From time to time I have been critical of Professor Paul Krugman, the Nobel Laurette from Princeton University and the New York Times. Recently I criticized his use of the babysitter model of the economy. However, Robert Blumen brought to my attention that I had unfairly criticized Krugman in my paper on the deflation phobia, Apoplithorismosphobia. I wrote: “Krugman falls into the gibber-jabber of sophomoric circular reasoning” and then quoted Krugman:
“If you think about this a bit, the story gets even worse. After all, prices are falling because the economy is depressed; now we’ve just learned that the economy is depressed because prices are falling. That sets the stage for the return of another monster we haven’t seen since the 1930’s, a “deflationary spiral,’’ in which falling prices and a slumping economy feed on each other, plunging the economy into the abyss. It’s pretty scary stuff, not just for Japan but for the rest of us. If Japan slides into the abyss, that will have a direct adverse effect on our economy dwarfing anything the terrorists did.” (Krugman 2002d)
Robert Blumen correctly points out that Krugman is discussing a circular process, but he is not using “circular reasoning.” Krugman is actually using reasoning based on a positive feedback cycle. His analysis is still wrong, but for my mistake I fully apologize to Professor Krugman.
In fact he is so wrong that I also wish to apologize to sophomores everywhere. Their errors on economics exams are to be expected and are not harmful. Krugman’s errors cannot be forgiven and are truly dangerous.
Follow Circle Bastiat
You don’t owe that clown an apology. He has singularly done more damage to our economy than any man I can think of in recent history by vomiting his twisted rhetoric upon the masses to confuse and distort the truth.
Well to be fair Krugman isn’t the one who has damaged the economy. The fools who listen to him are. His crime is lying, distorting and manipulating.
I am a typical economic ignoramus, belatedly reading Human Action for the first time and I don’t quite understand how wrong Krugman is in this case. Most of the time he is blatantly obvious but not to me this time. Anyone care to illuminate how the notion of a deflationary spiral is nonsense?
For a pretty good explanation of the benefits of deflation follow the link in the article associated with the word “APOPLITHORISMOSPHOBIA.” This is a rather long article, more than I think is necessary to refute Krugman.
But first let me note the following excerpt from Wiki, which I believe states the history of the U.S. economy in the 19th century accurately. “Historically not all episodes of deflation correspond with periods of poor economic growth. Deflation occurred in the U.S. during most the 19th century (the most important exception was during the Civil War). This deflation was caused by technological progress that created significant economic growth. This deflationary period of considerable economic progress preceded the establishment of the U.S. Federal Reserve and its active management of monetary matters.” So, obviously, deflation doesn’t equate with bad.
As Thorton’s APOPLITHORISMOSPHOBIA. article points out, “Since World War II and the rise of Keynesian economics, professional economists have understood the word deflation to mean a decrease in the index of consumer goods prices, and inflation to mean an increase in the same or similar index. Before this, the term deflation was defined as a decrease in the stock of money and inflation as an increase in the stock of money. One problem with defining deflation as the effect, i.e., price deflation, instead of the cause, i.e., monetary deflation, is that it can mislead economists from knowing the causes, effects, and proper policy approach to ‘deflation.’”
In the Krugman quote given here, he describes a deflationary spiral thus: “That sets the stage for the return of another monster we haven’t seen since the 1930’s, a “deflationary spiral,’’ in which falling prices and a slumping economy feed on each other, plunging the economy into the abyss. It’s pretty scary stuff, not just for Japan but for the rest of us. If Japan slides into the abyss, that will have a direct adverse effect on our economy dwarfing anything the terrorists did. Aside from the hyperbole (“another monster,” “plunging,” “abyss,” “pretty scary stuff,” “dwarfing anything the terrorists did.”), what is there here that you find persuasive? Wouldn’t declining prices induce people to buy more, thereby increasing the demand for goods, thereby increasing employment to meet the demand, and improving the general welfare by allowing people to buy more goods with their pay check, bringing about a robust recovery rather than the scary scenario imagined by Krugman? There is nothing logical in Krugman’s description of a deflationary spiral.