Tuesday, November 17, 2009

Krugman back to Dweeb Status. Surprise, surprise.

Paul Krugman has again drawn the attention of other economists and myself to some of his loose thinking. His most recent post at the Op-Ed of the New York Times is entitled Free to Lose. This blog post will be referring back to that article often so best to read it first.

Can Krugman Understand Economics?
Steven E. Landsburg, Professor of Economics at the University of Rochester, gave one of the best backhanded complements ever to Krugman at Krugman to the Rescue.
It’s always impressive to see one person excel in two widely disparate activities: a first-rate mathematician who’s also a world class mountaineer, or a titan of industry who conducts symphony orchestras on the side. But sometimes I think Paul Krugman is out to top them all, by excelling in two activities that are not just disparate but diametrically opposed: economics (for which he was awarded a well-deserved Nobel Prize) and obliviousness to the lessons of economics (for which he’s been awarded a column at the New York Times).

But I am more inclined to believe that Krugman just gets confused between good politics and good economics. As we explore the issues Krugman brings up, there may be good political reasons for doing certain things even if economics would state the opposite. It is up to him to explain the concepts in the different fields of study.

Landsburg looks specifically at the suggestions by Krugman and quotes the top three paragraphs of his Krugman's Op-Ed. Landsburg notes the differences in total amount produced per worker because of differences in hours worked and thus asks Krugman if it should not be the US to be emulated. A couple of excerpts of his post:
And exactly which brilliant European policies does Krugman believe the U.S. should now consider with favor? Among others, labor rules that discourage firing and incentives for “short-time work schemes”, where everybody puts in fewer hours.

* A really really really good way to get employers to stop hiring people is to tell them they can’t fire people.
* Putting people to work is not really terribly useful unless you put them to work productively. If they’re not producing, you might as well pay them to stay home. But imposed “short-time work schemes” are designed to diminish productivity. (In those cases where they can enhance productivity, employers have already adopted them).

He also gives some tongue in cheek suggestions for making each worker less productive. Donald J. Boudreaux, chairman of the department of economics at George Mason University, also notes the discrepancies between intent and results of such suggestions. In the post entitled Perhaps Demand Curves Slope Upward to the Right – or, Alternative-Universe Economics, he makes the following statement which he sends to the NYT.
But no student in my class would ever write such nonsense. My students learn from day one to distinguish intentions from results. So my students understand that the intention of such labor rules might be to decrease unemployment, but that the result will be to increase it – because my students also understand that labor rules that discourage firing raise employers’ costs of hiring workers to begin with. Firms will think twice – thrice! – before hiring employees who, once on the job, are difficult to fire.

Basically they are saying the demand for labor shifts to the left and down which will result in less employment and even lower wages. That is true for future employees as their costs of hiring (through forced retainment) is raised, but it is not necessarily the case for those already working. They would benefit from the increased costs of dismissal and for those already hired it would help maintain the employment levels for the short term. Eventually any additional costs are born out by decreased hiring and eventual letting go of the non-performing workers.

Boudreaux is at it again with another letter to NYT at Achtung! He presents a summary of OECD average rates of unemployment in Germany and the USA and closes with his contention that the Germans have been more prudent in the latest financial crisis instead of the "irresponsibly orgied" stimulus spending of the USA. His longer post on these issues are at Unemployment-Smoothing, Krugman, and Quackery where he summarizes the data as:
While it’s true that Germany’s unemployment rate today of 7.7% is lower than America’s current rate of 10.2%, it’s very difficult to look at the above numbers on unemployment rates over recent years and conclude that European-style labor-market restrictions are good policies for people seeking gainful employment. The average rate of unemployment for Germany over the 1998-2007 period was 8.9% while that for the U.S. was 4.9%.

Boudreaux concludes that while unemployment is costly to society and thus smoothing UE over time is a good thing it is not necessarily a good thing if it smooths it at a much higher rate of unemployment.

Krugman's Social Costs.
Let me quote at least a portion of Krugman's Op-Ed piece here:
And long-term unemployment inflicts long-term damage. Workers who have been out of a job for too long often find it hard to get back into the labor market even when conditions improve. And there are hidden costs, too — not least for children, who suffer physically and emotionally when their parents spend months or years unemployed.

There is clearly a social cost to society for long-term unemployment but he has not shown that German work rules would increase employment now or in the future. He would be better off promoting more job training or direct transfer payments or even some work jobs program and not schemes to shift the social costs off onto the labor markets. The distortions he suggests would actually make long term employment worst and not better. Instead of his constant promotion for another and even bigger "stimulus" he could actually try to use his influence on trying to correct the last stimulus package and what monies has not been allocated and making government more efficient with the massive amounts of resources it has at its disposal now.

An Intriguing Question.
Boudreaux asks another intriguing question, Would Productivity Fall or Rise?, and suggesting the following idea:
Let’s start at the New York Times. I know several economists currently without jobs (and certainly without regular newspaper columns). I propose that Times Co. chairman Arthur Sulzberger reduce Mr. Krugman’s presence on the editorial page to, say, one column per year. The remaining hundred or so columns that Mr. Krugman would otherwise have written for the NYT can be written by unemployed economists.

I’ll be very happy to supply Mr. Sulzberger with names of economists who need the work.

Great suggestion! The problem is that the people that suggest that know that their unique status prevents such solutions from being forced on themselves. Krugman for lack of a better way to explain it is a "star" and when Boudreaux talks about productivity changes when 100 unknown or little known economists fill Krugman's shoes they will not "produce" as much. In this case the other economists would not produce as many page views and readership would slip without his presence. Some radio talk show hosts also have suggested that, such as Thom Hartmann.

Why Can't We Have Better Economists?
As one economist laments "Why Oh Why Can't We Have a Better Press Corp?", I wonder if Krugman will show us what a winner of the Nobel Memorial Prize in Economics can do to inform and instruct us in sound economic policies.

Misc. Links:
by John Stossel Bogus Stimulus

Did the Stimulus Work?

Rational Irrationality

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