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Subject: Paul Krugman complains that today's earthquake wasn't bigger. rss

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Um, Drew, he wasn't suggesting by any means one should fake an alien invasion. He gave an hypothetical example to illustrate a point. Talking then about discovering after the fact that there was no such pending invasion illustrated another point that the reason chosen does not in the end matter.
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Some things aren't meant literally ya know. His point isn't really about aliens or how wonderful earthquakes are.
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Reading between the lines is tough. What I got out of that was that Krugman is skeptical about the universal value of using GDP to measure the quality of an economy.
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Drew1365 wrote:
This is what your ends-justify-means philosophy gets you: an asshole like Krugman wishing for mass destruction because it will help prop up his failed Keynesianism.


Yes, clearly he was wishing for it.

(As an aside, the people who shout "broken window fallacy" ignore the fact that in times of recession, spending goes down precisely because of economic uncertainty; the baker does not buy a new suit because he wishes to save the money for an emergency, which the hooligan then creates by breaking his window, forcing the baker to stimulate the economy by paying the glazier. This is the basic theory of Keynesianism.

Also, John Stossel is a stupidhead.)
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Drew1365 wrote:

This is what your ends-justify-means philosophy gets you: an asshole like Krugman wishing for mass destruction because it will help prop up his failed Keynesianism.



How do we know it is failed Keynesianism when it has never been implemented as Keynes intended?

For what its worth, I use the same defense for several free market principles. Both sides criticize the otherside when all they are really criticizing is a bastardized version of what they really don't understand.

Perhaps everyone should actually read Keynes and Friedman (my favorite free market economist) and a little of the Austrian School,,,,,,,
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Now to be fair, we could make the same critique of Communism, ala Marx.

That most certainly has never been truly applied.

The best anti-Keynesian argument that can be made is not that it doesn't work, or that it couldn't work. Its that it appears that in a democracy, its easy to get the political support to start a big spending program when times are bad, but when times are good and its time to put on the brakes, there is no political will to cut back on spending.

Thats why Friedman, arguing that Monetary policy is a better tool, is correct. Its a lot easier to get political sanction for variations in the flow of money in the money supply. Its much, much harder to get political support to ease back on government spending, even when times are good.

Thus, one could argue that the political reality is that Keynes doesn't work- because no government would ever have the political willpower to ease back on spending in a boom time.

But this doesn't discount that Keynes, as economics, works, of course, as you point out.

Darilian
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Darilian wrote:


Thats why Friedman, arguing that Monetary policy is a better tool, is correct.



Monetary policy can't work in a world with no restriction on capital movement. Even Friedman himself has recently admitted that controlling money supply "isn't sufficient on its own".

And GDP is a tremendously poor way of measuring a modern economy. It simply measures activity with no regard to the "quality" of that activity.
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Fwing wrote:
Even Friedman himself has recently admitted that controlling money supply "isn't sufficient on its own".


I hope not *too* recently.

Quote:
Milton Friedman (July 31, 1912 – November 16, 2006)
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Tegarend wrote:
Fwing wrote:
Even Friedman himself has recently admitted that controlling money supply "isn't sufficient on its own".


I hope not *too* recently.

Quote:
Milton Friedman (July 31, 1912 – November 16, 2006)


Heh More recently than the policy was adopted in the UK and US
 
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mightygodking wrote:
Drew1365 wrote:
This is what your ends-justify-means philosophy gets you: an asshole like Krugman wishing for mass destruction because it will help prop up his failed Keynesianism.


Yes, clearly he was wishing for it.

(As an aside, the people who shout "broken window fallacy" ignore the fact that in times of recession, spending goes down precisely because of economic uncertainty; the baker does not buy a new suit because he wishes to save the money for an emergency, which the hooligan then creates by breaking his window, forcing the baker to stimulate the economy by paying the glazier. This is the basic theory of Keynesianism.

Also, John Stossel is a stupidhead.)


I seem to recall the Stainless steel rat saying something similar.
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Darilian wrote:
The best anti-Keynesian argument that can be made is not that it doesn't work, or that it couldn't work. Its that it appears that in a democracy, its easy to get the political support to start a big spending program when times are bad, but when times are good and its time to put on the brakes, there is no political will to cut back on spending.


This. MGK is right that invoking the broken window fallacy ignores the whole point of Keynesian economics which is not that random triggers of spending are good but that in times of severe recession economic uncertainty creates a vicious cycle of restraint. Whether this is good policy can be debated, but "rebuttals" that ignore an argument's central premise don't impress even if they come in YouTube form.

