September 6, 2009

How Krugman got it wrong

Paul Krugman has a long article in the NYT Magazine entitled "How Did the Economists Get It So Wrong?" which demonstrates quite nicely, by all the topics it avoids mentioning, how the economists got it so wrong.

Krugman's article is basically a nostalgia fest, with Krugman arguing for Keynes over Friedman, East Coast economics departments over Great Lakes economics departments. Big whoop ... It's like baseball fans arguing over Mickey Mantle vs. Ty Cobb as a centerfielder on your all-time all-star team.

I'm sorry, but this is the 21st Century, and the critical problems we face are the ones that economists have tried hard to ignore.

Krugman, for example, totally ignores inconvenient realities, such as the bipartisan push by politicians for more mortgage lending to minorities, which played such a huge role in the mortgage meltdown that launched the recession.

Similarly, immigration is never mentioned. As I blogged on August 26, 2005:
Amusingly, the extremely low interest rates that are propping up the economy today are causing a boom in home construction in the exurbs (i.e., creating more of the exurban sprawl that Krugman derides). While the home construction boom is doing nothing to help us compete better economically with the Chinese, it is sucking in more illegal immigrants to work in construction. In turn, the rapidly rising populations of unassimilated Hispanic immigrants is triggering more white flight out to the exurbs and raising demand for new McMansions. [What I wasn't aware of in 2005 was how much of the lending was going to minorities.]

You might think that this process would interest economist Krugman, but you'd be wrong. Since 2001, Krugman has barely mentioned immigration at all, despite writing 100 columns per year for the New York Times. The problem he faces is that he and his bete noire George W. Bush hold almost identical, visceral, non-rational views on the goodness of immigration, so Krugman is just not going to mention the entire subject.

You might think this merely reflects Krugman's personal idiosyncrasies, yet it's also representative of how almost the entire economics profession in the U.S. has been AWOL on this enormous issue, one with obvious and profound economic implications. Economists have largely ignored immigration in recent years, and when they do discuss it, often spew self-evident nonsense that they would flunk an Econ 101 student for writing on a test on any other subject.

Meanwhile, even when it comes to conventional economics, Krugman still doesn't get the Austrian theory of how malinvestment causes recessions. He's outraged that an opposing economist says:
“We should have a recession. People who spend their lives pounding nails in Nevada need something else to do.”

Personally, I think this is crazy. Why should it take mass unemployment across the whole nation to get carpenters to move out of Nevada?

I explained at length last October why all the giant unfinished casinos in Las Vegas inevitably cause unemployment. Krugman wrote in 1998:
For if the problem is that collectively people want to hold more money than there is in circulation, why not simply increase the supply of money? You may tell me that it's not that simple, that during the previous boom businessmen made bad investments and banks made bad loans. Well, fine. Junk the bad investments and write off the bad loans. Why should this require that perfectly good productive capacity be left idle?
I responded:
Look, the hulk of the Echelon [casino] on the Strip isn't perfectly good productive capacity. It is, at present, perfectly no good productive capacity. It's worse than nothing because the owner has to keep paying the interest on the loans he took out for the money he's already spent on it. He has calculated, however, that it's somewhat less ruinous to let it sit idle than to finish the monstrosity for the Californians who won't be coming again for years. So, the owner of the Echelon isn't going to be spending as much on either consumption or investment as he had been planning to....

But the newly unemployed of Las Vegas aren't good workers in the post-Bubble economy. They are construction workers, croupiers, waiters, touts, whores, and other professions that we won't have much use for for a number of years. Hopefully, some of them will develop new, more valuable skills, but that will take years. And when you actually check the numbers on the newcomers to Las Vegas, you don't get a warm feeling that many of these folks are going to turn into solar energy technology inventors or whatever anytime soon. If we're lucky, a lot of them will go home to Mexico, where it's much cheaper to be poor than in America. If we're not lucky ...

Unfortunately, due to advice like Krugman's, we didn't have much of a recession in 2001-2002 due to inflating the money supply, both by the Fed and by easing up on mortgage lending rules, so now we are paying the price in spades.

The Tech Bubble was stupid, but at least pouring huge amounts of money into Cisco Systems had a certain surface plausibility. Cisco actually made something ... In contrast, building oversized homes outside of Las Vegas for the mortgage brokers who sold their old homes to the new blackjack dealers who got hired by the new casinos to fleece the Californians with home equity loans on their houses that were going to rise in price to infinity never ever made any sense.

