On the difference between Krugman the economist and Krugman the polemicist

Here.

The thing that should be remembered (leaving Krugman aside here) is that we’ve usually two or more things going on at any one time, two things that are often working in opposite directions. The final result is the combined effect. We cannot thus start to insist that “x” is obviously, always and eternally true. The true answer in economics is almost always, well, it depends.

Does unemployment pay raise the unemployment rate?

As here, there’s some less unemployment as a result of the unemployed having some money and thus adding to aggregate demand. But we also get longer periods of unemployment and more of it as a result of people not being so desperate to get back into work before they starve. It’s the balance that matters.

And there’s an interesting test of what that balance is. The difference between EU and US long term unemployment rates. They, traditionally, only pay 26 weeks of unemployment benefit. We pay indefinately. We have rather higher long term unemployment than they do.

QED.

15 comments on “On the difference between Krugman the economist and Krugman the polemicist

  1. How does someone like this maintain his intellectual credibility? How do people who claim to respect him, continue to do so? I can understand liking him as a fellow partisan. But how do you respect him as an economist when he ignores incentives? What he writes doesn’t just contradict thoughtful economics. It contradicts the thoughtful economics he himself writes in the latest editions of his textbook. What am I missing?

    He is a partisan hack. Who comes from a community that solidly votes against its economic interests in voting Democrat. And is married to someone who comes from another community that solidly votes against every possible type of interest in voting Democrat.

    Hating Republicans, the Right, and the people who vote for them is not just in the blood, in the milk he supped as a baby, but it probably does wonders for marital harmony too.

    And it does not upset other partisan hacks.

  2. “there’s some less unemployment as a result of the unemployed having some money and thus adding to aggregate demand”

    Hmmm.

    Where does the money come from?

    Whether it’s taxed from the productive sector, borrowed or printed, there are consequences.

    If taxed, those taxpayers have less to spend, reducing aggregate demand.
    If taxed from business (and we are happy the incidence falls on the business, which it doesn’t but hey ho) then they invest less which creates less earners and therefore less aggregate demand.
    If borrowed we have increased costs servicing debts, which means less money to spend on stuff, which decreases aggregate demand.
    If printed we get inflation, which puts prices up and forces us to buy less stuff, decreasing aggregate demand.

    I don’t see where the extra money given to the unemployed can increase aggregate demand in the long term – it seems we are just frontloading the demand and losing some of it in the transition, like butter sliding towards you down a tilted hot pan.

    Unless Polly has lent you her Magic Money Tree?

    Tim adds: Oh come on, marginal propensity to save etc.

  3. Krugman has another article that says ‘Bitcoin is evil’

    Odd to think that this is the same bloke who wrote Pop Internationalism. I know he has won the Nobel Prize and all that, but I prefer his early stuff.

  4. I am delighted to read a serious commentator stating boldly that there are usually two things happening. However, this evident truth can be unfortunate as it allows, for example, would-be Keynesians always in all circumstances to claim that increasing gov’t spending, forcing businesses to pay the living wage etc (but, rather interestingly, NOT reducing personal and business taxes) will increase aggregate demand and lead us to the promised land of milk & honey.
    Indeed aggregate demand will receive a boost from these things – and I’m quite prepared to believe in the fiscal multiplier – but the other things that happen, the medium and long-term effects – are dismissed and correspondents pointing to them ridiculed and reviled.

    To be fair it works the other way sometimes: commentators such as Dan Hannan and James Delingpole have condemned QE as inflationary; in what terms would they condemn throwing money out of helicopters?

  5. Ivor, a certain number of the unemployed are unemployed because they are feckless idiots unable to delay gratification. These people spend the cash on beer and fags, whereas others might hoard it.

    Not a great argument in my eyes for giving them cash that those who have earned it would prefer to save, but there you go.

    Re Krugman, the left are all liars. Have I mentioned that before?

  6. I think that both Spain and Italy have contributory unemployment benefits, ie you don’t get anything unless you have worked and paid for a bit. But I’m pretty they’ve had higher youth unemployment than UK for my entire adult life. Following your methodology, that proves JSA for the young prevents youth unemployment. QED, in your words.

