A well-publicized fight has broken out between Paul Krugman and economist Stephen Roach, Morgan Stanley's Asia chairman. I punished Krugman for his perverse views in When In Doubt, Blame China, but I didn't go nearly as far as Roach did when he said—
March 19 (Bloomberg) — Morgan Stanley Asia Chairman Stephen Roach said that Paul Krugman’s call to push China to allow a stronger yuan is “very bad” advice and that increased Chinese spending is a better way of reducing trade imbalances.
“We should take out the baseball bat on Paul Krugman — I mean I think that [his] advice is completely wrong,” Roach said in an Bloomberg Television interview in Beijing when asked about Krugman’s call, characterized as akin to taking a baseball bat to China. “We’re lashing out at China rather than tending to our own business,” which is raising U.S. savings, Roach said.
One part of Krugman's reply to Roach's "concerns" was interesting to me—
What I wonder here is how Roach — or anyone thinks that increased savings would help right now. What would cause an attempt to increase savings to be translated into increased investment, or an improved trade balance, as opposed to simply a more depressed economy. Yes, I know that macroeconomics at the zero lower bound is different from the normal scene — but how can an economist as good as Steve Roach not get that after more or less two years in a liquidity trap?
Here Krugman is referring here to a Keynesian concept called the Paradox of Thrift. Greater savings in a depressed economy leads to further decreases in final demand, which further depresses the economy, and so on. So the key dispute is over savings. From Bloomberg again—
“I’m a little curious what Steve thinks would happen if the U.S. increased savings” without a stronger yuan, Krugman said today. “Where would the demand” for goods and services come from, he asked. Boosting savings should be done “in the long run,” not now, [Krugman] also said.
Krugman is “giving Washington very, very bad advice,” Roach said in a later interview when asked to respond to Krugman’s reaction to his remarks. “I totally reject his idea that savings is bad.”
Krugman's position is outrageous. After 25 years of over-leveraged household consumption in the United States, we should further postpone savings. All of us—the government, households, and businesses—should blow up debt-based consumption again to make up for the current shortfall in demand. Krugman heartily endorses the spendthrift lessons of the Paradox of Thrift.
Krugman replied to to Roach while he was sitting on the beach—Btw, this was from a cell phone conversation held while I was, um, sitting on the beach. As Paul enjoys the Sand, Sun & Surf, I thought I'd give him a few more things to think about, to wit—
- From The $2,000 question: Could you come up with that much money in 30 days?
A recent survey found that half of Americans couldn’t get $2,000 within 30 days from their savings— or even family or friends—for an unexpected expense, like a major car or home repair. “This survey shows the financial fragility among households as a result of not setting aside for emergencies,” said Annamaria Lusardi, an economics professor at Dartmouth College and one of the researchers behind the survey. “It’s troubling how widespread the difficulty of coming up with $2,000 is.” Lusardi and a professor from Harvard Business School asked 1,000 families if they could round up the amount. Those 55 to 64 were most likely to have access to the cash, with about two-thirds saying they had or could get it. More than half of those responding who were under age 35 said they couldn’t get the money.
- From Do You Live Paycheck to Paycheck? You're Not Alone
If you’re living paycheck to paycheck, you’re not alone. According to a new CareerBuilder survey, 61 percent of workers report they always or usually live paycheck to paycheck to make ends meet, according to a new CareerBuilder survey of more than 4,400 workers. This is up from 49 percent last year and 43 percent in 2007.Surprisingly, people earning average salaries aren’t the only ones feeling the need to pinch pennies: 30 percent of workers with salaries of $100,000 or more report that they too live paycheck to paycheck, up from 21 percent in 2008.
Should these Americans be trying to save money? Yes, sure, of course—if they can. It's hard to save money when you're living paycheck to paycheck. It is undoubtedly in people's best interest to create whatever buffer they can between themselves and disaster. Boosting savings should be done "in the long run" says Krugman, not now. If not now, Paul, then when?????
Let's look at this from a theoretical perspective. The common saying is that economics pretends to be a science. That's right. Physics envy may be hazardous to your wealth! It is straightforward to demonstrate that Krugmanian economics is incoherent. This argument applies to grossly over-leveraged sovereign governments (hint, hint!) as well as households.
First, the standard underlying assumption is that Homo economicus is at all times and in all places a rational, self-interested actor. Let us call this proposition P. The Paradox of Thrift states that during bad times, rational, self-interested saving only makes the situation worse. Let us call this proposition Q. But then we get—
- If Q, then ~P
- P and ~P
Thus we arrive at a contradiction. The standard economics theory is incoherent. That's why it's called a paradox. In any of the so-called "hard sciences", if you got a result like this, you would junk the whole thing and start over.
But that's not what many, likely the majority, of those practicing Economics will do. And certainly Paul Krugman is not willing to rethink things. The garbage these economists were taught (or teach) in graduate school is still what they believe today. They just keep plugging away, dispensing bad advice to anyone who will listen.
In case you missed it, here's the Stephen Roach clip.