The Money Illusion

This is interesting as an art piece, but I think it is easy to intuit from the presentation that the authors are not being very careful thinkers.

The truth is that the question of austerity is a fairly complex one. The reason it seems so cut and dried is that the modal promoter of austerity has no training in macroeconomics and is making arguments that are clearly not supported by theory. That said, to portray Krugman as definitely correct on the matter of austerity is very misleading.

There are basically two camps of people opposing Krugman, "mainstream Austrians" and market monetarists. Mainstream Austrians isn't really a category, but this is people who make arguments based on analogies with household budgets, and worry about hyperinflation from out of control spending. Most of them have economic theories that are not well-supported empirically. These people say austerity is better and will lead to stronger growth, possibly after a painful period of economic adjustment. Often these are head economists at small banks or other pundits that get a lot of airtime for their opinions. They probably don't actually identify as Austrians 95% of the time, but in this particular instance they are following Austrian thinking.

The other major camp is market monetarists, whom Krugman is very dismissive of, despite the fact that their arguments are compelling and their empirical support is probably as strong as pro-spending Keynesians. In his arguments with market monetarists Krugman…

> In the last 10+ years fiscal spending has been half-hearted and anemic

See, this is one of those claims that is interesting to me because I never see anyone proposing what a "non-anemic" level would look like. No matter what gets proposed for fiscal spending, the response is "that won't be enough; we should spend more", without quantifying more.

As a scientific claim, it's unfalsifiable, fundamentally, which makes it hard to work with usefully.

> Austerity does hurt economic growth:

First off, there's a lot of cherry-picking going on. The US did "austerity" things, people claimed the result would be disastrous.... and it wasn't. Europe did austerity, but _also_ very tight central bank policy at the same exact time; results were not great, but it's hard to blame this on just "austerity" given the central bank behavior.

Just to be clear, I am not claiming that austerity _improves_ economic growth, which seems to be what the wikipedia link you post is about. I'm claiming that the specific predictions made about austerity by adherents of specific economics intellectual movements in the last 10-15 years did not in fact match what actually happened.

> but once you hit zero rates, then what more can you do from that angle?

Tons, if you want to, because you are not limited to short-term rates as your policy instrument. Those rates are correlated with monetary policy (in the short term; anti-correlated in the long term), not causative.

Note that at the point when we…

> did you really put an "if" there?

Yes, I put it there because a large fraction of minimum wage workers are teens who live with their parents or are otherwise in a living situation where they aren't the only breadwinner. Hence, they aren't so desperate that they can't not work. Since choice exists (yet again, on the margin), labor employment is a normal good that responds to supply and demand.

> do you have proof of this?

Quoting from http://www.themoneyillusion.com/?p=24759 :

Regarding the minimum wage, here is some data for Western Europe:

There are nine countries with a minimum wage (Belgium, Netherlands, Britain, Ireland, France, Spain, Portugal, Greece, Luxembourg). Their unemployment rates range from 5.9% in Luxembourg to 27.6% in Greece. The median country is France with 11.1% unemployment.

There are nine countries with no minimum wage (Iceland, Norway, Sweden, Finland, Denmark, Austria, Germany, Italy, Switzerland.) Five of the nine have a lower unemployment rate than Luxembourg, the best of the other group. The median country is Iceland, with a 5.5% unemployment rate. The biggest country in Europe is Germany. No minimum wage and 5.2% unemployment.

Still want to raise our minimum wage to $10? Germany used to have really high unemployment. Then they did labor reforms to allow more low wage jobs, combined with subsidies for low wage workers. Now they don’t have high unemployment.

Still want to raise our minimum wage to $10?"

> No reference to the…

A great response! Let me see if I can shed some more light on this topic.

"This phrase is the anti-science. No science operates based on \"commonly accepted\"."

Exactly! And, there is a very good reason for this. Economics is not a science. It is a social science that makes some use of the scientific method. Within this context, meta-analysis becomes extremely important for drawing pertinent conclusions. This is just a side note, because it seems that we have crossed our wires somewhere.

"Consider how absurd it would be for any modern economist to claim that a form of money, which was banned in 1933, was the cause of prolonging the great depression."

I should have been more clear. I was referring to the global economic instability (generally manifesting itself as a number of depressions across the Bretton Woods countries) that preceded the collapse of the Bretton Woods System.

I have to apologize, but when I see "gold standard" I immediately start my Bretton Woods rebuttal. It is a reflex reaction from spending too much time arguing with Austrian economists.

Of course, the grandparent post was referring to the Great Depression. Well, all is not lost. Dr. Scott Sumner (my favorite practicing economist) has a nice starter post on the Great Depression:

http://www.themoneyillusion.com/?p=4161

Strongly, strongly, strongly disagree with this description. This is a completely unfalsifiable definition of a bubble.

On December 5, 1996 Alan Greenspan first uttered the phrase "irrational exuberance". Some people amazingly credit him with "calling the bubble" for this statement. The Nasdaq 100 closed at 835.80 that day, the lowest price the Nasdaq 100 has closed once the bubble "crashed" was at 804.64 on October 7, 2002.

This is the problem with "bubble watchers". Yes, it's possible for prices to get too high and for companies to trade at too high of valuations (or so it seems) and late 1990s had plenty of that. However, many people are constantly calling bubbles, people were calling the S&P 500 a bubble in this current rally back at 1200 and 1300. Could it go back down? Certainly, but that doesn't make the people calling it a bubble at 1200 correct if it drops from 2100 to 1800.

One of my favorite jokes about the subject:
Bubble watchers have correctly predicted 9 of the last 2 bubbles.

Btw, for those interested in a sane economist talking about bubbles I highly highly recommend Scott Sumner. Here's a good old post of his on the subject:

http://www.themoneyillusion.com/?p=8063

What are you talking about? I suppose there's technically wiggle room because you said "raise" taxes on the rich (implying that regardless of whatever rich people pay now it should be more). But it's an absolute fiction that rich people don't pay taxes. The top income tax rate is about 43%, and the new GOP tax bill doesn't change that.

Did you know the richest 2.7% of all earners pay > 50% of all receipts collected by the government(1)?

Or that -- when asked explicitly whether the rich should pay more -- most (3/4) people, like you, say "yes", but when asked what the tax rate should be for top earners, precisely 3/4 of respondents said it should be 30% or below(2). Again, the top rate is 43% right now.

(1) http://www.pewresearch.org/fact-tank/2016/04/13/high-income-americans-pay-most-income-taxes-but-enough-to-be-fair/

(2) http://www.themoneyillusion.com/?p=15005