Monday, July 12, 2010

In which I violate DeLong's Law

DeLong's Law reads:

  1. Paul Krugman is right.
  2. If your analysis leads you to believe that Paul Krugman is wrong, see #1.
Brad DeLong violated rule #2, and the course of the year proved that he, not Krugman, was wrong. He knew better, heh :-). So anyhow, yesterday Paul Krugman wrote a blog entry, Trending toward Deflation. And I'm going to boldly go where Brad DeLong went and say that my analysis says that Paul Krugman is wrong.

No no, I don't mean Krugman is wrong about deflation as a threat. What I mean is, we're *already* in deflation -- monetary deflation, that is. Deflation is a *monetary* event, where there are not enough dollars to purchase all the goods and services for sale in the economy, not a *price* event. The initial response to deflation is not falling prices or wages -- the initial response is always layoffs and reduction in sales volumes because of not enough money in the economy to purchase manufactured goods at the price required to make at least a minimal profit -- both of which we have seen. Price deflation does not occur until maybe even a year after monetary deflation occurs, because of the phenomenon of *price stickiness* that I previously discussed here -- manufacturers simply will not sell goods for less than the price it cost to make them, they will reduce production and lay off workers instead, and they have minimum ability to reduce cost of manufacturing because of lead times and contractual agreements. As a result, labor force participation here in the U.S. is at a rate that implies a real 11.8% unemployment rate even *not* including those with part-time jobs who want full-time jobs, which would add up to a real 21.5% unemployment rate -- i.e., we're talking Great Depression levels here, folks.

None of this is new. This happened during the Great Depression too -- for example when the money supply fell by 20%, prices fell by 10% and production and employment fell by 10% as price stickiness kept prices from falling all the way to match the number of dollars in the economy. This was observed at the time and widely decried by the conservative economists of the time, who claimed that FDR was responsible for this situation by driving up wages with his New Deal programs. But it's clear that none of these conservatives have ever run a business, because if they had, they would know that the first law of business is that *you can't stay in business if you sell stuff for less than it costed you to make it*. The stupidity, it burns, it burns!

- Badtux the Business Penguin


  1. I thought that Krugman was being either optimistic or restraining himself. That said, I agree we are on the edge and in the process of falling off or in the middle of a free fall.

  2. Dude, why does it still burn? lol. This country is full of teh stoopid.

  3. I was thinking along your lines.

    But at the end he says:

    What I take from this is that deflation isn’t some distant possibility — it’s already here by some measures, not far off by others. And of course there isn’t some magic boundary effect when you cross zero; falling inflation is raising real interest rates and making debt problems worse as we speak.

    Krugman tends to understatement and politeness - unlike you and me. And he does seem to retain some cautious optimism.

    I gave up on that, long ago.

    Repugs are stupid

    and incoherent

    And the liberal-biased MSM NEVER calls them on it.


  4. 'Tux, I think you nailed it.

    But the question then returns to the sensible one of how do you create demand which in theory results in employment when the policy and trade agreements figuratively (and maybe practically) have moved all manufacturing off shore?


    (who desperately wants someone to rework NAFTA, CAFTA, and all the other FTAs...)

  5. Q: Who is hurt most by a trade war?
    A: Net exporters.
    Q: Who is hurt least by a trade war?
    A: Net importers.

    Why are we doing "free trade" with a Communist slave state (China) where the word "free" is inoperative? Why do we fear a trade war with them, when they would be harmed greatly by a trade war and we would not? And don't say "because they own America's public debt", because they don't -- they have been diversifying away from American dollars and own less than $1T of U.S. public debt, which could be wiped out in a minute with one run of the Federal Reserve's electronic printing presses. (A minute because it'd take that long to key in the sequence to do it).

    Something has been fishy about U.S. trade policy for two decades now, ever since the US became a net importer rather than a net exporter... *another* thing where Paul Krugman was wrong (he is a big free trade advocate, though he perhaps is changing his mind now).

    - Badtux the Trade Penguin

  6. Would a tariff on Chinese imports cause inflation? I'm thinking a good bout of 5-6% inflation is exactly what we need.

  7. Joe: Inflation is a monetary concept, not a price concept. Yes, a 6% tariff on imported goods would immediately raise prices by 6%, but would in turn immediately lower sales volumes by 6% too because there isn't 6% more money in the economy -- it's called the "pigeonhole principle" in mathematics. If you have six letters and six cubbyholes to put them into, you can put one letter into each cubbyhole. If you have six letters and eight cubbyholes to put them into... well, two of those cubbyholes will simply have to go unfilled (i.e., unsold, if we're talking goods for sale and the letters are dollars to buy them with). And now you know why we take all those mathematics courses in good computer science curriculums, it's so that we can talk about dining philosophers and letter sorting with authority ;).

    So anyhow, the *immediate* effect of a trade war with China would be unemployment as those involved in selling and distributing the now-unsold goods lose their jobs. The *long term* effect, on the other hand, would be to increase American manufacturing employment, which in turn would re-employ those people and more. Ask the people who work for Harley-Davidson whether they wish Ronald Reagan had just let them go bankrupt rather than bailing them out with a tariff on Japanese bikes... that's thousands of people who have jobs who would not have had jobs if not for the tariff. Same deal with the people who make Toyota Tacoma pickup trucks here in the US, which are made here because the tariffs to import trucks into the US are so stiff. And so on. The eventual result would be more jobs, higher employment... and, uhm, re-inflation of the economy, since building those new factories gives the banksters someplace to invest all that money that's currently residing under (virtual) mattresses at Fed HQ as reserves.

    So: Inflation? Not in terms of the money supply. Which is the problem, you'd have higher prices, but no more money to meet those higher prices. It's the same problem as deflation, except without the actual reduction in the money supply, and the result is unemployment -- in the short term. In the long term, however, the result is a real economy that can attain full employment as the higher prices make it economical to build new factories to build the stuff that's been tariffed more expensive... which is good.

    -- Badtux the Economics Penguin


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