Paul Krugman: Fighting off depression • Hacker News Board

Re: Paul Krugman: Fighting off depression

#11

Post by mhartl » Tue, Jan 06, 2009, 9:45 PM UTC

curiousgeorge wrote: post #6

mhartl wrote: post #3

I've long had a hobby interest in economics, but it's only in the past couple months that I've really dug into macroeconomics and monetary theory (motivated, of course, by current events). It's weird: there's bizarreness at every turn---it's like studying astronomy for the first time, only to discover that the astrologers are in charge. The inmates are running the asylum. To wit: take a look at "Baby-Sitting the Econ…

>> the economy will continue to tank despite (or because of) attempts to "stimulate" it Perhaps you should make up your mind about basic economic causality before hectoring Krugman for having actually read the original texts. The General Theory is a difficult and dense book and Krugman offers a decent summary of Keynes' paradox of thrift. If you are interested in economics, the problem with your suggestion is that by…

I do know about the paradox of thrift, and it seems not only not paradoxical but actually false. Increased saving both lowers prices (increasing quantity demanded) and lowers interest rates (increasing investment), so the dynamical behavior is self-correcting. In Krugman's example, inflation solved the liquidity problem, but it introduces new disincentives to saving and distorts long-term financial planning. The hard-currency/free-market solution not only avoids these problems, it also doesn't count on an enlightened central banker making the right decision at the right time.

My analysis could be mistaken, though, and I'll definitely take a look at Keynes's argument more carefully some time.

Re: Paul Krugman: Fighting off depression

#12

Post by barbie17 » Wed, Jan 07, 2009, 12:08 AM UTC

mhartl wrote: post #9

barbie17 wrote: post #8

Earlier quoted context omitted.

"Hint: consider what would happen in a real economy with hard currency by allowing the price of baby-sitting to fluctuate..." You are confusing two different types of analysis. If you had taken a (more rigorous) macroeconomics course you would have learned that there are two types of analysis: long-run and short-run. In the short-run prices are inflexible due to unions, preexisting contracts, menu costs, etc. In the…

Thanks for the explanation. It helps me to understand why so many economists (and politicians) seem to treat our present situation as some sort of short-term technical glitch that can be straightened out with the right kind of fiscal kick. I suspect they are wrong, and that we face deeper structural problems. Indeed, it seems obvious that we do. I have little confidence in the putative experts because of a long list…

You should check out Macroeconomics by Mankiw. It's very short and sweet. You really shouldn't judge economics by a few articles aimed at lay audiences just as you wouldn't try to learn about quantum mechanics from the NYTimes. Economics is filled with clever little insights that makes you go "Ahh!".

I'll take the time to explain some of your complaints:

"spending causes prosperity": well, obviously if you don't spend any of your money obviously you don't have prosperity. If you borrow money to spend economics assume that you are rational and that it is because you prefer having a good time now to later. This seems more like a value judgment though, which most economics tend to avoid.

"conflation of trade deficits with indebtedness": well, if country A wants to consume something produced by country B, it can only do so in three ways: 1) give B something A produced, 2) give B a chunk of A (e.g., real estate) or 3) borrow from B. Since most countries don't like 2), trade deficits are settled using 3)

Most economics will say that a higher savings rate will be beneficial in the long run but if people suddenly saved more because of government policy there will a aggregate demand shock and the economy will go into a recession since the price level cannot easily adjust in the short run. (When people save more they have less money to spend and thus all prices become "too high" for them.)

Check out the book for more information. You will find that while economics may have flaws, it is internally self-consistent. It just doesn't take into account that most people are not rational :(.

Re: Paul Krugman: Fighting off depression

#13

Post by mhartl » Fri, Jan 09, 2009, 6:49 AM UTC

barbie17 wrote: post #12

mhartl wrote: post #9

Earlier quoted context omitted.

Thanks for the explanation. It helps me to understand why so many economists (and politicians) seem to treat our present situation as some sort of short-term technical glitch that can be straightened out with the right kind of fiscal kick. I suspect they are wrong, and that we face deeper structural problems. Indeed, it seems obvious that we do. I have little confidence in the putative experts because of a long list…

You should check out Macroeconomics by Mankiw. It's very short and sweet. You really shouldn't judge economics by a few articles aimed at lay audiences just as you wouldn't try to learn about quantum mechanics from the NYTimes. Economics is filled with clever little insights that makes you go "Ahh!". I'll take the time to explain some of your complaints: "spending causes prosperity": well, obviously if you don't spen…

It's more than just a few lay articles, but your point is well-taken. And I appreciate the book suggestion. Alas:

  Macroeconomics by N. Gregory Mankiw (Hardcover - April 28, 2006)
  Buy new: $117.47

Ouch! I think we've discovered something about required textbooks and the economics of cartels.

Re: Paul Krugman: Fighting off depression

#14

Post by mhartl » Fri, Jan 09, 2009, 3:48 PM UTC

barbie17 wrote: post #12

mhartl wrote: post #9

Earlier quoted context omitted.

Thanks for the explanation. It helps me to understand why so many economists (and politicians) seem to treat our present situation as some sort of short-term technical glitch that can be straightened out with the right kind of fiscal kick. I suspect they are wrong, and that we face deeper structural problems. Indeed, it seems obvious that we do. I have little confidence in the putative experts because of a long list…

You should check out Macroeconomics by Mankiw. It's very short and sweet. You really shouldn't judge economics by a few articles aimed at lay audiences just as you wouldn't try to learn about quantum mechanics from the NYTimes. Economics is filled with clever little insights that makes you go "Ahh!". I'll take the time to explain some of your complaints: "spending causes prosperity": well, obviously if you don't spen…

N.B. Regarding trade deficits: if Alice from A wants to buy something from Bob in B, she typically pays for it with money. The source of that money is either production (your option #1) or debt (option #3). (Option #2 is just past production, since people usually buy real estate with money.) In either case Alice's purchase increases the A's trade deficit with B. But it's totally beside the point that Bob lives in B. Indeed, the analysis is identical if A = Atlanta and B = Boston.

There's a rough correlation between trade deficits and debt, just as there's a correlation between the number of movies people see and debt: there's a correlation between spending and debt. Focusing on foreign trade---and using the loaded and misleading word deficit---simply feeds people's xenophobia and distracts from the underlying issues.