Recently by Robert Wenzel: Translation of State Department Advisory
I have never before read writing so twisted, deceiving and evil as an article written, 10 years and some months ago, by the new Nobel Laureate, Paul Krugman. A quick reading of the piece will give one the impression that the piece is vicious, yet elegant. A deeper analysis reveals such evil that one has to wonder what twisted conditions faced Krugman as a child that he chose to use his mind in such an ugly manner.
I will dissect this article paragraph by paragraph so the article finds its justly spot, tossed onto an ash heap.
This is paragraph 1 from Krugman’s piece, Hangover Theory:
A few weeks ago, a journalist devoted a substantial part of a profile of yours truly to my failure to pay due attention to the "Austrian theory" of the business cycle — a theory that I regard as being about as worthy of serious study as the phlogiston theory of fire. Oh well. But the incident set me thinking — not so much about that particular theory as about the general worldview behind it. Call it the overinvestment theory of recessions, or "liquidationism," or just call it the "hangover theory." It is the idea that slumps are the price we pay for booms, that the suffering the economy experiences during a recession is a necessary punishment for the excesses of the previous expansion.
Notice the vicious launch, "I regard [Austrian Theory] as being about as worthy of serious study as the phlogiston theory of fire."
Interestingly, it was the great Austrian economist, Ludwig von Mises, who taught that one should study all economic theories so that one could argue and point out the faults in weak theories. Apparently, Krugman has a superior method of understanding so that he does not even have to study a theory before he dismisses it. This nonsensical start by Krugman is enough to toss the paper. But, let us do something he claims he does not need to do, let us review arguments contra to our own thinking, that is, let us give the rest of his article full hearing.
He then writes: "the incident set me thinking — not so much about that particular theory as about the general worldview behind it." This is twisted cleverness if there ever is such a thing, because for the rest of the article he does nothing but discuss the theory, with one subtle deviation, when he attempts to force Austrian Business Cycle Theory ("ABCT") into a subtle box as a moral quasi-religious theory, as opposed to the well reasoned economic theory that it is.
He then begins discussing the theory, "Call it the overinvestment theory of recessions, or "liquidationism," or just call it the "hangover theory." It is the idea that slumps are the price we pay for booms, that the suffering the economy experiences during a recession is a necessary punishment for the excesses of the previous expansion."
There are a couple things that need to be pointed out here. First, in debus ex machima fashion, he begins the theory with the boom already in place. In ABCT, how the boom starts is integral to an understanding of the theory. ABCT holds that central banks create an artificial boom by printing money that ends up in the capital goods sector.
Thus, not all booms will cause the negative consequences of a bust. An increase in productivity can cause a roaring boom that every ABCT theorist would agree has no reason to end in recession.
And notice the deceiving use of the word "punishment." Nowhere do ABCT theorists use the word. It has the connotation that ABCT is some moral theory about those who party too hard getting their just desserts, in a moral sense. This is pure twisted evil Krugman. He is much too good a wordsmith not to know the deception he is spinning here.
On to paragraph 2:
The hangover theory is perversely seductive — not because it offers an easy way out, but because it doesn’t. It turns the wiggles on our charts into a morality play, a tale of hubris and downfall. And it offers adherents the special pleasure of dispensing painful advice with a clear conscience, secure in the belief that they are not heartless but merely practicing tough love.
Ah yes, the use of the word "punishment" now sets the reader up for this poppycock paragraph about a "morality play," hubris and downfall. Thus, the evil Krugman digs the deception deeper. And, notice the use of the word "seduction," for a theory that has perhaps 1.0% of the followers of Krugman’s Keynesian religion.
Powerful as these seductions may be, they must be resisted — for the hangover theory is disastrously wrongheaded. Recessions are not necessary consequences of booms. They can and should be fought, not with austerity but with liberality — with policies that encourage people to spend more, not less. Nor is this merely an academic argument:
The hangover theory can do real harm. Liquidationist views played an important role in the spread of the Great Depression — with Austrian theorists such as Friedrich von Hayek and Joseph Schumpeter strenuously arguing, in the very depths of that depression, against any attempt to restore "sham" prosperity by expanding credit and the money supply. And these same views are doing their bit to inhibit recovery in the world’s depressed economies at this very moment.
Notice the sly Krugman here, this “seductive” ( which accounts for 1.0% of trained economists) morality play (A morality play which is a strawman, created by Krugman’s twisted and deceiving use of the word "punishment") "must be resisted."
Krugman then goes on to remarkably blame the Austrians for the Great Depression, a period during which FDR instituted more controls on the country than ever seen before. UCLA economists Harold L. Cole and Lee E. Ohanian have shown that FDR drove up wages and prices and was responsible for extending the length of the 1930s economic downturn by years.
The many variants of the hangover theory all go something like this: In the beginning, an investment boom gets out of hand. Maybe excessive money creation or reckless bank lending drives it, maybe it is simply a matter of irrational exuberance on the part of entrepreneurs. Whatever the reason, all that investment leads to the creation of too much capacity — of factories that cannot find markets, of office buildings that cannot find tenants. Since construction projects take time to complete, however, the boom can proceed for a while before its unsoundness becomes apparent. Eventually, however, reality strikes — investors go bust and investment spending collapses. The result is a slump whose depth is in proportion to the previous excesses. Moreover, that slump is part of the necessary healing process: The excess capacity gets worked off, prices and wages fall from their excessive boom levels, and only then is the economy ready to recover.
This is simply another twisted paragraph. Now it appears that Krugman has slyly changed the debate. He is no longer discussing ABCT, but all "hangover theories," and whatever happened to discussing ABCT’s "worldview"?
©2010 Economic Policy Journal