Deinonychus antirrhopus

A Decent Krugman Column?

Yes,this last column isn't half bad. It basically highlights some of the things I have been saying, such as consumer spending was the big driver in last quarter's growth, that consumer spending has been reasonably strong (at least relative to other forms of spending) since Bush has been president. I think the following paragraph is particularly good,

This can't go on — in the long run, consumer spending can't outpace the growth in consumer income. Stephen Roach of Morgan Stanley has suggested, plausibly, that much of last quarter's consumer splurge was "borrowed" from the future: consumers took advantage of low-interest financing, cash from home refinancing and tax rebate checks to accelerate purchases they would otherwise have made later. If he's right, we'll see below-normal purchases and slower growth in the months ahead.

Quite true. Low interest rates, the rise in housing prices, tax rebate checks, etc. have all combined to put money in consumer's pockets today and increase their future debts. Naturally some of that money is going to be used for consumer purchases, but it is also not sustainable, at least not at this rate. The low interest rates will help improve the cash flow situations for many households which will allow for increased consumer spending, but don't expect to the same level of spending next quarter (although who knows, business investment could finally pickup even more).

Krugman is also correct in that the main area of focus is the job market. I think Krugman is wrong in that the economy has "turned the corner" except for the job market. Will this growth result in more jobs in the future? Its hard to say. This kind of growth could convince business owners/leaders that the economy has turned the corner and induce them to start hiring. The past high growth rates followed by low growth rates could dampen that outlook.

At the end Krugman does sort of fall back into his new role of political hack though.

To put it more bluntly: it would be quite a trick to run the biggest budget deficit in the history of the planet, and still end a presidential term with fewer jobs than when you started. And despite yesterday's good news, that's a trick President Bush still seems likely to pull off.

As an economist Krugman knows full well that it is rarely the absolute value of some measure that is important, but it's relative value. For example, absolute prices are not all that important, but relative prices are. You see, consumers will keep consuming goods until the marginal utility of good x divided by the price of good x is equal to the marginal utility of good y divided by the price of good y. Changing this around a bit and you get the ratio of marginal utilities is equal to the ratio of prices. So, it is the ratio of prices that is really what is important. A change in one price changes the ratio. Similarly with budget deficits. Is the absolute value what is important, or is the relative value, say the deficit as a percentage of GDP? The latter is more important.

Further, Krugman is setting himself up for being called inconsistent in a huge way if somewhere down the road a Democrat runs a deficit. You see, the economy and government spending grow. Even if you hold government spending constant as a percentage of GDP, it will grow as the economy grows. Hence, in the future there will undoubtedly be a new "biggest ever" deficit (in absolute terms). If it is a Democrat and Krugman doesn't turn on the venom for said Democrat we will have more evidence that Krugman is nothing but a partisan shill.

As for the jobs claim. That depends on exactly which measure you select for jobs. Since Krugman is still not telling us he is using the non-farm civilian jobs measure let alone why, his claim as written actually has a very good chance of turning out to be quite false.