Thursday, January 5, 2012

Update On Krugman Post

I recently posted a couple of times on Paul Krugman's output of dubious Keynesian thinking. In the first of the two posts, I quoted Krugman as follows (my emphasis):

Now, you could argue that Greece and Ireland had no choice about imposing austerity, or, at any rate, no choices other than defaulting on their debts and leaving the euro. But another lesson of 2011 was that America did and does have a choice; Washington may be obsessed with the deficit, but financial markets are, if anything, signaling that we should borrow more
My commentary on this was as follows:

What Krugman is mistaking here is the fleeing of investors into the $US as a safe haven, as a winner in the 'least ugly' contest for money. However, his argument is investors want the US to borrow more! He ignores the fact that it is quite possible that the US might actually lose the least ugly contest if the US were to grow the rate of debt accumulation. He also ignores the fact that bond yields have been held down through money printing, and that any appreciation in US bond yields would see more money printing to keep the yields down. Just the promise of more money printing will, of itself, keep yields lower.
And then I quote Krugman as follows (my emphasis):

Again, this wasn’t supposed to happen. We entered 2011 amid dire warnings about a Greek-style debt crisis that would happen as soon as the Federal Reserve stopped buying bonds, or the rating agencies ended our triple-A status, or the superdupercommittee failed to reach a deal, or something. But the Fed ended its bond-purchase program in June; Standard & Poor’s downgraded America in August; the supercommittee deadlocked in November; and U.S. borrowing costs just kept falling. In fact, at this point, inflation-protected U.S. bonds pay negative interest: investors are willing to pay America to hold their money.
My commentary on this was as follows:

And if the Euro crisis was not taking place? Let's imagine a world in which there is financial stability, that sovereign debts in Europe are sustainable, that the Japanese economy is sound and so forth. If investors were to then look at the US, I think that there would be huge flight of capital. And this is the point; in the reality of today, where might the capital fly to? Yes, Professor Krugman, the US has managed to continue to accumulate debt without any major problems so far. It is not because purchasers of bonds want the US to issue more debt, but they simply cannot think of anything else to do with their money. If there were new measures that saw an increase in the rate of debt accumulation, it would simply test the status of the US in the least ugly competition. It is not a test that would be advisable.
Happily, an interesting study in the UK confirms exactly the points that I made. Although the study is for the UK, it is not difficult to see the points of comparison with the US:

Britain's borrowing costs are at a record low not because the UK is a "safe haven" but due to the Bank of England's money-printing programme, new rules requiring lenders to hold more gilts and the eurozone crisis, according to an analysis of the official data. [summary from the sub-head]
As you can see, the report mirrors my view of the reason for the low yields in the US, although I did not mention banking rules in my post. The interesting point here is that Krugman goes on and on about the fact that others do not use evidence, and that he grounds his work in the evidence. However, what he does not discuss is that he uses the evidence which confirms his own views. This is known as confirmation bias, and something to which we all sometimes submit. However, it is Krugman's continual attempts to delineate himself from other by claiming evidence that is so notable.

So, yes, US treasury yields are low. No, this is not because investors want the US to grow its debt.


  1. I think confirmation bias is too fancy a term for it. Isn't it simply a case of people thinking they understand something because they have had some education in it? I have found that studying economics text books leads one to 'buy into' the orthodoxy, because if you don't, the effort involved in understanding each successive chapter while maintaining a healthy scepticism is too great. I'm not surprised that a new, unique combination of circumstances (e.g. globalisation/China/peak oil) completely wrong-foots the economic experts like Gordon Brown and Krugman.

  2. Krugmann sees himself as a bit of a radical forward thinker, yet he is firmly in the box in my opinion. I don't doubt his intelligence but his views are of the established, accepted kind. Just the other side of an enforced dichotomy...not in any way radical.

    He said this of the movie Inside Job:

    "OK, about the economist-bashing: I thought it was basically fair. There aren’t, I think, all that many cases when economists are literally paid to offer a specific opinion — although Greenspan’s defense of Keating qualifies. But the movie didn’t say there are. What it suggested, instead, was a kind of soft corruption: you get paid a lot of money by the financial industry, you get put on boards, but only if you don’t rock the boat too much. Besides, you hang out with these people, and get assimilated by the financial Borg. I think all of that is very true."

    I wouldn’t call it ‘soft corruption’ as such. That suggests to me that when economists paint the picture deemed appropriate by the State Department or their big bank employers for example, against their own personal judgement or via confirmation bias, that this is in some way illegal in the context of the rules they are accountable to within the system. It is absolutely legal.

    I prefer to use the lens that Chomsky and Foucault are known for, that is, that such behaviour is rewarded for it helps to maintain a certain ideological status quo. This blog provides an excellent summary of the philosophical grounding for this (see parts 1,2 and 3):

    It is all subtle form of enforcement no less pervasive than the more explicit kind seen in totalitarian states. How many of our most progressive thinking academics are shunned by the media and left to write papers that reach only a small minority while others are lauded with Nobel Prizes for following the path laid out before them by others? The ‘experts’ in the financial sector are gradually bought off as they come closer to peering behind the curtain in my opinion through increasingly huge yearly bonuses. They didn’t rock the boat as the bubble was at the razors edge as it’s not what they have been taught to do – to be bold and question your place in the line. To do so is threatened with punishment in the form of a sacking, financial hardship, and exclusion from ‘the club’ they have invested so much time in. Politics works along similar lines. To be ‘successful’ you have to pay your dues.

  3. I just read a revisit of the "Limits to growth model" in New Scientist. If the New Scientist article is right then Krugman and 90% of the pundits are wrong. We have not only passed "peak oil" but are about to pass peak everything - see The limits to growth - or the end of the world as we know it.

    Your historical emphasis on China in this blog may be apposite for another reason other than those you have given: the growth of India and China may be the last straw for the world. Am I being unduly alarmist or is this the start of a very long term decline?

  4. A question occurs to me: is Prof Krugman a Keynesian? I know he recommends government borrowing more during recessions, and indeed periods of slow growth. But has he ever argued for government to run a surplus at any point in any economic cycle? It might be amusing to check if there has ever been a time when he has argued for that. If he hasn't, then he ain't a Keynesian and any commentator would be entitled to say so.


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