Semi-Daily Journal

How I would explain this distinction, as a non-economist, would be to say that we're simply not smart enough to micromanage macroeconomic activity such that we produce an aggregate outcome better than a free market can provide on its own. On the other hand, we *are* smart enough to manage a few large macroeconomic variables that we understand relatively well. I am smart enough and competent enough to manage driving my car quite well and to achieve desired outcomes by using the gas, brake, and steering controls. I am *not* smart or competent enough to manage my car's functioning by attempting to alter its mechanics or alter its numerous computers' programming.

Right now, people such as most economists and those like myself make common cause with conservatives and libertarians regarding free markets. However, this agreement is not inevitable, as one side (mine) supports free markets as a practical, utilitarian matter while the other supports free markets as a principled (often rights-based), philosophical matter.

Someday, we very well may be able to completely manage an economy -- from top to bottom, large and small, abstract and detailed. That would be perfectly fine with me.

Dear Brad,

Thanks for the coverage, please note also that my blog post has real praise for Krugman and his book. I still see a contradiction in Krugman, I don't think I am misreading him. Consider the second quotation, which you call the macro one. Krugman believes, as do you (and many others), that Keynesian demand management can improve economic performance. This argument typically comes bundled with a belief in some kind of rigidity or price stickiness, or various other microeconomic imperfections. In other words, it requires a belief that markets fail at some micro level, which contradicts quotation one. There are other economists, as you yourself note, such as Friedman and Hayek, who believe that these micro imperfections are not so important. Krugman does not believe in the market as much as these other (respected) economists, again contra quotation one.

The point is not that the logical error is so interesting but rather that Krugman's writings now use (sloppy) rhetoric so freely. I am sure you have seen the other examples of this around the blogosphere and elsewhere.

It must be difficult to be under all the scrutiny that Krugman is, and we all say and write things that don't totally mesh if examined closely. Plus people change their minds over time. Nonetheless I have noticed a general feeling among economists, and I don't just mean free market economists, that there are "two Krugmans." My post sought to draw out this distinction, without neglecting the real merits in his work, which were prominent in my account of his new book.

Tyler,

I just don't see the contradiction between these two statements:

"I admire the virtues of free markets as much as anyone."

and

"There are various imperfections in free markets."

You can admire the free market as much as anyone, but still believe that there are certain flaws and tendancies that need to be corrected for a free market to work the best for everyone. That he does not believe as Friedman or Hayek do does not mean he does not admire its *virtues* any less.

Don't fall prey to using the sloppy rhetoric that you accuse others of using.

http://www.nytimes.com/2003/09/11/opinion/11DOWD.html

I've actually gotten to the point where I hope Dick Cheney is embroiled in a Clancyesque conspiracy to benefit Halliburton. Because if it's not a conspiracy, it's naïveté and ideology. And that means our leaders have used goofball logic and lousy assumptions to trap the country in a cockeyed replay of the Crusades that could drain our treasury and strain our military for generations, without making us any safer from terrorists and maybe putting us more at risk....

Testifying before the Senate on Tuesday on the $87 billion request, Paul Wolfowitz, the Pentagon official who pushed so hard to own Iraq and control it, said, "We have no desire to own this problem or to control it." There may not be much choice, given Colin Powell's pessimistic warning to Congress yesterday that no allies want to help us pick up the tab for rebuilding a country full of people who revile us....

August 21, 2003

A Price Too High
By Bob Herbert The New York Times

How long is it going to take for us to recognize that the war we so foolishly started in Iraq is a fiasco — tragic, deeply dehumanizing and ultimately unwinnable? How much time and how much money and how many wasted lives is it going to take?

At the United Nations yesterday, grieving diplomats spoke bitterly, but not for attribution, about the U.S.-led invasion and occupation. They said it has not only resulted in the violent deaths of close and highly respected colleagues, but has also galvanized the most radical elements of Islam.

"This is a dream for the jihad," said one high-ranking U.N. official. "The resistance will only grow. The American occupation is now the focal point, drawing people from all over Islam into an eye-to-eye confrontation with the hated Americans.

"It is very propitious for the terrorists," he said. "The U.S. is now on the soil of an Arab country, a Muslim country, where the terrorists have all the advantages. They are fighting in a terrain which they know and the U.S. does not know, with cultural images the U.S. does not understand, and with a language the American soldiers do not speak. The troops can't even read the street signs."

The American people still do not have a clear understanding of why we are in Iraq....

Getting back to Paul Krugman, I read in one of his books that monetary policy is the best tool of economic management because fiscal policy takes too long to work its effects. So how in practice does Krugman differ from the free market people? His main criticism of President Bush is the latter's deficit spending. In terms of policy, what is the argument about?

Getting back to Paul Krugman, I read in one of his books that monetary policy is the best tool of economic management because fiscal policy takes too long to work its effects. So how in practice does Krugman differ from the free market people? His main criticism of President Bush is the latter's deficit spending. In terms of policy, what is the argument about?

When judging the consistency of statements, sometime a little game is useful. Substitute another noun or noun phrase in the place of the original. In this case, Trickster is right, I think, I one could substitute "husband" of "wife" for "free markets."

"I admire my the virtues of my wife as much as anyone...various imperfections..." Eeks!

Tyler Cowen

When I notice you use a radical right hachet loon like Donald Duck Duckin to go after PK, I laugh at you and move on. Poor baby, worried about all the harsh criticism of these innocent widdle radical rightees. Phooey.

Joe: Tax cuts and deficit spending are fiscal policy, not monetary.

Right Walt. But it's the Bush administration that is touting the idea of tax cuts and deficit spending in order to help the economy. The Democrats, and Krugman, seem to be saying don't cut taxes (except maybe a bit in the lower brackets) and don't have big deficits. The Democrats seem to the old fashioned conservatives advocating a passive approach to the economy. I'm not saying that's good or bad, just that it doesn't seem to a layman like fiscal activism.

