Krugman: There is very little that’s baffling about our problems

[Kurt_and_Hunter]

... Contrary to what you may have heard, there’s very little that’s baffling about our problems — at least not if you knew basic, old-fashioned macroeconomics. In fact, someone who learned economics from the original 1948 edition of Samuelson’s textbook would feel pretty much at home in today’s world. If economists seem totally at sea, it’s because they have carefully unlearned the old wisdom. If policy has failed, it’s because policy makers chose not to believe their own models.

On the analytical front: many economists these days reject out of hand the Keynesian model, preferring to believe that a fall in supply rather than a fall in demand is what causes recessions. But there are clear implications of these rival approaches. If the slump reflects some kind of supply shock, the monetary and fiscal policies followed since the beginning of 2008 would have the effects predicted in a supply-constrained world: large expansion of the monetary base should have led to high inflation, large budget deficits should have driven interest rates way up. And as you may recall, a lot of people did make exactly that prediction. A Keynesian approach, on the other hand, said that inflation would fall and interest rates stay low as long as the economy remained depressed. Guess what happened?

On the policy front: there’s certainly a real debate over whether Obama could have gotten a bigger stimulus. What we do know, however, is that his top advisers did not frame the argument for a small stimulus compared with the projected slump purely in political terms. Instead, they argued that too big a plan would alarm the bond markets, and that anyway fiscal stimulus was only needed as an insurance policy. Neither of these arguments came from macroeconomic theory; they were doctrines invented on the fly. Samuelson 1948 would have said to provide a stimulus big enough to restore full employment — full stop.

So what we have here isn’t really a lack of a workable analytical framework. The disaster we’re facing is the result of the refusal of economists, both in and out of the corridors of power, to go with the perfectly good framework we already had.

http://krugman.blogs.nytimes.com/2010/08/31/brother-can-you-paradigm/

[LaurenG]

1. That's usually the way of it isn't it

It's simple but convoluted beyond recognition by idiots. K&R

[ixion]

2. Indeed. The problems are both simple and macroeconomic in nature

which is why it is so utterly ludicrous for people like Gibbs to say "no one could have foreseen these issues," because they were entirely "foreseeable" to anyone who's ever taken Econ 210.

[northernlights]

7. I've never taken an economics class

But when my manager started talking up outsourcing back in the mid-late 80s, my first gut response was, "But then there won't be anybody to buy products." Her response to me was to start screaming that I don't know anything.

Likewise, the moment I read that Glass-Steagal had been undone, my first, gut response was, "We're going to have a depression."

It's just common sense. No jobs means no money to buy products, and we all go down. No regulation means a free-for-all...for thugs and thieves. It's really that simple.

[unblock]

9. sure there will be people to buy our products.

it's just that those people will be in places like india and china.

EVENTUALLY, demand THERE will be large enough to sustain employment HERE, but we have a long way to go building up their consumer base before that happens.

of course, the real question is, should this have been the economic policy of THIS country??

[northernlights]

18. don't hold your breath waiting...

people who have been on the brink of starvation living hand to mouth for generations are not in that much hurry to start buying our products. As one potato chip salesman put it, an elderly Chinese lady said straight out to him (paraphrased), "I can buy 10 pounds of potatos for the same price. Why would I buy that?" You don't turn a thousand year old culture in a day or a year or even a generation.

Yes, there are some younger people that will buy more quickly. But not nearly in the rosy numbers they predicted. And not in the patterns they expected. They were never going to get the billion customers they predicted.

And doing business overseas brought a lot of problems they never anticipated. And on other unexpected surprise -- people watch and learn. I've seen that here where I live in Maine. They saw the problems "transplants" from Massachusetts caused in southern Maine, and fought against them like hell when they tried to import their "Masshole" culture up here.

[unblock]

19. agreed. the benefits of "free trade" sound great in theory

but in practice they take far too long to benefit most americans.

[zipplewrath]

3. Faith over reason

It is a difficult job, as someone who makes analytical models, to accept that a model is "correct" when it is contrary to your "belief" or preconcieved notion of what is "right". The problem with the right wingers is that their faith is strong, even in the face of information to the contrary. Their usual response to such information is that the information itself is wrong, never their strongly held convictions. What Krugman is describing is some model makers how are unhappy with their own models, not because of known flaws in them, but merely because they are predicting things that are contrary to their desires.

What Krugman is pointing out is that a common model verification methodology is being ignored. If you have a model, present it with the inputs of past events, where you know what the outcomes were. If they acurately predict the known outcomes, that indicates the models are probably working correctly. If they can accurately reproduce the past, they have little hope of predicting the future.