A more serious problem, as Dar points out, is that even assuming we can time economic stimulus well it's extremely difficult to cut spending back as the economy recovers. Similarly, once the government has the tool of spending purely for macro-economic reasons it's reasonable to expect that it will do so for political reasons under macro-economic guise.
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It always makes me sad to see that broken window fallacy video, because after it makes its point well, it then becomes biased and uses an example that doesn't mirror the fallacy.
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Meanwhile, it turns out that the Google Plus Paul Krugman was not actually Paul Krugman at all.

Actual Paul Krugman wrote:
Just to be clear: World War II was expansionary because it led to a large increase in public spending — and even so, that didn’t make war desirable! Meanwhile, natural disasters in America don’t lead to big public spending increases — look at how pitiful the aid post-Katrina was. If you think I believe that disaster is good for its own sake, you have drunk the Kool-aid.
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Paul Krugman just plain got his facts wrong. There was not a "Twilight Zone episode like this", it was The Outer Limits.
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Fwing wrote:
Darilian wrote:


Thats why Friedman, arguing that Monetary policy is a better tool, is correct.



Monetary policy can't work in a world with no restriction on capital movement. Even Friedman himself has recently admitted that controlling money supply "isn't sufficient on its own".

And GDP is a tremendously poor way of measuring a modern economy. It simply measures activity with no regard to the "quality" of that activity.


Excellent point made here:

http://www.coordinationproblem.org/2011/08/the-krugman-who-c...

As several others have pointed out...the problem with the "disasters are good for the economy" nonsense, and GDP more generally, is that it confuses a flow with a stock. GDP measures a flow of activity, not a stock of wealth. Destroying things and then rebuilding them might increase economic activity in the area affected (by drawing resources from elsewhere), but leaves us with less wealth than we would have had without the disaster. That is the real meaning of the Broken Window Fallacy.
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I think the points raised here
http://thinkprogress.org/yglesias/2011/08/23/302565/the-anti...

And mentioned here:
http://krugman.blogs.nytimes.com/2011/08/24/anti-keynesian-s...

Are relevant. Saying that something would boost the economy is not the same as saying that it would be be a good thing.
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SpaceGhost wrote:
Perhaps everyone should actually read Keynes and Friedman (my favorite free market economist) and a little of the Austrian School,,,,,,,


This is an interesting discussion and I'm pleased that it hasn't devolved into name calling. The broken window fallacy seems to break down big ideas into a more easily understood narrative, but what does the simple answer really mean? I agree that property damage costs society, but conclusions about where money would or wouldn't go aren't supported by the given example. In the absence of alien invasions and such, how does economic theory get implemented in our real world? That's what I'd really like to know. Zelvis, what books would you recommend?
 
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Oh, also, that link no longer works. Was it a link to Krugman's Google+ page? Because he mentioned in his blog today that people were complaining about a post on his Google+ page, but that he does not use Google+.
 
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Re: Broken Window Fallacy

The big assumption is that money would have been spent on other things. Clearly people/businesses are choosing not to spend that money on other things. A "broken window" forces the issue.

The point, however, is not to go out and break windows, but to identify the windows that are broken. Crumbling infrastructure is a "window" that's taken years to break, but if it's broken then a lot of good can come out of the fixing of it, which is inevitable. It just becomes a matter of timing.
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blindspot wrote:
Re: Broken Window Fallacy

The big assumption is that money would have been spent on other things. Clearly people/businesses are choosing not to spend that money on other things.


Hazlitt addressed this in 1946:

...the bank either lends it to going businesses on short term for working capital, or uses it to buy securities...But when money is invested it is used to buy capital goods, houses or office buildings or factories or ships or motor trucks or machines. Any one of these projects puts as much money into circulation and gives as much employment as the same amount of money spent directly on consumption. "Saving," in short, in the modern world, is only another form of spending...

...It is true that this refusal to buy may intensify and prolong a depression once begun. But it does not itself originate the depression. At times when there is capricious government intervention in business, and when business does not know what the government is going to do next, uncertainty is created. Profits are not reinvested. Firms and individuals allow cash balances to accumulate in their banks. They keep larger reserves against contingencies. This hoarding of cash may seem like the cause of a subsequent slowdown in business activity. The real cause, however, is the uncertainty brought about by the government policies. The larger cash balances of firms and individuals are merely one link in the chain of consequences from that uncertainty. To blame "excessive saving" for the business decline would be like blaming a fall in the price of apples not on a bumper crop but on the people who refuse to pay more for apples.

...It is said that the various consumers' goods industries are built on the expectation of a certain demand, and that if people take to saving they will disappoint this expectation and start a depression. This assertion rests primarily on the error we have already examined–that of forgetting that what is saved on consumers' goods is spent on capital goods, and that "saving" does not necessarily mean even a dollar's contraction in total spending. The only element of truth in the contention is that any change that is sudden may be unsettling. It would be just as unsettling if consumers suddenly switched their demand from one consumers' goods to another. It would he even more unsettling if former savers suddenly switched their demand from capital goods to consumers' goods...




