Oversimplifying the Ignoramus Strategy

I enjoyed this post from Paul Krugman (despite its borderline ad hominem approach – which I think is more playful than insulting really).  He rather succinctly describes the environment of the last few years, why austerians have been wrong, and why the government’s budget deficit has been a benefit and not a cost to the US economy.  But I don’t know if the post is descript enough.  Here’s what he says specifically (with my comments in bold):

“1. The economy isn’t like an individual family that earns a certain amount and spends some other amount, with no relationship between the two. My spending is your income and your spending is my income. If we both slash spending, both of our incomes fall.”

Precisely.  This is Wynne Godley 101.  As the sector financial balances clearly show, one sector’s spending is another sector’s income.  See the following chart for instance:


“2. We are now in a situation in which many people have cut spending, either because they chose to or because their creditors forced them to, while relatively few people are willing to spend more. The result is depressed incomes and a depressed economy, with millions of willing workers unable to find jobs.”

Precisely, this is balance sheet recession theory 101.  When the debt bubble hit spenders turned into savers because they were concerned about the health of their balance sheets as asset values collapsed and incomes declined.  MRists are more specific though.  We understand there are times when supply side problems exist and when demand side problems exist (so, in an environment like today, we emphasize demand side problems).  

“3. Things aren’t always this way, but when they are, the government is not in competition with the private sector. Government purchases don’t use resources that would otherwise be producing private goods, they put unemployed resources to work. Government borrowing doesn’t crowd out private borrowing, it puts idle funds to work. As a result, now is a time when the government should be spending more, not less. If we ignore this insight and cut government spending instead, the economy will shrink and unemployment will rise. In fact, even private spending will shrink, because of falling incomes.”

I’d say MOSTLY right.  But there are definitely instances where the government could compete with the private sector for jobs and hurt overall output.  

“4. This view of our problems has made correct predictions over the past four years, while alternative views have gotten it all wrong. Budget deficits haven’t led to soaring interest rates (and the Fed’s “money-printing” hasn’t led to inflation); austerity policies have greatly deepened economic slumps almost everywhere they have been tried.”

Right.  Monetary Realism emphasizes understanding the structure of a monetary system from its institutional roots up.  In Europe where nations are currency users with a foreign central bank the nations have solvency constraints.  The USA is entirely different.  So there’s an element of “it depends” in PK’s comment which I think is very important.  

“5. Yes, the government must pay its bills in the long run. But spending cuts and/or tax increases should wait until the economy is no longer depressed, and the private sector is willing to spend enough to produce full employment.”

Not exactly.  The government doesn’t HAVE to pay off the national debt over the long-term.  Remember, the government’s debt is the non-government’s saving.  Ie, the government’s issued t-bond make up part of grandma and grandpa’s savings accounts in the same way that a corporation’s liabilities (like corporate bonds) are someone’s savings.  Dr. Krugman seems to have forgotten bullet point #1.   Anyhow, the more important point is not that the government has to “pay off” the debt, but that it must be cognizant of how this debt impacts the private sector and perhaps more importantly, how its spending impacts private output.  For instance, government spending could be entirely counterproductive if it resulted in paying 300 million Americans to sit on their couches all day (yes, extreme example, but you get the point).  

Anyhow, those are my big picture thoughts there.  What are yours?


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.
Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • Geoff

    One of Krugman’s best posts ever.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Great post Cullen.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    The argument made in your post here needs to be made in response to the following kinds of arguments everywhere they are encountered (by commenter Richard Ebeling on Glasner’s site):


    Ebeling’s argument is severe but intuitive, and, I believe very much wrong…. and perhaps all too prevalent!

  • John Lemieux

    “For instance, government spending could be entirely counterproductive if it resulted in paying 300 million Americans to sit on their couches all day”

    I’m not endorsing this, but seeing as our problem right now is mostly a lack of demand, would this help in the very short run?

  • http://oneconomist.com Hans

    Krugman + Roche = Statist…I had always wondered where the owner of PCC stood…

  • DH

    Is government spending intended to prime the pump or function as a version of welfare while making allocation decisions instead of allowing the market to do it? Is government building infrastructure or subsidising consumption? Is the Fed monetizing this effort or providing liquidity? Is the debt the equivalent of living off the credit card or is it the equivalent of investment in an infrastructure that will provide a national income for future generations. Welfare is not investment. Even if wall street demands it.

  • SS

    Don’t be an ignoramus. The beauty of MR is that you can be a supply Soder some times and a demand sider at other times.