    Obviously not. As you start by saying, it depends.

  7. Lost Leonardo

    Depends.

    We’re not exactly suffering hyper-inflation at the moment are we? QE over the past 5 years has been used as a counter-deflation tool, rather like throwing money from helicopters.

  8. I agree with Ivor. The money has to come out of the economy to be given to the unemployed, and that has real consequences.

  9. Re: Tim’s comment

    Marginal propensity to …………..what?

    Save…………..where?

    There’s no yield baby – spend it or lose it to inflation (or a bail-in!)

    I might accept “middle class people might go on holiday abroad and spend their extra money outside our economy”

    But people in foreign need money too, right?

  10. Ironman
    January 16, 2014 at 1:21 pm

    Lost Leonardo

    Depends.

    We’re not exactly suffering hyper-inflation at the moment are we? QE over the past 5 years has been used as a counter-deflation tool, rather like throwing money from helicopters.

    From what I read when QE first stared wasn’t that it would cause inflation straight away, but politicians would get addicted and that it wouldn’t be tapered quickly enough, if it all.

    There is also evidence that QE is causing inflation in luxury goods. (Not I just picked this at random as the Economist where I first read it is behind a pay wall.

  11. Ironman

    Inflation:

    Stocks
    Art
    Diamonds
    Real Estate

    You might notice that these items are the purview of the wealthy.

    They are closest to the spigot from whence the extra cash is springing, so these items are the “special forces” of inflation – the vanguard if you will.

    Soon follows the infantry and the artillery.

    Things to keep an eye out for (in the order in which they will arrive):

    Price inflation on energy (already starting)
    Smaller amounts of stuff for the same price (already starting)
    Lower quality items for the same price (horsemeat anyone?)
    Actual price inflation (the actual end is nigh baby)

    Once you can see all four, it’s time to buy tinned food like it’s going out of fashion.

  12. SimonF/ Ivor

    “From what I read when QE first started wasn’t that it would cause inflation straight away, but politicians would get addicted and that it wouldn’t be tapered quickly enough, if it all”

    Agreed. But QE has been central to us avoiding the deflationary death spiral of the Eurozone.

    Otherwise:
    So asset prices increase with the lower interest, so what? They always do.
    So luxury goods increase in price, so what? The point is that borrowing costs dropped to nothing and liquidity was kept in the system.

    As for:
    “the purview of the wealthy. They are closest to the spigot from whence the extra cash is springing”
    oh please, this isn’t the Tax Research UK blog.

  13. Ironman.

    I guess as long as you don’t care about the misallocation of capital, all is well.

    For about another six months.

    And then wheeeeeeeeeeeeeee oops bang end of.

  14. Giving money to the unemployed clearly gets them out of a hole (which they probably didn’t get themselves into) and is therefor a good thing for that reason.
    It may or may not increase agregate demand so it may or may not be a good thing for that reason.
    If, as at present, nothing is required in return, then it provides some incentive to idleness.
    May I suggest workfare? Give the unemployed money in return for work- even if it is make-work. Then they have an incentive to find better work, are got out of the hole, and any benefits from increased aggregate demand still acrue.
    To put it another way, it is generally agreed that if you tax something you get less of it (a common argument in favour of tobacco and alcohol duties for example) and if you subsidise something you get more of it (windfarms, solar panels). The more we tax earning the less of it there will be (undesirable, obviously) and the more we subsidise idleness the more there will be. So tax idleness- and since we can’t tax the earnings of the unemployed, tax their time instead. After all we take tax money from the rich on the grounds that they have plenty of money, why not tax the time of the unemployed as time is something they have plenty of.
    It should be possible to pay workfare on a day by day basis, thus removing the bureaucratic delays waiting for benefits to come through, and allowing people to take a part time job when they can find one whilst still getting support for the rest of the time. Indeed there should be no need to check whether people are doing workfare and (say) driving a cab- if they’ve the energy to do two jobs they’ll soon find something more remunerative than any makework scheme.
    I would suggest this would result in an increase in production, less need for benefits, and hence less need to tax the rich (which at the moment means anyone earning more than £9500 per year).

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