Wondering Ever More about Paul Krugman

I have frequently said that Paul Krugman deserved his Nobel Prize for his work on trade theory, and I stand by that. But keep in mind that his work there was very narrowly focused and quite technical, which doesn’t automatically indicate a good overall grasp of how the world works. And ever more I begin to wonder if Krugman really is just a rather average, even shallow, thinker outside his narrow specialty. This is from a 2008 Krugman blog post.

Bob Hall and Susan Woodward argue against the multiplier effect of infrastructure spending by pointing out that GDP and military spending rose by about the same amount during World War II.

Um, rationing?

With the onset of World War II, numerous challenges confronted the American people. The government found it necessary to ration food, gas, and even clothing during that time. Americans were asked to conserve on everything. With not a single person unaffected by the war, rationing meant sacrifices for all.

[Bangs head against the table]

Seriously? Does Krugman understand why rationing was put in place? It was because government was commandeering resources for the war effort, so those resources weren’t available for the consumer market! If there’s no goods for consumer to buy because the government is buying everything, then consumer spending can’t increase, so what exactly has been multiplied?

Or as Russ Roberts responded, “Does he think the rationing is what produced scarcity rather then being a response to scarcity?”

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About J@m3z Aitch

J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
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8 Responses to Wondering Ever More about Paul Krugman

  1. D. C. Sessions says:

    How is that relevant to the point at issue? The multiplier effect is based on the usual proportion between increases in income and increases in consumption. For whatever reason, if increased income has no outlet in consumption then you don’t see a multiplier.

    Forest, trees.

  2. Michael Heath says:

    I don’t interpret Paul Krugman’s point like you and Russ Roberts. In this case Krugman appears to be noting that rationing would explain the lack of growth in that period without having to claim this period falsifies the multiplier effect of infrastructure which Woodward and Hall assert. If my perception is Krugman’s rather than your’s; why is that worthy of your criticism?

  3. James Hanley says:

    Michael, because rationing can’t explain the lack of growth, because it was a consequence of the real cause of lack of growth–the crowding out of private consumption by government consumption. Failing to see that distinction is worthy of criticism, because Krugman argues that government consumption doesn’t crowd out private consumption. So there’s a data point that refutes him, and he simply points to it as though it supports his argument, and then actually avoids analyzing it, simply writing “[bangs head against table]” as though there could be no doubt about its meaning.

    D.C., Exactly–if there’s no outlet in consumption there’s no multiplier. But Krugman is arguing that there is a multiplier.

    Consider what the lesson of WWII is if Krugman is really right. The way to economic recovery is for government to employ all the unemployed people, put them to work building widgets, deny everyone the right to buy consumer goods for a couple of years, then blow up all the widgets. Voila, economic recovery! I think it sounds a lot like mysticism–rebuild the economy by creating privation and destroying vast amounts of created value. Perhaps we should blow up all those shovel ready projects as soon as they’re finished; that ought to really help the economy boom.

  4. ppnl says:

    The way to economic recovery is for government to employ all the unemployed people, put them to work building widgets, deny everyone the right to buy consumer goods for a couple of years, then blow up all the widgets. Voila, economic recovery!

    Well that actually may work depending.

    1)If the widget factories can easily be converted to produce consumer goods.

    2)In order to build the widgets you build up the production of raw materials such as coal, steel and oil.

    3)You bomb the productive capacity of the rest of the world back to the stone age and let them borrow the money to rebuild.

    But it seems a rather expensive solution.

  5. D. C. Sessions says:

    Michael, because rationing can’t explain the lack of growth, because it was a consequence of the real cause of lack of growth–the crowding out of private consumption by government consumption.

    Rationing isn’t an explanation for lack of growth, it’s an explanation for lack of multiplier effect. Which is more than just a growth equation term, it’s specifically an effect on demand.

    Which, in any supply-dominated economy, is not going to propagate. The question is, “is the economy supply-dominated?”

    Failing to see that distinction is worthy of criticism, because Krugman argues that government consumption doesn’t crowd out private consumption.