Maybe I'm missing something. Please correct me if I'm wrong. I'm here to learn so that I can be an informed voter.

..."in a world where there is often not enough demand to go around, the case for free markets is a hard case to make"...

This sentence of Krugman's could also be interpreted to mean that it is more difficult to convince others (potential converts to free markets) about the advantages of neoliberal policies when depression conditions exist. And that slow-downs are dangerous, politically, as momentum for liberalizing markets can wane or backslide into protectionism or command-style interventions.

Obviously Krugman is a market-enthusiast (isn't it amazing who is considered a leftist in our political environment?)...and, along with Prof. DeLong's distinction between the micro world of unhindered resource allocation and the macro world of aggregate demand smoothing, I think Krugman could have just been referring to the political difficulties of selling free-markets during downturns.

If you read his books Krugman sounds more like a moderate Republican than like a Democrat. He's in favor of some light-handed aggregate demand management, mostly means of monetary policy, but most of all he is for free trade. He thinks the Europeans need to liberalize their economies. How does his line differ from that of the moderately conservative publication *The Economist*?

Joe Willingham wrote, "So how in practice does Krugman differ from the free market people? His main criticism of President Bush is the latter's deficit spending. In terms of policy, what is the argument about?"
and
"Right Walt. But it's the Bush administration that is touting the idea of tax cuts and deficit spending in order to help the economy."

Krugman has a few points.
(1) Fiscal policy has its place in the set of tools to be used in economic downturns. But monetary policy should be used first, because it's quicker and can be reversed more quickly after the economy has recovered.
(2) Bush's tax cuts are largely (if not entirely) slanted towards the rich, which means (as fiscal stimulus) they have very little bang for the buck.
(3) Bush's tax cuts are "backloaded": they increase over time, over a period of years. The time span is far too long to explain as a desire for fiscal stimulus.
(4) The obligation faced by the Social Security and Medicare trust funds is going to increase quite a bit when the baby boomers start retiring, which is only a few years (less than 10?) away, so now's not the greatest time to decrease national savings with a tax-cutting spree.

Joe: I'm not quite sure what you're asking, but I think the answer to your question is the ultra-vague "in some ways yes, and in some ways no". Moderate Democrats (like Krugman) are more likely to advocate monetary maneuvers to stimulate the economy. Leftish Democrats (Max Sawicky is probably a good example) are more likely to advocate fiscal stimulus.

Is fiscal stimulus necessarily more activist than monetary stimulus? Again, yes and no. The usual monetary technique runs out of gas once the real interest rate hits zero, and since right now the real interest rate is around 1% (IIRC), while you can continue using fiscal policy until no one will lend you money anymore. But there are unconventional monetary techniques that you can try, which can be considered "aggressive".

I'm not sure that Krugman's economic policy really is that different from that of a moderate Republican. He probably worries about distribution issues more than a moderate Republican, though.

To Walt and Stephen:

Thanks for your clear and concise accounts of Paul Krugman's thinking on the Bush administration's economic policies and of where Prof. K. fits into the political spectrum.

I'm conservative on most political issues, and I agree with all of the four points Stephen mentioned. This is evidence for my belief that "conservative" and "Republican" are not at all coextensive terms.

Let me ask all you scholars another question: Do you know of any name brand economists respected in the profession who think President Bush's economic policies are just fine? If so, what are their arguments? I would guess that they would say that the deficits are too small as a percentage of GDP to cause "crowding out" of private investment. They would probably also say that no amount of saving would be adequate to fund Social Security and Medicare as those programs are presently structured. What else might they say?

As Stirling Newberry pointed out once, Republicans are mostly reactionaries (they want to roll back to the 20's), and Dems are mostly conservatives (they want to keep the Great Society and the New Deal).

Paul Krugman writes, "I admire the virtues of free markets as much as anyone."

Dr. Krugman admires virtues. Wow! Not many folks admire virtues! ;-) The rest of us *hate* virtues, and love vices. ;-)

Mark Bahner (just being picky...I certainly couldn't be held to such a high standard of writing, were my own writings similarly picked apart)

P.S. But I *do* agree with Tyler Cowen. Look at Paul Krugman's opinion piece of August...17(? I forget...and I'm to lazy to look up) on the Northeast blackout. He ascribes the blackout to "faith-based deregulation"...even though he ascribes the problem lack of transmission capacity, where the transmission portion of the grid has NOT been deregulated.

The only possible reason for Krugman to use the phrase "faith-based deregulation" is to bizarrely and completely inaccurately link the problem, in the public's mind, to G.W. Bush (of the [in]famous "Faith-Based Initiative").

P.P.S. I definitely respect, admire and appreciate Paul Krugman's ability to explain economics matters in layman's terms. It's just a shame he's so...shrill.

Joe Willingham writes, "Getting back to Paul Krugman, I read in one of his books that monetary policy is the best tool of economic management because fiscal policy takes too long to work its effects. So how in practice does Krugman differ from the free market people?"

Well, one way in which Paul Krugman differs from most free market people is that he wants a much more steeply graduated income tax system.

Walt Pohl responds, "I'm not sure that Krugman's economic policy really is that different from that of a moderate Republican. He probably worries about distribution issues more than a moderate Republican, though."

Exactly. A side note: at least THIS "free market person" doesn't even like the word "distribution." Wealth isn't distributed; it's created. (I'm slogging through "Wealth and Democracy," by Kevin Phillips. But I can't take more than about a half-chapter at a time, because Mr. Phillips seems to think that all wealth is created by governments, and given to chosen people, who are then rich.)