  • Matt Gilbert

    So what is the end game? Is the debt to GDP number meaningless? And can’t we say that the only reason we’re not seeing rate inflation is because all of the other big economies are sort of in the same boat and therefore there’s both a flight to quality (keeping treas rates low) and a sort of rigged game? Please help me answer these questions – I read your stuff and others (lots and lots of others) and the end game (eg where does all of this stim lead? How do we lower our debt to GDP ratio or is that even important?). The other side talks about calamity and your side seems sanguine. Thanks

  • Tom Adkins

    As usual, Krugman is wrong. Immensely.
    His entire simplistic “You spend, I spend” approach ignores wealth creation, and the subsequent perpetual efficiencies of free-market capitalism.
    He completely ignores the issue that if you take all your money and give it to people who don’t work, you don’t have money to reward people who produce. Nothing gets made, nothing gets bought, there is no reward for success or failure, and the economy collapses.
    Just like right now, all over the world. Coming to a nation near you.

    No wonder socialists love him. They are equally ignorant.

    How anyone beyond 6th grade could fall for this is shocking.
    I suppose “smart” doesn’t have much of a relationship with “wise.”
    This article is Exhibit “A.”

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Austerians ignore the devastating unemployment in PIIGS much as the rest of Europe ignored the devastating economy of post WWI Germany. How long do you think youth unemployment will peacefully sit at 50% before we see some extremist parties come to power to “fix” things. They will promise change, and change they will get! Germans have forgotten how they were treated debt wise post WWII: i.e. in an attempt to NOT repeat the ignorant mistake make after WWI, their debt was largely forgiven by the allies! Thus ensued the “German miracle.” Now they look at the devastation in the PIIGS and this concept doesn’t cross their minds. Humans always forget after about 60 years… and we have to re-learn lessons from the past all over again.

  • http://www.highgreely.com jldasch

    I think point #5 is perhaps mistaken semantics. Krugeman has in general argued that the total government debt can increase roughly at the rate of GDP growth. He has written one widely read, but poorly thought through, piece on why government debt doesn’t matter now, but could in the future in which he bases his straw-man argument on a situation where we have full employment, substantial GDP growth, rising inflation, and continue to run Federal deficits of 7 to 10% of GDP.

    That aside, Krugeman has understood the situation extremely well over the past decade.

    The dominant problem, as evidenced by many of the posts in reply to this, is that there is a huge propensity for people to base their macro economic thinking as an extension of their personal micro economic thinking. If you start from first principles and recognize that there is an economic equivalent of detailed balance from statistical mechanics and the role of entropy many of the comments made about consumption vs investment are, at the global level, meaningless. Because countries are still partially autonomous these factors do effect the relative balance between countries. That said, integrated over long periods of time because entropy dominates real capital investment (infrastructure), the only real net asset accumulation is intellectual. So the only real wealth creation is intellectual. Unfortunately ignoramuses with no understanding of thermodynamics or statistical mechanics don’t understand this.

    Because of the entropy effect there is almost no ability of humans to save real productivity. Food and clothing are simple examples, but shelter simply has a longer decay time constant. So roughly (and ignoring intellectual productivity savings) across the globe at all points in time the integral of real productivity is equal to the integral of consumption. So, what Cullen said is wrong at the true macro economic level. The world could pay 300 million Americans to sit on their couches every day and consume and the consumption would be balanced by an equal amount of productivity elsewhere in the world.

    This is just very basic physics and since the earth is a closed system we know this holds. We make choices that change the magnitude of the integrals over productivity and consumption but they always roughly balance across the globe. The free market vs socialism don’t enter the basic macro economic balance.

    At the large scale micro economic level (what Cullen thinks is macro economics) the flows of money (something with zero real value) do effect the real macro economy by altering the magnitude of the productivity and consumption integrals which balance. But the magnitude of the flows are completely removed in the integration, as required by detailed balance. You can get exactly the same integrals with low debt/gdp and high debt/gdp although the distribution of flows is different.

  • http://orcamgroup.com Cullen Roche

    Yes, probably.

  • http://orcamgroup.com Cullen Roche

    If understanding that the govt’s deficit is the non-govt’s savings then we should all be “statists”. I generally am not a big advocate of govt spending, but anyone who’s understood this recession understands how important it’s been in the recovery. There are definitely times when govt spending can have detrimental impacts on the economy so let’s be careful slinging around labels that don’t necessarily apply. I am very much a believer in private sector based economic growth so “statist” is an absurd misrepresentation of my position.

  • http://orcamgroup.com Cullen Roche

    There’s no clean answer to this. The real metric is living standards. But what does that mean? To some people their living standard is improved if they have healthcare, water, food, etc. These are things a govt can play an important role in providing, but obviously at a cost (higher taxes and potentially higher inflation). We might call this our social living standard. From a purely economic perspective, the right metric for higher living standards is per capita earnings adjusted for inflation. When our income allows us to buy the same amount of goods and services by doing less work our living standards are improving. We can call this our economic living standard. Which one matters more and what should the balance be? It depends.

    Debt:GDP could reflect a higher combination of both of these metrics. So it’s not as cut and dry as many imply. Our living standards are a complex matter that rely on more variables than a simple equation can probably resolve.

  • http://www.fanbrowser.com/ Cowpoke

    Big C, I am on board with the “living standard” and agree.
    To a point.
    The point is what defines living standards?

