Monday, 9 December 2013
Paul Krugman doesn’t know how to raise aggregate demand at the zero bound!!!
It’s scarcely believable. I’m dumbfounded.
I’ve just stumbled across an article by Krugman written a few weeks ago which left me gobsmacked. He basically agrees with Lawrence Summer’s ridiculous “secular stagnation” theory. That’s the idea that we’re in for a long and unavoidable period of deficient demand. To quote Krugman’s final paragraph:
“But as Mr. Summers said, the crisis “is not over until it is over” — and economic reality is what it is. And what that reality appears to be right now is one in which depression rules will apply for a very long time.”
That paragraph does not of course specifically say that DEFICIENT DEMAND is the culprit, but read the whole article if you want to verify that deficient demand point. The article is only 700 words or so.
I expect nonsense from a significant proportion of so called “professional” economists. That is, I wouldn’t expect that proportion to know how to raise demand at the zero bound. But Krugman? I’ve always had a huge amount of respect for him. So how do we raise demand at the zero bound? Well advocates of Modern Monetary Theory have no problem answering that question. The answer is as follows.
Revelation of the century: governments can print money.
You may not be believe the following because of a well-known bit of psychology: it’s the “naked emperor” phenomenon. That’s the fact that most of us are understandably reluctant to believe that important people can make ludicrous mistakes (like wandering around outdoors with no clothes on). But if you check the links and references set out here, you’ll come to see that there are in fact crowds of naked emperors in the economics profession.
In particular, there are numerous so called “professional” economists (Krugman included) who don’t seem to realise that governments can raise demand by any amount simply by printing money and dishing it out to the population (e.g. via tax cuts, or increased social security payments). That’s sometimes called a helicopter drop.
Of course, whenever the words “print” and “money” appear in the same sentence, hoards of economic illiterates pipe up and start chanting “Mugabwe”, “Weimar”, “inflation”, etc. So I better deal with that point, and of course the answer to that point is that printing extra money won’t be inflationary unless and until it leads to excess demand (as David Hume pointed out 250 years ago).
Notice the word “demand” there? That is the alleged problem here is deficient demand, and the solution is to print and distribute enough money to raise demand to the level that brings full employment, but doesn’t bring EXCESS demand.
Of course it may be difficult to judge exactly HOW MUCH money needs to be printed and distributed without bringing excess inflation, but the important point is that (contrary to the claims of Summers, Krugman, etc) there is no limit in principle to the amount of additional demand that can be engineered.
But surely it’s obvious that governments can print money?
Well you’d think it was obvious. But as I pointed out here and here, there seem to be numerous economists who, strange as it might seem, don’t understand that printing is possible. Robert Mugabwe knows how to print money. But a significant proportion of the West’s “sophisticated and professional” economists just don’t get it. It’s positively weird.
As to Krugman, he doesn’t seem to realise that printing money costs next to nothing. See here. That is, he doesn’t get the point made by Milton Friedman, namely that “It need cost society essentially nothing in real resources to provide the individual with the current services of an additional dollar in cash balances.”
Economists are robots.
95% of the human race are robots: that is, they’ll believe almost anything they’re told, and think whatever they’re told to think. And if you don’t understand that, then you’re one of the 95%.
To be thoroughly cruel, if I had control of newspapers and television, I’d have no difficulty in persuading 95% of the population to march up and down the street, one arm raised at 45 degrees, chanting “Seig heil”. Plus if I wanted them to take part in an invasion of Poland, that would be no problem.
And the latter robot or “deferring to authority” phenomenon is widespread amongst economists. That is, as soon as someone in authority, like Lawrence Summers makes a widely publicised speech spouting complete nonsense, very few economists question the nonsense. Of course promotion in most professions depends on licking the arses of senior members of the profession, so that accounts for some of the deference. But even economists whose promotion does not depend on deference to authority, nevertheless defer for all they’re worth. For example Martin Wolf goes along with Summers’s daft ideas, as does Frances Coppola.