(posted Thursday, Dec. 10, 1998)
The Unnamed Journalist Replies
Re Paul Krugman's piece " The Hangover Theory": I'm undoubtedly the unnamed journalist he mentions in his lead, since my recent article about him did take him to task for ignoring the Austrian theory of business cycles. Accordingly, I'd like to correct his arguments and even a few of his facts.
Krugman is probably right that a proper understanding of the causes and cures of recession requires a few Keynesian insights. But it's astonishing that he apparently believes you can completely dispense with the obvious relevance of Austrian theory. Questioning that theory, he asks, "Why should the ups and downs of investment demand lead to ups and downs in the economy as a whole?" Well, there are at least three reasons.
To begin with, as he himself suggests, workers who are laid off from the capital goods industries that are contracting do not instantaneously find jobs elsewhere (the "frictional problem"). To that, Krugman logically demands to know, "Why doesn't the investment boom ... also generate mass unemployment?" The answer is that it could, but it's all in the timing. Usually an investment boom builds slowly enough for labor to adjust, but a contraction can sometimes happen too quickly for the adjustment to be made.
Second, those who do lose their jobs must of course reduce their consumption, which causes layoffs in other areas of the economy.
And third, a factor that has been commonly remarked upon in these situations, with bank loans going sour, "bank-dependent" businesses that may even be relatively sound ventures can also be denied credit, thereby causing further layoffs, further cutbacks in consumption, and so on.
All of this is why the story does indeed resemble what, in Krugman's words, "actually happens in a recession, when every industry--not just the investment sector--normally contracts."
Finally, Krugman indicts Austrian economist Friedrich A. Hayek, whom I doubt he's bothered to read. (A tip-off is that he keeps calling that gentleman "von Hayek," even though his byline did not include the honorific "von.") So let me refer him to a key passage from Hayek's discussion of business cycles, which bears directly on Krugman's satirical riffs:
Although insufficient general demand is normally not the primary source of unemployment ... unemployment may itself become the cause of an absolute shrinkage of aggregate demand which in turn may bring about a further increase of unemployment and thus lead to a cumulative process of contraction in which unemployment feeds on unemployment. Such a 'secondary depression' caused by induced deflation should of course be prevented by appropriate monetary counter-measures." (Italics mine--from New Studies, 1978, Page 210.)So much for Krugman's charge that Austrian theorists "can't stand the thought that positive action by governments (let alone--horrors!--printing money) can ever be a good idea."
I continue to be a fan of Paul Krugman's writings. In this case, I think his problem is simply this: He honestly seems to believe that no economic theory can be worth its salt unless somebody has expressed it in math. The Austrian economists insisted that all good theory must be put in words; ergo, they aren't worth listening to. That's truly a pity, because Krugman himself has an obvious gift for words, and he'd probably find the Austrians to be kindred spirits, if he'd only make some attempt to overcome the limitations of his training.
Barron's Financial Weekly
Paul Krugman replies: First, let me clear myself of one charge: I was well aware that Hayek didn't use the "von," and in the piece I submitted to Slate I was careful never to apply the honorific. However, the copy-editing gremlin seems to have been at work while I was overseas.
Second, if I have misread what Hayek was saying, I am not alone. Check out the comprehensive pre-Keynesian survey of business cycle theories by Gottfried Haberler in Prosperity and Depression, originally published in 1936: His reading of Hayek is exactly the same as mine. (In fact, I wrote that column with Haberler as my guide.) And while Hayek may at some point have advocated "appropriate monetary counter-measures," whatever that may mean, the plain fact is that he was vociferously opposed to efforts to fight deflation during the great slump.
As for the rest: If there was any abstruse math either in my latest piece or in my column about the baby-sitting co-op, it was well hidden not only from the readers but from the author. It's true that I do believe that an economic theory should "add up": that it should give a consistent account of who is doing what, and of where the money comes from and where it goes. But that doesn't seem like a lot to ask, even if it turns out that some plausible-sounding theories fail that test.
I have to admit that it's a bit dismaying, given the amount of effort I have made and continue to make to express economic ideas in plain English, still to find myself charged with being just another one of those math-obsessed economics nerds. I do think that math is a useful tool for economic thought (see my piece "Two cheers for formalism"). But the trouble with Austrian theory, as with many heterodox economic doctrines, is not that it is expressed in words but the fact that its proponents use a sort of blizzard of fancy words to cover up a fatal lack of intellectual clarity.
I've no doubt that Edward Hegstrom's " Overblown" is right--the numbers are probably inflated. They always are in Central America--the better to graft away the influx of foreign aid that follows such disasters. That said, the scale of disaster resulting from a simple rainstorm in these lands can be quite grand. In the fall of 1983--or was it '84?--a week or so of heavy rains did more damage to the Salvadoran economy than the guerillas had been able to do in five years of sabotage--as my AP colleague Joe Frazier pointed out at the time. A mudslide that sloughed off part of the San Salvador volcano killed 500 people in their shantytown in a matter of minutes.
However much prevarication and graft is involved, the Central American governments and NGOs are right to inflate the death toll. It's the only way they can get the world's attention, now that the Cold War has left Honduras and the rest of Central America to the tender mercies of the global economy. The storm's devastation of the economy is, after all, quite real. Destroyed roads and bridges, the ruined banana industry, etc., are going to create new misery in the lives of hundreds of thousands of people.
Truth is relative in the news business. One death on Park Avenue equals 10 in east New York and 100 in Italy and 1,000 in El Salvador, or whatever the hackish symmetry of the moment is. Unfortunately, no one would care about the plight of the Central Americans if their stories hadn't been brought to our attention via a hyped death toll.
Re "Overblown," by Edward Hegstrom: Wow! Now that's reporting! Perhaps he could give lessons to a few overblown egos in Washington/N.Y.
Perhaps Mr. Hegstrom should be turned loose to report on the lack of substance to the "Clinton scandals." Who knows; maybe there were crimes committed, and the press would still get to report on the criminal trials of high government officials--only Republicans rather than Democrats. Wouldn't that just be a hoot?
I love the "Today's Papers" section. Just a thought on the Dec. 7 column:
I believe that the USA Today story that you cited contained a flaw that you may have repeated. The suggestion that the DNA left at violent crime scenes "surprisingly often" matches the DNA of known burglars is misleading. This is the sort of logic that concludes that there is something remarkable about the fact that a large number of heroin users have previously used marijuana.
This is not a trivial point. The relevant statistic, of course, is what percentage of marijuana users go on to become heroin addicts. Similarly, the public policy implications of the USAT story are significant. Most burglars are not violent criminals, although a small but significant percentage do progress to or engage in violent crime.
In California, and several other "three strike" states, residential burglary is not differentiated from armed robbery or assault in the decision to award "strikes" in support of awarding a life sentence. Most violent crimes (and residential burglaries) are considered "serious felonies" in California. (I suppose to distinguish this type of crime from "nonserious felonies"--which is like saying "small giants." George Orwell would be proud.) Inflating the severity of the crime (and its attendant punishment) is part of an unusual political agenda that I fear is no longer confined to California.
I am writing to object to Mr. Murphy and Mr. Morse's opinion in " A Few Well-Chosen Words" that the lack of interest in looking up Lewinsky-scandal-related words at the Merriam-Webster Online dictionary site signifies a lack of interest on the part of the American people in the scandal itself. Perhaps "integrity" didn't gain a higher ranking because most of America, unlike our president, already know exactly what it means.
Maybe Mr. Clinton could have the word with the definition taped to his bathroom mirror, so he could review it every morning.
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