mimicked On Nov 11, 7:54 pm, rigsy03 <[EMAIL PROTECTED]> wrote: > There have been other dubious winners of the Nobel Prize.//The average > American's only hope against his government's largesse to those who > profit from the bailout, is thrift. THRIFT. SAVINGS.// When Sinclair > Lewis got his call from a Swedish newspaper informing him of his Nobel > Prize for literature he thought it was a prank so he mimiced the > accent as a joke. > > On Nov 11, 6:51 pm, Travis <[EMAIL PROTECTED]> wrote: > > > > > From: Travis > > Subject: Consumers Don't Cause Recessions > > Date: Tuesday, November 11, 2008, > > > Consumers Don't Cause Recessions > > > *Daily Article* by Robert P. > > Murphy<http://mises.org/articles.aspx?AuthorId=380>| Posted on > > 11/11/2008 > > There's one saving grace about Paul Krugman's column at the *New York Times > > *: when an Austrian economist wants to explain how mainstream economics > > leads to ruin, he can always trust Krugman to set up the target in a clear, > > concise manner. This saves us a lot of work, because we don't have to first > > build up the position before knocking it down. > > Even the casual reader of the financial press knows that it is dominated by > > Keynesian "demand-side" thinking. For example, during the debate over the > > stimulus checks earlier in the year, the main objection was that taxpayers > > might use some of their rebate to pay down credit card bills, rather than > > blowing the whole thing at the mall. But the reader will never see a > > careful, step-by-step exposition of the worldview that generates such crazy > > notions. > > Enter Paul Krugman. In a recent piece, "When Consumers > > Capitulate,"<http://www.nytimes.com/2008/10/31/opinion/31krugman.html>the > > newest Nobel laureate spells out the method behind the madness. Let's > > take the opportunity then to show just why this focus on consumer spending > > is not only mistaken but downright dangerous. > > "The Paradox of Thrift" Krugman first tells us the (allegedly) bad news: > > "The long-feared capitulation of American consumers has arrived…[R]eal > > consumer spending fell at an annual rate of 3.1 percent in the third > > quarter; real spending on durable goods (stuff like cars and TVs) fell at an > > annual rate of 14 percent." > > Now let's stop for a moment. Many left-leaning writers—including > > Krugman<http://query.nytimes.com/gst/fullpage.html?res=9A0CE0DB133DF935A15750...>—have > > been warning for years that the US trade deficit was too high, and that the > > national savings rate was too low. So one would think that a drop in > > consumer spending would be a good thing. Ah, not so fast: Krugman tells us > > that "the timing of the new sobriety is deeply unfortunate….For consumers > > are cutting back just as the U.S. economy has fallen into a liquidity trap." > > And now to the actual theory behind all these musings. Krugman writes, > > > [O]ne of the high points of the semester, if you're a teacher of > > introductory macroeconomics, comes when you explain how individual virtue > > can be public vice, how attempts by consumers to do the right thing by > > saving more can leave everyone worse off. The point is that if consumers cut > > their spending, and nothing else takes the place of that spending, the > > economy will slide into a recession, reducing everyone's income. > > In fact, consumers' income may actually fall more than their spending, so > > that their attempt to save more backfires — a possibility known as the > > paradox of thrift. > > > My friend Bill Anderson actually derives sustenance from his hatred of Paul > > Krugman<http://www.forbes.com/2008/10/13/krugman-nobel-economics-oped-cx_wla_...>; > > at lunch one time, Bill skipped a sandwich and instead just bought a *New > > York Times*.[1] <http://mises.org/story/3194#note1> Now one of Bill's > > frequent remarks is, "Paul Krugman is not an economist." When I first heard > > that, I thought Bill was being unfair in order to score a funny point. But > > the above excerpt from Krugman changes all that. > > The most central lesson of economic science—going back further than Adam > > Smith's "invisible hand" metaphor at least to Mandeville's 1732 *Fable of > > the > > Bees*<http://oll.libertyfund.org/?option=com_staticxt&staticfile=show.php%3...>—is > > that in a system based on private property, private vices can actually be > > harnessed for the benefit of the public at large. Specifically, a market > > economy steers greedy businesspeople into staying up all night, thinking > > about how best to satisfy their customers. > > Besides this truth (discovered relatively recently in human history), people > > have always known that a wise person refrains from possible consumption in > > order to accumulate savings. The reason humans in the 21st century are so > > fantastically wealthy compared to those in the 11th century is *not* merely > > a matter of technological innovation. It is also the result of the growing > > inventories of machines, tools, and equipment (i.e., "capital goods") that > > have been bequeathed from generation to generation. "Everybody knows" that > > thrift leads to prosperity, while prodigal