Tag Archives: Krugman

Chart of the Week

This, below, is the best chart of the week. It’s like an optical illusion. You have to stare at it for a while. Note that the right scale is inverted. Tweeps were quick to confirm their favorite political theories – George Bush “put the economy in a ditch,” Obama never “created or saved” any jobs. Jeremiah debunks president centered economic theories here.

EmploymentThe point of plotting both these lines is to show that one of them is bogus. The blue line is the one that’s economically relevant. The black line, U3 Unemployment, is a proxy measure for the blue one. What is astonishing is that U3 held up so well for so long. All serious observers have switched to U6, nonfarm payroll, and labor force participation. Even if you’re looking at NFP, you have to crack the report and look at the categories.

No one takes the headline numbers seriously, especially not U3. It’s not technically wrong. It’s just irrelevant, and then CNN serves it up as feel good propaganda. The Fed has kept ZIRP for almost seven years now. They are either trying to destroy capitalism, or they see a weak economy. Jeremiah is not prone to conspiracy theories. We disagree with the Fed’s prescription, but not the diagnosis.

Back before Chairman Yellen, the Fed set a benchmark of 6.5% unemployment before they would raise rates. The reason this is “chart of the week” is that it shows the corresponding figure, 62% on the blue line, that would mark the return of a healthy job market.

See also: New Fed Bashing Hero

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Blood on his Hands

KrugmanLast week, there was a violent protest at ECB headquarters in Frankfurt. Since the Greek debt crisis, we have seen simmering violence all over Europe. These young people have a right to be angry. Their prospects have indeed been wrecked by failed fiscal policies. Unfortunately, they are protesting in the wrong city. They should be in Rome and Athens, demanding the return of capitalism.

The kids think they are protesting against “austerity,” which simply means that the government is no longer able to support them. They also can’t get jobs, because socialism has destroyed their economy. Their governments – Portugal, Italy, Greece and Spain – are bankrupt. Historically, when your government runs out of money, the social transfers have to stop.

That’s what happened in every other sovereign debt crisis. We had the Asian debt crisis, the Mexican crisis, and sundry other peso crises. In each case, the IMF lent a little money, and then demanded they get their accounts in order. They didn’t call it austerity. The natives called it “imperialism,” but – they needed the money. An IMF loan with strings attached is still better than being flat broke.

Emerging market policymakers were faced with economic advice that suggested many years of austerity and unemployment … [but] when the crisis hit at home, Western economists were much less willing to accept the pain – Rajan

Now, however, there is a new narrative. Other countries are lending to the PIGS, and the ECB is creating fresh money. Thus, Europe’s young people have been told, there is no need for austerity. If the EU and the IMF (and the hated Germans) insist upon getting paid back, and the ECB fails to print enough Euros, then they are the villains – not the corrupt politicians back home.

The kids are protesting against “austerity,” as if there is an alternative. In the real world, there is no alternative. When you’re broke, you’re broke.

The euro area is not a political union of the sort where some countries permanently pay for others – Draghi

So, who told them that austerity was a punishment imposed by the troika? Who gave them the intellectual support for throwing acid on the police? Paul Krugman. Because of Krugman’s dogmatic and increasingly unhinged musings, real people got hurt. The blood is on his hands.

Krugman is still calling for free money, while respectable economists have moved on. Even Christine Lagarde, in her latest address, said the time had come for structural reform. The national bank of Sweden has told Krugman to mind his own business. Ironically, this is the same outfit that awarded him the Nobel Prize in 2008.

You would wish when [Krugman] says this – that Sweden looks like Japan – that he write fewer articles and have more of a look at the data … it doesn’t make him come across as a guy who is very well informed – Jansson

This is the problem with being a pundit. Sometimes you’re too busy writing polemics to mind the actual data. Just last month, we caught the professor in a freshman blunder over chart scaling.

