Paul Krugman is a well know economist. His bio is here:

http://topics.nytimes.com/top/opinion/editorialsandoped/oped/columnists/paulkrugman/index.html?inline=nyt-per

He definitely leans left, however, his opinions are more rooted in economics and less in politics (as opposed to the left leaning and purely political Robert Reich)

In yesterday’s NY Times Op/ed, Mr Krugman comments on the Austrian based economic principles of Ron Paul. The article is well done and well worth the short amount of time it will take to read:

http://www.nytimes.com/2011/12/16/opinion/gop-monetary-madness.html?_r=1

Here is the conluding paragraph for those unwilling to spend a few minutes to read the entire article:

“Now, it’s still very unlikely that Ron Paul will become president. But, as I said, his economic doctrine has, in effect, become the official G.O.P. line, despite having been proved utterly wrong by events. And what will happen if that doctrine actually ends up being put into action? Great Depression, here we come.”

I’ll let my comments I made on the blog stand there, but I’ll add some more here.

From Krugman’s piece:

So here we are, three years later. How’s it going? Inflation has fluctuated, but, at the end of the day, consumer prices have risen just 4.5 percent, meaning an average annual inflation rate of only 1.5 percent. Who could have predicted that printing so much money would cause so little inflation? Well, I could. And did. And so did others who understood the Keynesian economics Mr. Paul reviles. But Mr. Paul’s supporters continue to claim, somehow, that he has been right about everything.

I believe Krugman’s methodology is flawed and leads to incorrect conclusions. I don’t believe it’s reasonable to look at aggregate price inflation over the three years and simply divide by three to make the conclusion he does. His math is correct, obviously, but I believe his methodology is ill-conceived. Why?

You have to remember, each of the last three years have been distinctly different economically speaking. Starting in 2008, one of the Fed’s stated goals was to slow monetary growth. I think that continued well into 2009. Combine that with consumers cutting their household spending to either save for a rainy day or pay down debt, and you have a recipe for flat or minimal inflationary pressures, as you don’t have as much $$ chasing goods, which traditionally would cause prices to rise.

Now if you look at more recent times, I think you’ll see a different tale. Just so happens there was a CPI release today (http://bls.gov/news.release/cpi.nr0.htm):

Over the last 12 months, the all items index increased 3.4 percent before seasonal adjustment.

That’s quite a bit more than the 1.5% per annum Krugman proffers. His figures are off because he’s using a moving average to “smooth” the plot so he can more effectively make his point that the Austrians were wrong. His moving average paints a much different picture that the reality.

I call foul. He should know better.

I believe Krugman’s methodology is flawed and leads to incorrect conclusions. I don’t believe it’s reasonable to look at aggregate price inflation over the three years and simply divide by three to make the conclusion he does. His math is correct, obviously, but I believe his methodology is ill-conceived. Why?

You have to remember, each of the last three years have been distinctly different economically speaking. Starting in 2008, one of the Fed’s stated goals was to slow monetary growth. I think that continued well into 2009. Combine that with consumers cutting their household spending to either save for a rainy day or pay down debt, and you have a recipe for flat or minimal inflationary pressures, as you don’t have as much $$ chasing goods, which traditionally would cause prices to rise.

This commentary seems to contradict everything you’ve ever posted. You have railed about the Fed flooding the economy with too much money. The very premise of your position is the danger of fiat money and the economic implosion to come due to the excessive amount of money in the sytem. Now you seem to state the exact opposite. Which is it?

According to Fed data on money supply, your comments above are incorrect: http://www.federalreserve.gov/releases/h6/hist/h6hist1.pdf Money supply started increasing steadily and much more rapidly than the years preceeding 2008.

Over the last 12 months, the all items index increased 3.4 percent before seasonal adjustment.

That’s quite a bit more than the 1.5% per annum Krugman proffers. His figures are off because he’s using a moving average to “smooth” the plot so he can more effectively make his point that the Austrians were wrong. His moving average paints a much different picture that the reality.

I call foul. He should know better.

Two points: Krugman may have made an error in language…hard to tell…but from what you posted the comparison seems to be between seasonally adjusted and non seasonally adjusted numbers. Additionally, inflation did run hotter in the past 12 months than the preceding 24 due to the oil and commodity price shocks. The inflation spike is now easing. Inflation is volatile. Smoothing techniques are used to get a better picture of longer trends to prevent inappropriate knee jerk policy reactions to short term data fluctuations.

shadowdiver - 18 December 2011 09:29 AM

I believe Krugman’s methodology is flawed and leads to incorrect conclusions. I don’t believe it’s reasonable to look at aggregate price inflation over the three years and simply divide by three to make the conclusion he does. His math is correct, obviously, but I believe his methodology is ill-conceived. Why?

You have to remember, each of the last three years have been distinctly different economically speaking. Starting in 2008, one of the Fed’s stated goals was to slow monetary growth. I think that continued well into 2009. Combine that with consumers cutting their household spending to either save for a rainy day or pay down debt, and you have a recipe for flat or minimal inflationary pressures, as you don’t have as much $$ chasing goods, which traditionally would cause prices to rise.

This commentary seems to contradict everything you’ve ever posted. You have railed about the Fed flooding the economy with too much money. The very premise of your position is the danger of fiat money and the economic implosion to come due to the excessive amount of money in the sytem. Now you seem to state the exact opposite. Which is it?

I fail to see how. I’ve not taken opposing stance here at all. I’m simply recalling history as I see it. I may not have my dates exactly correct, but there was an environment of attempted monetary growth rate reduction, followed by some QE attempts.

Sure I have opinions about fiat money, which you do not share. But, where’s the contradictory statement, exactly?

According to Fed data on money supply, your comments above are incorrect: http://www.federalreserve.gov/releases/h6/hist/h6hist1.pdf Money supply started increasing steadily and much more rapidly than the years preceeding 2008.

What I stated was that during that time one of the Fed’s goals was to slow the growth rate of money, not necessarily reduce the absolute value of M1 and M2. You’d have to take the data you provided and look at the rates of change over time, rather than just the values, which is what that chart shows. These tables, therefore, do nott refute what I said.

Two points: Krugman may have made an error in language…hard to tell…but from what you posted the comparison seems to be between seasonally adjusted and non seasonally adjusted numbers. Additionally, inflation did run hotter in the past 12 months than the preceding 24 due to the oil and commodity price shocks. The inflation spike is now easing. Inflation is volatile. Smoothing techniques are used to get a better picture of longer trends to prevent inappropriate knee jerk policy reactions to short term data fluctuations.

Yes, I understand the purpose of smoothing and moving averages. But Krugman’s entire modus operandi in that piece was to discredit Paulian/Austrian economics. To “hide” more current data that might not make his points as salient and relevant is just plain dishonest, IMO. That was my only point.