Wonk v. Wank I

by the Sandwichman

A few days ago on his blog, Paul Krugman offered up an "unreadable little paper" with a "fully-specified model" to examine the case for "big government spending in the face of a liquidity trap". The bottom line: "When the economy is depressed and monetary policy can’t set it right, the true opportunity cost of government spending is low. So let’s get those projects going."

Unreadable as Krugman's little paper may have been, seventy or so readers managed to comment on it insightfully. It's too bad Krugman doesn't reply to his commentators. I suppose it's the custom of simplistic economic model building to hide behind the abstract generality, simplicity and unreadability (to non-wonks) of the model. Nevertheless, several commentators had little difficulty identifying what was missing in Krugman's "fully-specified" model: The Big Picture.

Below are excerpts from several of the comments:

Umm… while we’re at it, Dr. Krugman, perhaps you could please explain just why consumption has to be so high to prevent economic meltdown.

... why does the economy require that people spend money they can’t afford on stuff they don’t need now, in order to keep the economy moving at all?

Better, surely, to have the government buy public goods that are at least needed–education, insulation, health care, efficient transportation.

But when, if ever, can we enter Keynes’ vision of a world at leisure, with plenty of time, jobs with family-compatible hours, and enough goods to keep us smiling? Will our economic system ever permit it? Can we use a crisis as a time to think about the possibility?

Can you please explain. Fiscal stimulus forever - or only until consumer spending resumes? Earlier this year you wrote in the NY Times that “weak spending is treatable and the economy could be saved”.

In the last 6 years everyone bought new cars, new computers, new mobile phones, new houses! These will last at least 10 years.

What now? Perpetuate the spending Greenspan ignited?

Consumer spending on “exotic” upgrades? - replacing a perfectly good car or computer with a more expensive model? $400 sun glasses, $300 joggers, the latest mobile phone? Is that the idea - spend like we use to? Maybe the government should stimulate advertising! Maybe brainwash the people - they really do need to buy these goods!
Or make it compulsory to have all cars, computers, TVs etc. destroyed if they are older than say 5 years. Then people will have to buy new ones! Creative destruction!
Spending restored and economy saved!

Keep people employed making and selling things we don’t really need = full employment in jobs nobody likes. Is that it?

The problem you face is convincing people that since excessive debt got us into this mess, even more debt (Federal this time) will get us out of the mess. And you have to do it without math.

Is there any chance that a liquidity trap is actually a manifestation of any or all of the following:

Too much debt; wealth/income inequality; and/or negative real earnings growth for most people

Why do almost all economists assume that preventing price deflation requires MORE DEBT??? I DO NOT believe that the solution to too much middle and lower class debt is MORE DEBT (whether gov’t debt or not)!!!

As was forwarned , the paper was too tough to follow. I have an equally difficult time understanding why complex wonkish academic theory and analyisis trumps and ignores common sense and the more obvious. What is right before our eyes is the fact that no matter what we do to stimulate the economy our major downfall is our lack of manufacturing ability which we gave away to China and the like. Sadly our national focus and young talent has migrated to financial ( funny money) engineering from engineering that creates new technology. And for too long the foundation of our new economy has been based on borrowed money and not on import income from making quality things. The more we borrow ( which we now have no choice but to do ) the more we dig our selves down into the black hole which may now be too deep to ever to get out of . The wonkish analysis seems to ignore what is obvious to the lesser intelligent people. Me and most of my friends who are about as equally unintelligent as me, were able to see the crazy mortgage/housing bubble and also the fact that our economy was a house of cards because it is based on borrowed and funy money. And this was obvioius to us several years ago while the wonkish lot ( ie economists such as Greenspan and company) were producing analytic outcomes that suited themselves so as to perpetuate the massive wealth accumulation for the very wealthy.

As I see it, full employment is not a binary predicate in any real economy.

You will always have sectors with over-full employment, sectors with full employment and sectors with less than full employment. The same is true for different geographic areas. There is plenty of skill and location stickiness that ensures that this is always true.

This means that there is no point in time in which you reach full employment in the whole economy, which also means that at no point in time does anything dramatic happen. The cost curve will never become a discontinuous function.

Rather, for every new job that is being added, there’s an increasing chance that the next job will appear in a tight part of the job market. As long as you have non-perfect distribution of new jobs only to the sectors and regions that have less than full employment, you will see the marginal cost increase for every created job, and from the start you’ll see faster than linear cost growth.

With government programs, it’s likely that certain sectors are stimulated more than others. Due to skill stickiness this will mean that the mismatch between available skills and requested skill grows. I believe this means that it’s highly likely that the cost curve crosses the benefit curve well before the mythical state of full employment.

Maximization of consumption is totally different from sustainable consumption. Your model is not comprehensive and tough only some parts of economy.

But the biggest point is we think only maximization but that is not sustainable. We have over consumption and over debts. The more government uses, the more the next generation will have to pay tax and the less the next generation will have to consume.

All optimization economic models we contribute cannot bring the sustainability of economy. We may look back to see Ramsey model to find why we have too much consumption, too much debts and low saving because we use optimization of consumption model that is all wrong in concepts.

Government can bring the full employment in short term to optimize consumption like we did for nearly 70 years on Keynesian tools but we cannot sustain full employment in the long run if the government and private debts stay at unsustainable high level.