    Straw man. Krugman (and DeLong, and pretty much any other saltwater economist) certainly recognize that crowding out occurs. They just recognize that there are times when it does and times when it doesn’t — which is what you’d expect in a nonlinear system.

  6. James Hanley says:

    D.C.,
    I think your first paragraph agrees with me.

    As to crowding out, Krugman’s argument essentially denies, or at least simply ignores, that real crowding out took place during WWII, and both Krugman and DeLong seem to deny that any current government spending could cause crowding out…but I haven’t actually seen a real explanation of why not. They just fall back on their beginning assumption, insufficient demand, and essentially say, “therefore.” But it still seems to me that their argument depends on the existence of a vast stock of unused money sitting out there somewhere, because if there isn’t that, if the money is being used by the private sector, then crowding out seems inevitable.

    there are times when [crowding out] does [occur] and times when it doesn’t — which is what you’d expect in a nonlinear system.

    If in fact it ever doesn’t. The simple fact that the system is non-linear does not mean that any particular phenomenon ever occurs. In all seriousness I remain dubious about the claim that government can spend money without crowding out, unless it does so by tapping a whole new stock of money that otherwise was not going to enter the economy. Keynesians claim people stop spending and money just sits around doing nothing. Friedman claimed that was B.S. I’m still waiting for someone to explain to me why Friedman was wrong. (That is, I’m sure someone’s made a serious argument about that, and if I looked diligently enough–which I intend to do, when I have time–I could find it; but I’m intrigued by the number of people who are convinced Friedman was wrong about that, but who can’t explain why.)

  7. Ed Darrell says:

    Rationing had a piddling effect on the full-employment government stimulus the war spending provided. That full-employment stimulus is what we should focus on.

    Was rationing always to conserve vital resources? Well, yes, but not always directly. Gasoline was not in short supply. The U.S. had plenty of it, going into the war as the world’s leading producer and exporter of petroleum (was it Yergin who called World War II our first oil war? Japan attacked when we cut them off.).

    Gasoline was rationed as a further brake on the consumption of rubber. If people didn’t have enough gasoline to drive around, they’d have less tire wear, and that would conserve rubber.

    In other areas, we had great surpluses, but the population was called on to conserve anyway — as part of the “war effort.” How much did anyone’s Victory Garden really contribute to the war effort? Compare that with how much it quieted dissent against the war, and made people feel part of the fight.

    Claiming that the multiplier effect didn’t work has a lot of other flaws that Krugman doesn’t touch in that short excerpt, including the fact that millions of consumers stopped purchasing personally while they fought in the war. You’re closer to being correct with your latter paragraphs, but Krugman’s right that we can’t use economic figures of World War II to argue that great government intervention has no effect. Keynes was right, and I wish people would reconcile themselves to that economic law and get on with life: Governments can intervene to reduce the worst effects of recessions, and they probably should.

  8. James Hanley says:

    Ed,
    the full-employment government stimulus the war spending provided.

    Hold that thought for a moment.

    Krugman’s right that we can’t use economic figures of World War II to argue that great government intervention has no effect.?

    Really? Because the argument that it did have such an effect is irrefutable? Or because there’s not sufficient data there on which to base a claim, or because it was much too unusual a situation? If the former, then I’d like to see the argument. If the latter, haven’t you already contradicted yourself by claiming that it did have such an effect?

    millions of consumers stopped purchasing personally A)

    If the problem of the Depression was insufficient aggregate demand, and WWII further reduced private demand, that’s a bit of a problem for the arguments that WWII government spending provided a stimulus. B) If there is no additional purchasing resulting from the government spending, then there is no multiplier effect–the multiplier effect only happens if there is an actual effect; it can’t be said to have occurred when there is no effect to measure. If you want to argue that the stimulus was delayed for several years, well, I’d have to think about what that for a while, but I’m struggling to see the logic of claiming that the multiplier effect actually did occur from the government spending; it just couldn’t show itself because people weren’t spending.

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