Keynesians like to think they’re “evidence based,” but the evidence is that six years of accommodation have harmed savers, enriched the banks, distorted price discovery, and not solved the Euro crisis. Structural reform would have meant a short, sharp recession, followed by a strong recovery. We can’t prove the counterfactual, but we can state the current situation with certainty.

More than six years after the start of the Great Recession … unemployment remains high and inequality has increased. This is why we need a decisive push for structural reforms – Lagarde

We are now six years into a weak recovery (in America) and a triple dip recession in Europe. The central bankers have no dry powder for the next downturn, interest rates have gone negative, and – did we mention the violence? The only Keynesian prediction coming true right now is the one about easy money and the end of capitalism.

Professor Krugman accused the Riksbank of “sadomonetarism.” He has coined “austerian” as a play on the Austrian school of economics – which school, by the way, is what separates the prosperous North of Europe from the bankrupt South. It must be fun to sit in an ivory tower and make jokes, while his followers throw petrol bombs in Europe.

See also: You Say You Want a Revolution

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Of Flat Lines and Derp

Paul Krugman is here again with his favorite straw man argument. Krugman is smart and everyone else is stupid because QE has not resulted in hyperinflation. He doesn’t say “stupid,” though. He says “derp,” which means “I have statistics which seem to support my prejudices and you don’t.”

InflationApparently, hyperinflation is the only negative outcome recognized by the good doctor. He presents a lovely FRED chart proving his point. CPI has been flattish for six years, while money supply has grown. Can you think of any negative outcomes, other than inflation? Here is one hint, from FT, and another from Jeremiah. The quote below is from an ECB study.

An increase in the monetary base tends to … benefit primarily those on higher incomes, who hold a larger amount of overall savings in equities, and thus benefit from greater capital income.

Krugman’s chart shows only that his prescribed policy has avoided one particular negative outcome. It does not prove that the policy has actually worked, nor does it address the many other negative outcomes. Krugman’s acolytes are nonetheless hailing this one chart as the decisive defense of QE.

So, has the policy achieved its stated goal of increasing employment? Let’s look at another FRED chart. It looks a lot like the CPI chart, doesn’t it? Based only on these two variables, you would conclude that QE has had no effect at all.

EmploymentAt this point, we are obliged to point out that both these charts are bunk because the fivefold increase in money supply is obscuring smaller changes in the dependent variables. Accordingly, we drop it and display only employment and inflation. We already know what the history of QE has been over the period, and now we can see that inflation has indeed risen while employment has remained flat.

Both

Finally, we observe that Krugman, a college professor and an economist of some note, is here coining a childish new term of abuse for his opponents – while engaging in exactly the sort of factless advocacy he presumes to criticize.

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New Fed Bashing Hero

AudreyHepburnJeremy Grantham gave an insightful interview to Fortune magazine, which they have subtitled “Fed bashers have a new hero.” Business Week picked up the story, calling Grantham a “noted gloomster.” This is what passes for analysis in journalism today. Everything is ad hominem and partisan. If you have actually read Grantham’s published research, you know that he is rigorous, objective, and precise. When he says that stocks are overvalued, this is based on solid analysis of corporate earnings – documented elsewhere by his colleague James Montier. Temperamentally, Grantham is bullish on America, but he is not in business to make overpriced investments.

“The only ones who have really benefited from QE are hedge fund managers.” – Jeremy Grantham

A related headline is, “Grantham calls Yellen ignorant.” What he actually said was, “either she is ignorant of the markets, or else she is cynical about manipulating them.” Congress had asked the Fed Chair if markets were overvalued, which is not her area of expertise. The Fed studiously avoids pricing stocks, gold, or Bitcoin. They look instead at employment, yields, and consumer prices. Financial analysts, obviously, feel the Fed should also study the markets.

The New York Times presents this roundup of Fed bashers. The Times is married to Paul Krugman’s idea that printing money somehow helps the common man – dogma long past its sell-by date. Opinions are more varied than the tabloids let on, and the consensus is much as Jeremiah has presented. The Fed was right to step in with the first round of quantitative easing, but now it has gone too far. Easy money has created a variety of perverse incentives and moral hazards.

