Monday, November 10, 2008

Krugman Highlights Limits of Education, Intelligence

Paul Krugman will receive his Nobel Prize next month, and I don't doubt that he deserves it for work I never really studied but sounds pretty well respected in the Industrial Organization area. One must remember that economic nobel prizes are given out, usually, for generating really clever abstract models. If they pertain to reality, that's merely a bonus, not the key. Anyway, we could not agree less, suggesting that learning economics merely helps one articulate your prejudices, as opposed to forming them.

Krugman in rare form, trying to plant some seeds in the upcoming administration:
the truth is that the New Deal wasn’t as successful in the short run as it was in the long run. And the reason for F.D.R.’s limited short-run success, which almost undid his whole program, was the fact that his economic policies were too cautious.
I don't know where to start, other that we disagree on pretty much everything as a matter of fact.
Social Security: Ponzi scheme soon to be over. Started with twenty some workers per recipient, soon to end with inverse odds. Will it still be considered successful, ex ante? Was Enron 'successful' in 1999?
Paying for farmers to take land out of production: This is known as partial equilibrium analysis.
WPA and NRA: make work and officious.
SEC and greater financial regulation: barriers to entry in finance.
Smoot-Hawley: tariffs maintained, but exports declined more than imports (go figure, they all retaliated), so net effect hardly something to be proud of.
Wagner Act: hurt employment, prevented wage adjustments when prices are falling 50%.
TVA and Public Utility Holding Company Act: crowd out private investment (what utility wants to compete with the government that also regulates prices!).

Finally, the tax on retained earnings was primarily responsible for the worst 1 quarter decline in GDP on record in 1937. the 1937 recession was most probably due to a tax over-reach by anti-business Democrats. Unemployment rose from 5 million to almost 12 million in early 1938. Manufacturing output fell off by 40% from the 1937 peak; it was back to 1934 levels. What caused the plunge in output was the tax on retained earnings, which seemed like a good idea to economically incompetent Roosevelt because he assumed he was just taxing money, and unused money at that, which is typical 'assume the economic pie is constant' thinking for redistributionists. See here for a 1937 rationale, and note it mentions Henry Ford by name. Unfortunately, retained earnings are key sources of investment funds for companies, and taxing them was like putting rocks in your transmission (new Fed chief Ben Bernanke did a lot of work in this area).

Then Krugman notes optimistically that patronage-economics expert Rahm Emanuel stated:
Rahm Emanuel, Mr. Obama’s new chief of staff, has declared that “you don’t ever want a crisis to go to waste.”

Because we know that political decisions are much more considered when done in haste? Is exigency ever good for coming to a wise decision?

the definitive study of fiscal policy in the ’30s, by the M.I.T. economist E. Cary Brown, reached a very different conclusion: fiscal stimulus was unsuccessful “not because it does not work, but because it was not tried.”

This from a guy who considers the Reagan era a nightmare, in part because of its deficits. That is, the economy was below potential throughout the eighties in part because sf Reagan's deficits, but the deficits were too small under FDR to really lift the economy. Huh? As per 'not trying fiscal stimulus', we have a lot of data on countries with large deficits, and the data there show no deficit-growth relation.

F.D.R. thought he was being prudent by reining in his spending plans; in reality, he was taking big risks with the economy and with his legacy. My advice to the Obama people is to figure out how much help they think the economy needs, then add 50 percent.

FDR actually proposed a 99.5% marginal tax rate in 1941 on incomes over $100k, but he lost, so it only got to 90% in the 1940's. He tried to do much more, but the Supreme Court would not let him, and so he tried to pack the Supreme court. But according to Krugman his main failing was a lack of boldness? I guess Krugman pines for Huey Long, he would have really made it happen.


Anonymous said...

When I read articles like this Krugman one, I wonder how the human race ever got out of caves, or how we've averted blowing ourselves to oblivion.

Plamen said...

Hear, hear! Also, thanks for the great links. And to think that I ran from Eastern Europe to escape socialism... Now it seems to be catching up with me here in the US. With some jest, it seems that USA may build socialism before Russia/USSR, and Russia may build fascism before Germany. History is so full of irony.

Anonymous said...

eric, you've been around this longer than me (sic). what do you think it's different this time? (that would fundamentally change things and render previous experiences useless).

this would be most useful to hear from the old hands.