Now, anti-Krugmaniac realist economics has a very valuable policy implication, which is: "frictional problems" are incredibly painful. So, don't waste money in the first place. More specifically, the spending of a population is based on its wealth. In the long run, its wealth is mostly a function of its human capital (i.e., the population's ability to earn money). So, don't debauch the average human capital of your population.

My published articles are archived at iSteve.com -- Steve Sailer

29 comments:

Anonymous said...

...this is the 21st Century, and the critical problems we face are the ones that economists have tried hard to ignore... immigration is never mentioned...

Nor is this ever mentioned:

The 2009 Statistical Abstract of the United States
Section 1, Population
census.gov

Table 8. Resident Population by Race, Hispanic Origin, and Age: 2000 and 2007

Not Hispanic, White Alone, 2007
[in thousands]

50-54 years old: 15,363
45-49 years old: 16,109
40-44 years old: 14,597
35-39 years old: 13,272
30-34 years old: 11,425
25-29 years old: 12,497
20-24 years old: 12,930
15-19 years old: 13,006
10-14 years old: 11,866
05-09 years old: 11,255
00-04 years old: 11,175

Glaivester said...

May I suggest my rebuttal to Krugman's 1998 piece?

Rimowicz said...

yeah yeah we get it. you hate blacks n' mexicans. blah blah blah. what's new.

Anonymous said...

Steve, I recently found your blog and wish to thank you for addressing the housing bubble with respect to illegals. I don't know if you have seen this, but three years ago the Denver Post reported that:

One government source estimates 20,000 illegal immigrants hold FHA-insured loans in metro Denver alone.

Denver Post

This is just for Denver! I wonder what this figure is in places like California.

Cleveland Steamer said...

It's as if Krugman feels guilty and wants to get this big, smelly, steaming, nasty, mess off of his chest. But he's just too cowardly to accept personal responsibility.

Anonymous said...

yeah yeah yeah we get that Rimowicz can't actually make an argument. So what else is new.

...Steve, you are really a treasure. At some point in the not too distant future we'll look at Krugman's prize like we look at Duranty's. Another guy in the NYT, another liar.

Andrew said...

8 posts in one day! Slow down Steve! Spread it out a little...

Whiskey said...

I've mentioned it a LOT Anonymous. In fact, in my blog I devote considerable space to covering the lack of young people. You might check out for example my posts on the failure of Indy 103.1 FM, or why Rock died, or my post on the Brandon Tartikoff Strategy at NBC failing (because it's not the 1980's any more).

BUT ... the argument over inflationary/deflationary pressures is as old as Andrew Jackson vs. Bank of the United States, or William Jennings Bryan and the Free Silver movement.

What is interesting is who switched positions. In the old, pre-1968 America, it was Westerners who wanted inflation to wash away debts, and Eastern bankers who wanted low inflation. Now, the middle class is SCREWED by inflation and the Western Populists don't want inflation. Meanwhile, East Coast I-bankers and elites want inflation, to wash away their debts.

/I am also Testing99

Anonymous said...

Rimowicz sez
yeah yeah we get it. you hate blacks n' mexicans. blah blah blah. what's new.


Mmm, this wouldn't be Krugman himself, would it? Wouldn't surprise me if these NYT types resort to this low level of discourse when things don't suit them. It's not without historical precedence either.

tommy said...

yeah yeah we get it. you hate blacks n' mexicans. blah blah blah. what's new.

Now if only the Rimowiczes and Krugmans of the world would get it, then we might not be in the mess we are in today.

Anonymous said...

More specifically, the spending of a population is based on its wealth. In the long run, its wealth is mostly a function of its human capital (i.e., the population's ability to earn money).





Reminds me of that "what is wealth" argument we had here a month ago. It's hard to escape the conclusion that the people running the show don't know, and never even wonder.

Anonymous said...

Economics still enforces the Axiom of Equality--everyone's the same but for education. Thus, the Mexican immigrants are just like the Germans Benjamin Franklin ridiculed, or the Irish. To assert otherwise is 'beyond the pale'.

Henry Canaday said...

Krugman’s omission of government pressures on housing finance markets and incompetent immigration enforcement are intellectually significant because a strong implication of his generally true argument that financial markets are imperfect is that government must play a stronger role in regulating financial markets. And once we allow government to play this stronger role, the question is, what will government do with its enhanced powers? If government manipulation of housing finance ignited this particular crash, then we may have simply expanded government powers to do mischief, creating more opportunity for future disasters or slow stagnation.

