Economists tell tales.
The best are those that make it easier for us to understand very complicated ideas. Paul Krugman, a Nobel Laureate, wrote one such tale years ago, an essay called “Ricardo’s Difficult Idea.” It explains something economist David Ricardo discovered nearly 200 years ago: When nations trade they both become better off even when some people seem to suffer.
Since that essay Krugman has been telling tales for the New York Times. Not all have been as wholesome.
Krugman appears to be one of those court wizard economists who believe they — that is, the government — can fine-tune the economy. In his August 2, 2002 column he says that “[t]o fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that . . . Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”
Yes, back in 2002 Krugman supported the Fed’s super-low interest rates, and predicted the outcome: A housing bubble.
Which has burst.
Since then, Krugman’s readers have looked for someone to blame. Well, Krugman’s own words give us all we need to incriminate his own very self . . . and his fellow court wizards.
Familiar story: Self-aggrandizing experts aim to fix things, and put us all in a fix. The case against government management of the economy just got even stronger.
This is Common Sense. I’m Paul Jacob.
2 replies on “He Should Have Pleaded the Fifth”
First, I am generally much more in agreement with Paul Jacob than Paul Krugman. But, Krugman quoted McCulley from PIMCO on creating the housing bubble. Although interest rates affect housing, it was lending to people who couldn’t pay that caused the bubble. The GSEs where 50% of the mortgages went through had much more impact on the bubble than the Fed.
Ricardo was dead wrong. His analogy was foolish and has been abused by economists ever since.
Ricardo was right that England should not try to produce wine, and Portugal should not try to make woolen goods, but after that it is nonsense. That is his theory of comparative advantage.
Comparative advantage says that a workman making shoes at $10 per hour will switch to making hats ag $15, which is true at the individual level. But then this is used at the national level, to say that Americans should give up this factory to develop something that has a greater return, because of comparative advantage and the brilliance of Americans.
Therefore, as Americans lost manufacturing industry after manufacturing industry, we were always going to be better off because we would think of something that would employ millions in high wage jobs, to replace the millions of high wage jobs that were lost. Doesn’t seemed to have happened.
In reality a firm making a product at a profit does not drop a profitable line, what it does is keep that line and expand into a new one. If it is making $7 selling shoes and $12 selling hats, it will do both. It may have to hire extra workers, pay overtime, etc, but it does not give up production of one for the other.
Paul Streitz
America First: Why Americans Must End Free Trade, Stop Outsourcing and Close Our Open Borders
Available on Amazon.com]
pstretiz@optonline.net