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eknauer wrote:
blindspot wrote:
Re: Broken Window Fallacy

The big assumption is that money would have been spent on other things. Clearly people/businesses are choosing not to spend that money on other things.


Hazlitt addressed this in 1946:

...the bank either lends it to going businesses on short term for working capital, or uses it to buy securities...But when money is invested it is used to buy capital goods, houses or office buildings or factories or ships or motor trucks or machines. Any one of these projects puts as much money into circulation and gives as much employment as the same amount of money spent directly on consumption. "Saving," in short, in the modern world, is only another form of spending...

...It is true that this refusal to buy may intensify and prolong a depression once begun. But it does not itself originate the depression. At times when there is capricious government intervention in business, and when business does not know what the government is going to do next, uncertainty is created. Profits are not reinvested. Firms and individuals allow cash balances to accumulate in their banks. They keep larger reserves against contingencies. This hoarding of cash may seem like the cause of a subsequent slowdown in business activity. The real cause, however, is the uncertainty brought about by the government policies. The larger cash balances of firms and individuals are merely one link in the chain of consequences from that uncertainty. To blame "excessive saving" for the business decline would be like blaming a fall in the price of apples not on a bumper crop but on the people who refuse to pay more for apples.


This seems like a classic assertion that could do with some support.

The argument made by the Keynesian side isn't that savings causes a depression, per se, but in times of high economic uncertainty the collective effect of economic fear is to justify those fears.

Rather than "address" this, the passage you've given here just asserts his conclusion as a premise -- that the reason that people and businesses are holding back on spending can be lain at the feet of government policy.

Moreover, the assertion that whatever isn't spent on consumer goods is necessarily spent on capital goods is only true if one adds the word, "someday" to the sentence. Savings does not necessarily mean "even a dollar's contraction in spending" but it can, and my impression is that currently it absolutely does.
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Chad_Ellis wrote:

Moreover, the assertion that whatever isn't spent on consumer goods is necessarily spent on capital goods is only true if one adds the word, "someday" to the sentence. Savings does not necessarily mean "even a dollar's contraction in spending" but it can, and my impression is that currently it absolutely does.


But do you not think that contraction in spending must occur at some point if the inbalances created over the last two decades are ever to correct ?

Debt payoff is a form of savings that does not increase "spending" if your debt holder is an external agency or a country. That does not make paying off debt bad economic policy.
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Chad_Ellis wrote:
eknauer wrote:
blindspot wrote:
Re: Broken Window Fallacy

The big assumption is that money would have been spent on other things. Clearly people/businesses are choosing not to spend that money on other things.


Hazlitt addressed this in 1946:

...the bank either lends it to going businesses on short term for working capital, or uses it to buy securities...But when money is invested it is used to buy capital goods, houses or office buildings or factories or ships or motor trucks or machines. Any one of these projects puts as much money into circulation and gives as much employment as the same amount of money spent directly on consumption. "Saving," in short, in the modern world, is only another form of spending...

...It is true that this refusal to buy may intensify and prolong a depression once begun. But it does not itself originate the depression. At times when there is capricious government intervention in business, and when business does not know what the government is going to do next, uncertainty is created. Profits are not reinvested. Firms and individuals allow cash balances to accumulate in their banks. They keep larger reserves against contingencies. This hoarding of cash may seem like the cause of a subsequent slowdown in business activity. The real cause, however, is the uncertainty brought about by the government policies. The larger cash balances of firms and individuals are merely one link in the chain of consequences from that uncertainty. To blame "excessive saving" for the business decline would be like blaming a fall in the price of apples not on a bumper crop but on the people who refuse to pay more for apples.


This seems like a classic assertion that could do with some support.

The argument made by the Keynesian side isn't that savings causes a depression, per se, but in times of high economic uncertainty the collective effect of economic fear is to justify those fears.

Rather than "address" this, the passage you've given here just asserts his conclusion as a premise -- that the reason that people and businesses are holding back on spending can be lain at the feet of government policy.

Moreover, the assertion that whatever isn't spent on consumer goods is necessarily spent on capital goods is only true if one adds the word, "someday" to the sentence. Savings does not necessarily mean "even a dollar's contraction in spending" but it can, and my impression is that currently it absolutely does.


I’m not sure what the “collective effect of economic fear is to justify those fears” means in this context. Blindspot (not Keynes) wrote ” The big assumption is that money would have been spent on other things. Clearly people/businesses are choosing not to spend that money on other things." The point Hazlitt is making is that saving is a form of spending so it's not a criticism of the Broken Window Fallacy to say that people and business are not spending.
 
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