Believe those who are seeking the truth. Doubt those who find it. Andre Gide


Friday, September 14, 2012

The ridiculous Paul Krugman

Gee, he makes makes me laugh out loud sometimes. Here is Krugman trying to explain why we are all "Keynesians:" The iPhone Stimulus. (h/t Mark Thoma).
What I’m interested in, instead, are suggestions that the unveiling of the iPhone 5 might provide a significant boost to the U.S. economy, adding measurably to economic growth over the next quarter or two. 
Do you find this plausible? If so, I have news for you: you are, whether you know it or not, a Keynesian — and you have implicitly accepted the case that the government should spend more, not less, in a depressed economy.
Yes Paul, I find that plausible. No Paul, I do not see how your astonishing conclusion follows. 
The crucial thing to understand here is that these likely short-run benefits from the new phone have almost nothing to do with how good it is — with how much it improves the quality of buyers’ lives or their productivity. Such effects will kick in only over the longer run.
Yes, O.K. But what does this have to do with "Keynesian" economics? The same thing is true in a neoclassical model; see here: Can News About the Future Drive the Business Cycle?
And to believe that more spending will provide an economic boost, you have to believe — as you should — that demand, not supply, is what’s holding the economy back.
As you should...lol. Thank you for telling us what we should believe, Herr Doktor Professor.

As I have written repeatedly, it is easy to generate what looks like a negative aggregate demand shock by appealing to a "bad news" shock in a general equilibrium model. Investment demand contracts. Spending contracts. GDP contracts. There is downward pressure on the price-level. But none of this necessarily implies a role for fiscal policy; see here, for example. Embed the same sort of shock in a labor market search model and you generate prolonged unemployment. Etc. etc.

Now, this should not be taken as an argument to discredit "Keynesian" interpretations of what is ailing the economy. It is meant as a reminder to keep our minds open to alternative interpretations that have nothing to do with "standard" Keynesian reasoning.

Certainly, one can accept the idea that a technological innovation is likely to spur spending and growth, without accepting the K-man's bald assertion that doing so makes us "Keynesian."




11 comments:

  1. Yes, thank you for pointing out Krugman's ignorance of Keynesian economics. Roger Farmer is closer to communicating Keynes ideas than Krugman who seems to think ISLM is "Keynesian"

    ReplyDelete
  2. How does the iPhone5 add to growth if it merely cannibalizes spending that would anyway have occurred on other goods or services?

    ReplyDelete
    Replies
    1. Most innovations have the property of "cannibalizing" existing sales (and depreciating existing capital), so not exactly sure what your point is.

      Delete
  3. The JP Morgan study cited by Krugman claims that the iPhone5 release will boost GDP growth. I would like to understand how that occurs - that's my point. If the money spent on iPhones would anyway have been spent, how does the iPhone boost growth?

    ReplyDelete
    Replies
    1. Anon,

      Let's try to answer your question another way.

      When Henry Ford applied the assembly line concept toward automobile production, did that innovation spur economic growth? After all, all the money now spent on cars would have instead been spent on horses and carriages.

      If you are instead asking about the Iphone5 specifically, then I can't answer precisely. The innovation in this case is likely small. But the qualitative effects are similar to my assembly line example.

      Does this help, or did I miss your point?

      Delete
  4. "the money now spent on cars would have instead been spent on horses and carriages"

    So there was a gain in productivity (more properly, a gain in TFP), which increases growth. But is there really a productivity gain with the iPhone5?

    ReplyDelete
  5. Thanks, David, I appreciate you taking the time to explain.

    ReplyDelete
  6. I actually quite liked Krugman's post. He took an "if-then" approach. The crucial assumption is that the iPhone 5 does not yield any "productivity" improvements in the short run - it simply replaces the iPhone 4. Under that "axiom", if you believe that the iPhone 5 will boost the economy in the short run, then you are (implicitly) stating that the boost comes from the expenditure on the iPhone 5 to replace the iPhone 4.

    You can argue with the critical assumption (which apparently came from the JPMorgan study), but I think if you accept the premise then the conclusion does follow.

    On a side note, you really do write some of the best economics blog posts around. I find your stuff on unemployment particularly enlightening (it helps that your '96 paper on business cycles and labor search got me started on my PhD!).

    ReplyDelete
    Replies
    1. Brad,

      I am not disputing the fact that expectations can increase output now, even if those expectations are ultimately unfulfilled.

      What I object to is his conclusion that if we believe this, then we are all "Keynesians" in the sense of believing that we have "implicitly accepted the case that the government should spend more in a depressed economy."

      His conclusion is logically invalid. It is, in short, ridiculous. And somehow, he gets away with it.

      PS. I'm sure that your PhD thesis was a work of art! :)

      Delete
    2. Ok, I suppose I was affording him a little leeway... I interpreted his article as an attempt to get the reader to concede that government spending *can* increase short run output in a depression. That is to say, it seemed to me to be aimed at those of his critics who argue that government spending simply crowds out private spending and cannot increase output.

      Like you say though, whether that means government *should* increase spending does not quite follow. I'll also agree that he does get away with a lot.

      Delete