Speaking of moral hazards, look at the list of Fed critics – Gundlach, Grantham, Einhorn, Hunt, Chanos, Spitznagel, and Druckenmiller. The Times says they’re all wet – and a minority.  So, what does the rest of Wall Street have to say? Not a damned thing. They’re taking the money.

See also: Inflation at Tiffany’s

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El Niño Grande

waterworld23Continuing our series on economics and meteorology, we find an interesting parallel involving large quantities of inflation and heat energy that have lately gone missing.

Climate skeptics have been enjoying the sixteen-year pause in global warming while, despite this contrary evidence, IPCC scientists are sticking by their models.

Simulations …  suggest that warming should have continued at an average rate of 0.21 °C per decade from 1998 to 2012.

This case of models versus evidence has an exact parallel in monetary policy.  Purists say that $4 trillion in quantitative easing must inevitably result in raging inflation, never mind that CPI is still quiescent.  They even use thermodynamic metaphors, like “pumping” and “hot money.”

Austrian [economists] made some very strong predictions about inflation — and rightly, given their model of how the world works.

For fun, we can add political labels.  Paul Krugman identifies monetary hawks as “the right.”  On climate change, the roles are reversed.  The left believes in IPCC modeling, and the right believe their thermometers.

So, where are the missing quantities?  The excess heat, as everyone knows, has gone into the Pacific Ocean, while the inflation has gone into assets like stocks, T-bills, and Ferraris.

Jeremiah expects both will come roaring back simultaneously, raising the sea level along with the price of milk.

See also:  Partly Bullish, Chance of Recession

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Other People’s Money

KrugmanPaul Krugman has a new post titled, “why do you care how much other people work?”  This suggests it’s mean spirited to begrudge your neighbor a shorter work week, and the post is meant to back that up with some economics.

On even numbered days, though, Prof. Krugman holds forth like Robin Hood on the topic of income inequality.  Jeremiah wants to know, “why do you care how much other people make?”  Isn’t that the same idea?

Complaints about income inequality generally assume that the rich get rich by taking resources from the poor.  This is the zero sum fallacy.  Some rich people, individually, do get rich by exploiting others.  At a macro level, though, a rising tide lifts all boats.

On the other hand, if your neighbor cuts back his hours because he’s receiving a health care subsidy from the government, you are paying for that.  This one is a zero sum game.  The flaw in Krugman’s reasoning is here:

By withdrawing their labor, subsidized workers reduce the overall size of the economic pie … however, they also take a smaller share of the economic pie, because they earn less in wages and salaries.

The subsidized workers take the same share or more of the economic pie as previously, because they’re receiving – wait for it – a subsidy!  The professor’s sums are off by the very quantity he’s trying to explain.

How is it possible that a trained, professional economist touts a zero sum argument where it doesn’t apply, and denies one where it does?  That’s not ignorance.  It’s propaganda.

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Bad Idea Roundup

If you followed along with the Booth economics quiz, you may have noticed they didn’t ask about the minimum wage.  That would have been a good fit with the theme – too good, in fact.

Economists know that minimum wage laws are bad for the economy, and create unemployment.  This is contrary to every decent, charitable impulse you might have, and economists would rather not talk about it.

minimum_wageTo a lefty economist like Paul Krugman, minimum wage proposals are kryptonite.  Keynes, his hero, was all about increasing employment through real wage cuts.  The diagram is from Zero Hedge.  The list of bad ideas is from Germany’s Social Democratic party.

  • National minimum wage
  • Lower retirement age
  • More welfare spending
  • Less infrastructure spending
  • Rent controls

The new agenda is opposed by German economists, employers, and even the Bundesbank.  It’s funny to see this happening in Germany.  Why?  Schadenfreude.  Now, if we could only send a copy to China.

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