This would have a precedent. ‘Cartoon Keynesianism’ fell into disrepute in the 1970s not chiefly due to its intellectual weaknesses, which were always real but had been ignored for quite a while, but because the powers this simplified model gave politicians were systematically abused, in the form of chronic spending indiscipline, excess monetary creation and weakening or distorting necessary incentives.

I think that is chiefly what the most reasonable 'freshwater' economists are worried about, and very rightly so.

Robert said...

So Rimowicz is saying that no one would ever make the argument that blacks and Hispanics got too many easy-money mortgages unless he was prejudiced against blacks and Hispanics. No other argument that might support such a position is allowed to be considered. Why? Blankout, as Miss Rand would say.

Hot Karl said...

It's as if Krugman feels guilty and wants to get this big, smelly, steaming, nasty, mess off of his chest. But he's just too cowardly to accept personal responsibility.

definitely agree.

Jeff said...

I have studied economics, as a man and as a boy, for over 40 years.

My impression of Krugman and the other Keynesian economists at U.S. universities is that they are nothing more than apologists for big government.

That's all they are: whores who always support more government spending. As such they play a useful role for the masters of the corporatist thief state.

A fun thing to do, if you meet up with one of these creeps, is to ask them how much government spending is enough: A trillion trillion? A googol? Infinity minus one? [h/t Thomas Woods]

They will never give you an answer to how much government spending is enough, because they are programmed to always answer "More!"
And, of course, big government debt is "not a problem."

Mr. Anon said...

"Anonymous said...

At some point in the not too distant future we'll look at Krugman's prize like we look at Duranty's. Another guy in the NYT, another liar."

Every "Nobel" Prize in Economics is a lie, given that such a prize was never in Alfred Nobel's original bequest. The people who award this ersatz "Nobel Prize" can no more legitimately do so than can I award someone a Victoria Cross.

Anonymous said...

Something else that economists never mention:


List of Nobel laureates by country
en.wikipedia.org

List of countries and territories by fertility rate
en.wikipedia.org


Note that no effort has been made to weed out the effect of Muslim immigration and fecundity on the following statistics [which, as a result, probably grossly overstate the fertility rates in question].

Also, note that a total fertility rate of 2.10 is widely believed to be necessary to maintain a stable population.


France
57 Nobel Laureates
UN TFR 2005-2010: 1.89
CIA TFR 2008: 1.98 ["Metropolitan France"]

Norway
11 Nobel Laureates
UN TFR 2005-2010: 1.85
CIA TFR 2008: 1.78

United Kingdom
113 Nobel Laureates
UN TFR 2005-2010: 1.82
CIA TFR 2008: 1.66

Denmark
13 Nobel Laureates
UN TFR 2005-2010: 1.80
CIA TFR 2008: 1.74

Sweden
28 Nobel Laureates
UN TFR 2005-2010: 1.80
CIA TFR 2008: 1.67

Netherlands
18 Nobel Laureates
UN TFR 2005-2010: 1.72
CIA TFR 2008: 1.66

Belgium
11 Nobel Laureates
UN TFR 2005-2010: 1.65
CIA TFR 2008: 1.65

Canada
17 Nobel Laureates
UN TFR 2005-2010: 1.53
CIA TFR 2008: 1.57

Switzerland
25 Nobel Laureates
UN TFR 2005-2010: 1.42
CIA TFR 2008: 1.44

Austria
19 Nobel Laureates
UN TFR 2005-2010: 1.42
CIA TFR 2008: 1.38

Germany
102 Nobel Laureates
UN TFR 2005-2010: 1.36
CIA TFR 2008: 1.41

Russia
23 Nobel Laureates
UN TFR 2005-2010: 1.34
CIA TFR 2008: 1.40

Italy
20 Nobel Laureates
UN TFR 2005-2010: 1.38
CIA TFR 2008: 1.30

Hungary
9 Nobel Laureates
UN TFR 2005-2010: 1.28
CIA TFR 2008: 1.34

Poland
12 Nobel Laureates
UN TFR 2005-2010: 1.23
CIA TFR 2008: 1.27

Japan
16 Nobel Laureates
UN TFR 2005-2010: 1.27
CIA TFR 2008: 1.22

Taiwan
1 Nobel Laureate
UN TFR 2005-2010: N/A
CIA TFR 2008: 1.13

Anonymous said...

