from it. :D

Keynes was entirely capable of writing. He did quite a bit of it.

Try quoting him when you're shoving words down his throat.

Your usual sources trying to reimage the most influential economist of the last century into a supporter of the inane doctrines of the current American right wing are not what we call 'primary.'

Once again, Keynes wrote copiously on the subject of economics. Having to quote 'Essays on Inflation' (A book by a third party, which copiously gives examples of Thomas M. Humphery's view of Keynes, but very little... Keynes) to me is sad. Try 'General Theory of Employment, Interest, and Money' some time. You might learn something.

Here, let me quote Krugman on him:

Stripped down, the conclusions of The General Theory might be expressed as four bullet points:

• Economies can and often do suffer from an overall lack of demand, which leads to involuntary unemployment

• The economy’s automatic tendency to correct shortfalls in demand, if it exists at all, operates slowly and painfully

• Government policies to increase demand, by contrast, can reduce unemployment quickly

• Sometimes increasing the money supply won’t be enough to persuade the private sector to spend more, and government spending must step into the breach

This might give you some idea how badly off you are on Keynes, how little you've understood him. Probably not. I've dealt with your hallucinatory ideas of reality for a while, and I've pretty much given up.

What it will do is give people a reason to research Keynes rather than 'trusting' you (if any still do). That's really all that needs to happen for you to be utterly discredited here (hint: Keynes would have been quite happy with a restoration of employment levels that left the inflation at, oh, 6% (heh... 2%... heh, you don't even know what's currently going on).

[lomiller]

Let me guess: "This time it's different?"

Every industrialized country in the world has deliberately expanded it’s money supply for decades, and guess what, no hyperinflation. Clearly you are the one claiming “this time it’s different” but refuse to give us any reason why it’s different, other then the fact you hate anyone right wing extremists.


"Inflation has historically kicked in n monthes after big spending increases.

That’s both incorrect and irrelevant. There are no big spending increases, and inflation is primarily a function of monetary policy.