spending leads to ruin. There's > > even a famous story in the Bible on this topic. > > It is truly shocking to learn that Krugman not only tells his students the > > exact opposite—namely that private virtue leads to public vice, and that > > saving makes the community poorer—but that he actually *relishes* the > > demonstration. Fortunately for one's sanity, we can uncover the fallacies > > pretty easily. > > The Misleading "Circular Flow" Model In a nutshell, the problem with > > Krugman's Keynesian analysis is that it is static, meaning that it doesn't > > involve the passage of time, and consequently it can't begin to grapple with > > the capital structure in a modern economy. The "circular flow diagram" > > illustrates the way Krugman views the economy: > > <http://www.people.eku.edu/ruppelf/Eco230/circularflow.gif> > > So during a recession, Krugman thinks that (for some reason) consumers freak > > out and start spending less. This reduces the revenues earned by firms from > > the sale of goods and services. But then this means firms have less money > > with which to hire factors of production (natural resources, labor hours, > > and capital equipment). That means the income earned by the owners of these > > items—i.e., everyone in the economy—goes down. But with less income, people > > in their role as consumers can't spend as much on goods and services, so > > business receipts fall even further, and so on until the decentralized > > market economy crashes into a major depression. To repeat, Krugman thinks > > the free market can't solve this problem, because individuals rationally > > respond to the onset of the crisis by increasing their cash balances, which > > only makes the crisis worse. > > According to Krugman, in order to escape from this vicious cycle, the > > government must coax consumers to start spending again, perhaps by cutting > > interest rates or giving tax refunds. But sometimes (as in the present > > situation) those remedies are inadequate, and then it is the duty of the > > politicians to be the adults and spend tens of billions in borrowed money to > > do a Control-Alt-Delete on the economy. > > There are so many problems with Krugman's thinking that it's hard to know > > where to begin. For starters, if government pump-priming can boost firm > > revenues, which raises national income, which allows further business > > expansion, etc. etc., then why employ this technique only during recessions? > > Why not recommend that the government *always* engage in deficit spending, > > in order to create jobs and boost GDP? > > "Well," the Keynesian would say, "in a state of full employment, further > > additions to aggregate demand wouldn't allow firms to hire more workers. The > > new demand for products and services at that point would serve merely to > > push up prices, not increase real output." > > Ah, now we're getting somewhere. With all the talk of consumer spending and > > national income, we often forget that *actual production* must occur before > > people can consume anything. It doesn't matter how many green pieces of > > paper are in your wallet; you can't "demand" a TV set unless the store has > > an actual unit on the shelf. Pushing it back one step, no matter how many > > customers are lining up outside his store, the manager of Best Buy can't > > stockpile his shelves with TVs unless the manufacturer has previously > > assembled them. And of course, the manufacturer can't do so—regardless of > > how much money he is offered by the Best Buy manager—unless he can find > > enough workers, and enough of the relevant parts, to actually make the TVs. > > We now see why the circular-flow diagram above is a very misleading model of > > the economy. It leads us to think that output of finished consumer goods can > > immediately rise and fall with "spending." This framework would hold if > > there were no capital goods, meaning that all consumer goods and services > > were produced immediately, as workers took gifts of nature and produced the > > finished item on the spot. > > For example, in an economy composed of masseuses and jugglers, the > > circular-flow diagram might be useful. If someone wanted a massage and had > > the cash, the masseuse could go right to work. The only physical constraint > > on output in the "massage sector" would be the number of masseuses, and the > > fact that they needed to sleep at some point. Besides the input of the > > masseuse's labor, the only other item involved is a table, and the same > > table can be used in the production of thousands of massages before needing > > to be replaced. > > Things are different with most of the goods and services produced in a > > modern economy. In almost every sector, the workers show up and rely on > > tools and equipment that greatly magnify their productivity. Moreover, the > > overwhelming majority of workers don't apply their tools directly to raw > > natural resources. > > ... > > read more »- Hide quoted text - > > - Show quoted text - --~--~---------~--~----~------------~-------~--~----~ Thanks for being part of "PoliticalForum" at Google Groups. 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