Sunday, May 19, 2013

Krugman's economics, cumbaya and pseudo-science

The man started screaming at the store's clerk. Shocked and scared, I fixated on his long hair and bear. He had clearly not showered for many years and seemed very thin. Truly angry, the guy used more obscenities than I had ever heard from any one person. I was seven years old.
After the man stormed out of the store, the clerk, a store owner's daughter who was left shaken, told us that the store had been giving money to the homeless man for many years. It turns that that day she had not gone to the bank to change the big bills yet. This was the first time that the store had not given him any money.
This is how I learned that giving someone money would not solve their problems but would instead create an obligation for the giver. I also learned that having good intentions was not enough.
Over the years, I resisted giving money to the many people who beg the streets of Mexico, where I grew up. I was therefore called heartless by many friends whose opinion I valued. It did not matter that I had supported many projects aimed at helping people learn to do better by themselves instead. It was difficult to follow my convictions with so much pressure but it was a matter of integrity; I had to do it!.
End This Depression Now
Paul Krugman, on the other hand, seems to be willing to bend his beliefs so long as everybody likes him better. Of course that I don't know the man. This is just the impression that I was left with after reading his book, End This Depression Now! In it, he claims that Economics should not be driven by morality, yet makes many economic arguments based on moral principles. It seemed convenient to take both sides. Often, he would build credibility on one idea only to claim to believe on an opposite one without clarifying what the connection between the dual positions was.
I was therefore turned off by his seeming lack of integrity and a deep emotional insecurity expressed through an obvious desire to be liked by everyone. I rather prefer personal character and a strong conviction, even when I may disagree with the ideas.
As someone with background in engineering and scientific research, I have very little tolerance for those who claim to have mathematical or scientific evidence but who have not applied sufficient rigor to their process. In such cases, I would be much happier if the claims were described as a thesis instead. For example, Mr. Krugman builds his position that government spending will get us out of the recession on a very small sample of correlated data. Just like the Quants who developed the mathematical models that could not see risk in housing derivatives because of only using recent data, Mr. Krugman did not address any of the historic evidence for or against his ideas from before the 1900's; no Rome or Spain. Against claims that promoting business activity would be equal or more effective than government spending, he offered thin arguments. He focused on a single aspect of business incentives: lower taxes. He completely ignored the universe of other possibilities. Moreover, he never described extreme historic examples of too much or no government spending during recessions.
I should probably mention that any true scientific test must include evaluations of opposite or inverse scenarios. Here again, he omitted describing how government spending by the USSR's leadership failed to lift the union's economic collapse during the eighties. A sound evaluation would had then compared the USSR's investments during the 80's with that of China's during the last decade. It would had served as a good variable-canceling pair since both were centrally managed. In such case, the difference was that China promoted private business activity while the USSR did not.
There was one great concept that Mr. Krugman offered in his book; the idea of a Liquidity Trap. A Liquidity Trap happens when additional injections of capital into the financial markets by central banks betray traditional expectations by failing to stimulate the economy. This seems to only take place during deep recessions. It is clear from the way that this phenomenon is defined that it is happening right now and that it offers a better explanation than those from the many economists who have failed to predict results since 2009.
Launch Paul Krugman
Unfortunately, there is no explanation of how a Liquidity Trap transitions back to normal under the weight of so much stimulus. A graph with an approximation of the slope would have been helpful. We are thus left with the possibility that high economic stimulus would continue to work until the moment it doesn't. In other words, the graph would show an elbow with a sudden change from deflation to utter inflation. Yes, Mr. Krugman opposes the idea that there would be any inflation at all during the Liquidity Trap, but what he does not address is what happens when such Liquidity Trap ends. He seems to take the position that the graph would show a gradual change in slope; yet he fails to provide evidence behind such conclusion.
On the other hand, the idea of a Liquidity Trap could just as well support the ideas put forth by Edward Conard in Unintended Consequences. Mr. Conard describes how capital can act in either of two fashions: risk-averse or patient. The idea that excess risk-adverse capital is inappropriate when trying to fundamentally rebuild the economy could easily fit the concept of a Liquidity Trap if the excess liquidity happens to be risk adverse. It would also contradict Krugman's suggestion that investment by governments is the only alternative; lowering economic risk expectations could promote deployment of patient capital by business. Even Mr. Krugman had a hard time arguing in his book that government investments were effective enough to merit consideration. He had to rely on correlations; something that earlier he discredited.
In a nut shell, if you do read the book, focus on the concept of Liquidity Trap. Do let me warn you, though, that the road there is paved with lots of religious rhetoric. So you may better spend your time and money studying the concept of Liquidity Trap through other sources. On my part, I was so frustrated with the cumbaya that I almost dropped the book right in the middle of reading it. In my opinion, it could have been better written as a brochure on the concept of Liquidity Trap rather than a book on Krugman's religious beliefs on economics.

Book Title: End This Depression Now! 
Author: Paul Krugman
Publisher: W. W. Norton & Company
ISBN: 978-0393345087

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