[OHdem10]

4. In an effort to deny anything Keynesian , the GOP will dig the hole

deeper. We will get what we deserve. When no one is
willing to stand up and say you are wrong to GOP and Business,
their Supply Side Model will prevail. Shall we get them
a bigger shovel.

[The Wielding Truth]

5. "...provide a stimulus big enough to restore full employment ..." seems logical to me.

Oh well, logic and politics aren't usually in the same company. Are they?

[ipaint]

6. If we don't addreess the massive corruption and fraud currently in our

financial system, all we will be doing is setting ourselves up for another worse downturn. Get money and help to the people who have no jobs- go after the assholes who caused this and get them behind bars.

Obama needs to follow Bill Black's advice:

Number one: Fire Treasury Secretary Timothy Geithner, Office of Thrift Supervision chief John Bowman, Fed chief regulator Patrick Parkinson, and Office of the Comptroller of the Currency Chief John Dugan.

Number two: Create a consumer financial protection agency headed by Harvard Law School professor Elizabeth Warren.

Number three: Get rid of too big to fail.

Number four: Get rid of Ben Bernanke as chair of the Fed. Replace him with Nobel prize winner Joseph Stiglitz.

Number five: Bust up the FBI partnership with the Mortgage Bankers Association.

Number six: Regulate first.

Number seven: Target the top 100 corporate criminals.

Number eight: Fix executive compensation.

Number nine: Appoint a chief criminologist at each of the financial regulatory agencies.

Number ten: Hire 1,000 FBI agents.

http://www.corporatecrimereporter.com/billblack030510.htm


To rob a country, own a bank 5 parts (in part 4 Black elaborates on the above list)
http://www.youtube.com/watch?v=sA_MkJB84VA&feature=related

[glitch]

12. +^ K & R nt

[kentuck]

8. Supply side vs Demand side?

The supply side theory has been the dominant economic theory for the last thirty years and it has been a disaster. This is not the first time it has happened. When will we ever learn?

[JHB]

15. It hasn't been a disaster for everyone...

...and those are the people paying the fantasy-economists.

[kentuck]

16. True...

That is the whole idea behind supply-side.

[Kurt_and_Hunter]

20. It has been good for capital

low inflation, low wages.

[depakid]

10. Unfortunately, the incoming administration kept the faith based approach of its predecessor

in many more ways than one.

And it's unlikely that they're going to "change."

[Kablooie]

11. Dems are deathly afraid to contradict GOP economic theories...

since most of Wall Street and corporate America are primarily Republican.

That's why Democrats won't play hard ball.
It will displease their financial overlords.

[Javaman]

13. Until we are all digging roots for food, nothing will change

and the tea bag ball licking repukes will champion the root harvest as progress!

[amborin]

14. starting out from a position of compromise did not help either.....

[Hawkowl]

17. Obama is a supply sider

Only a supply sider talks about deficits as being a critical problem. Only a supply sider keeps working on ways to stimulate "private investment" as the main engine of the economy.


"I think the next couple of years, we've got to focus on debt and deficits. We've got to focus on making sure that we make the recovery stronger. And a lot of that is attracting private investment. Making sure that these companies who are making good profits are actually seeing the opportunities out there in a whole range of new areas and new ventures." That is Obama spewing supply side bullshit. If he actually believes this shit he might as well be an idiot rethuglican.


http://www.salon.com/news/politics/barack_obama/index.html?story=/opinion/walsh/politics/2010/08/30/obama_debt_and_deficits



Maybe that's why he sees nothing wrong in supporting free trade, or his unwillingness to do anything to halt offshoring of jobs. He is ignoring that consumption drove 70% of this economy and people and businesses HAVE NO MONEY. People and businesses won't borrow money even at the ridiculously low current interest rates if they can't pay it back!

Summer, Geithner, Bernake all lack the expertise or theoretical underpinnings to fix this economy. A dribble of stimulus here and there is like talking aspirin for an infection. It will alleviate the symptoms but doesn't do anything to combat the infection. We need an industrial policy that is more than letting Wall Street defraud the entire country.

[Octafish]

21. ''Guess what happened?''

"A Keynesian approach, on the other hand, said that inflation would fall and interest rates stay low as long as the economy remained depressed."

Thank you for the great column and thread, Kurt_and_Hunter. Samuelson's ideological successors have much to answer for.

[Kurt_and_Hunter]

22. Not me. It's a Paul Krugman piece.

[Barack2theFuture]

23. John Prine wrote a song: "humidity built the snowman; sunshine brought him down."

In our case: "Diligence and ingenuity built the empire; hubris brought it down."