And yet another thing that economists never mention:


RACE MIXTURE IN THE ROMAN EMPIRE
by Tenney Frank
American Historical Review
July 1916, vol. 21, no. 4: 689–708
theoccidentalquarterly.com

...By combining epigraphical and literary references, a fairly full history of the noble families can be procured, and this reveals a startling inability of such families to perpetuate themselves. We know, for instance, in Caesar’s day of forty-fi ve patricians, only one of whom is represented by posterity when Hadrian came to power. The Aemilii, Fabii, Claudii, Manlii, Valerii, and all the rest, with the exception of the Cornelii, have disappeared. Augustus and Claudius raised twenty-five families to the patriciate, and all but six of them disappear before Nerva’s reign. Of the families of nearly four hundred senators recorded in 65 A.D. under Nero, all trace of a half is lost by Nerva’s day, a generation later. And the records are so full that these statistics may be assumed to represent with a fair degree of accuracy the disappearance of the male stock of the families in question. Of course members of the aristocracy were the chief sufferers from the tyranny of the century, but this havoc was not all wrought by delatores and assassins. The voluntary choice of childlessness accounts largely for the unparalleled condition...

Anonymous said...

"Rimowicz said...
yeah yeah we get it. you hate blacks n' mexicans. blah blah blah. what's new."

Do you have anything useful to contribute? Facts to prove Steve wrong, say?
Howls of "Nanananana, you RACIST" don't impress us around here.

Cincinnati Bowtie said...

Krugman really needs to reverse his position. He's got it all backwards.

Mercer said...

Steve I share your hostility to high immigration and "diversity" dogma but I don't think you can blame them for financial meltdown. Diversity dogma was a factor in the housing bubble but don't I see how it caused worse credit crisis in 70 years. The financial meltdown was caused by Wall Street.

Diversity had nothing to do with the creation of credit default swaps and other derivatives which Buffett accurately called financial weapons of mass destruction. Diversity also did not call for investment banks to leverage their capital at 40 to 1 ratios.

Our immigration policies are flawed but so is our regulation of Wall Street. The financial meltdown was caused by bankers who take very risky bets and are bailed out when their bets are wrong - see Long Term Capital Management for the precedent.

Anonymous said...

Here is an interesting article on migrants, aka illegals, worldwide from the BBC

It points out how the recession has cut the number of Mexicans coming to the US by 40%. It has also taken a toll on remittances being sent home.

However, they are apparently staying put and not going home. The BBC doesn't mention this, but I bet the availability of food stamps, welfare, emergency room care and other freebies is keeping them here.

I wonder how many would self deport if only the government followed the law.

Anonymous said...

So, don't debauch the average human capital of your population.

How many hours would you last at Princeton or the NYT after speaking that kind of truth?

milam command said...

Wow. Someone's been reading some Austrian economics. Nice to see the start of some basic level of understanding, rather than the usual knee-jerk ad-hominem attacks on austro-libertarians you usually read here.

jimbo said...

Once again, Steve, you are being almost willfully obtuse. Krugman is not arguing that the half finished Casinos are "good productive capacity". He specifically says "write them off". But, he asks, why should other "perfectly good productive capacity", in say, Detroit or Portland or Boston, be idled because of bad investments in Las Vegas?

You are usually good at avoid talking about stuff you know nothing about. But in this case, you are taking talking points from your batshit insane Austrian associates, and your normally clearheaded analysis is suffering for it.

Truth said...

"So Rimowicz is saying that no one would ever make the argument that blacks and Hispanics got too many easy-money mortgages unless he was prejudiced against blacks and Hispanics..."

IS that what he was saying?

John Anello said...

I don’t know why sensible people even bother to discuss Paul Krugman as though he is a serious economist. His Nobel Prize work was not exactly groundbreaking and the rest of his work is just flat out wrong. He is little more than a political propagandist providing a fa├žade of intellectual heft to the redistribution goals of the Left.

Reactionary said...

But, he asks, why should other "perfectly good productive capacity", in say, Detroit or Portland or Boston, be idled because of bad investments in Las Vegas?

Because the prior investment in higher stages of production spurred by artificially cheap credit was as unwarranted in Detroit, Portland and Boston as it was in Las Vegas.

Idiot.