    I would really enjoy a PC piece on Living Standards.

    Is it A/C and cable TV. Is it 3 hots and a cot. Is it simply vaccinations from 3rd world diseases?

    What are great living standards.
    people in switzerland seem to have no worries. Are those lack of worries the same as people on welfare the same as here in the US? I certainly dunno. I think it may be a great topic.
    What describes a “quality of life”?

  • JK


    Here’s a tidbit you skipped over from point (3)…

    “Government borrowing doesn’t crowd out private borrowing, it puts idle funds to work.”

    “idle funds” sounds like Krugman can’t let go of IS-LM.

    Of course “idle funds” could mean the unemployed people, but I don’t think that’s what he meant there. Seems clear he’s talking about loanable funds.

  • Nils

    This settles it. Clearly Cullen Roche is one of the lizard people, don’t trust him.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Cullen, in your Sector Financial Balances chart it appears that

    Sum Private Sector + Federal Govt – (Current Account) = 0

    blue + red – black = 0

    It’d be easier to interpret if all three curves summed to zero, rather than having to add two and subtract one. However, I’m not sure I’m interpreting it correctly. Am I?

    In fact, I’m not even sure what I wrote above is true. Look right after 4/1/2002. The blue curve is basically at zero, but the other two are not lying right on top of one another like I’d expect. In other words right at that place on curve I don’t think it’s true that

    blue + red – black = 0

  • kman

    I see Krugmans point but aint it so that a lot of countries that are persueing Austerity can’t afford to borrow and spend anymore. They have reached the point where they get negative reuturns on that and thier creditors aren’t allowing them to do it anymore. It seems like an economy has to find it’s natural balance based on it’s capacities, based on whats happening in other economies in the global ecosystem as capital innovation and productivity do thier thing. So when u are past that stage as much of these European economies are then u have to cut and get back to some organic sustainable level ??? right ???
    These guys aren’t competitive anymore, innovation in other areas, countries has dealt them a blow, and they don’t see it yet but past levels of growth probably wont come back and no amount of borrowing will help.

    They need a killer app

  • LVG

    Cullen is one of the only people who has absolutely nailed the last 5 years with pinpoint accuracy. The real lizards are the people like you who have been saying he’d be wrong for 5 years and now have nothing to fall back on except name calling. Pathetic.

  • LVG

    He wrote another post today about how Bush squandered the Clinton surplus. He obviously still doesn’t understand what he’s talking about. Cullen should be much harder on him in my opinion.

  • Very Serious Sam

    I’m having problems to understand the ‘austerity’ thing. For a private houesehold it is simple: spend less than you earn. On a nation-state level it is of course different for the known reasons.

    But when exactly can a level of spending be named rightfully so as ‘austerity’? Take, for instance, the eurozone. According to the graph I linked below, there is even an increase in the speed with which the debt is increased. The deficits, very slowly, are coming down. Is this ‘austerity’?


  • http://brown-blog-5.blogspot.com/ Tom Brown

    That only tells part of the story. If revenues fall because 25% of the workers are now unemployed… well, then the debt could climb right along with spending cuts increasing!

    Take the extreme case: 100% of the people unemployed. All industry at a standstill. No revenue coming into the government at all… and the government cuts 99% of it’s budget… the debt would still increase.

    You can’t judge austerity from that chart.

  • Adam P.

    Wow !

    …we do not share the view of many of our economics colleagues that growth will solve the economic problem, that narrow self-interest is the only dependable human motive, that technology will always find a substitute for any depleted resource, that the market can efficiently allocate all types of goods, that free markets always lead to an equilibrium balancing supply and demand, or that the laws of thermodynamics are irrelevant to economics.

    Ecological Economics, by Herman Daly and Joshua Farley

    See also this:


  • JK


    Are you new around here?

    For countries like USA, Japan, Canada, etc… their Central Bank sets the interest rate for which the federal government will borrow at.

    You are speaking of the Euro countries as if what applies to them also applies to the USA. Each of Euro countries effectively use a foreign currency. Their government debt is effectively denominated in a foreign currency. That is to say, each Euro country’s Central Bank is not in control of the rate of interest for which the federal government borrows at. How much and on what terms their federal government borrows is subject to the “bond vigilantes”

    That’s a very different situation than the USA.

    Read Cullen Primer.

  • MrV
  • Johnny Evers

    The situation in Greece is not pretty, but the alternative to ‘austerity’ is that they go back to paying pensions to 50-year-old retirees. As a temporary measure, that might make sense. But what is being argued for in these pages is a permanent solution — that’s because the problems are structural, not cyclical.
    Printing money so people can sit on couches doesn’t work. It might create demand, but supply will evaporate. I might be willing to go an mow my neighbor’s lawn in exchange of his government script, but eventually I will notice that he doesn’t do anything for me, and I will resent the hell out of it. I will resent that he is paid for not working, while I must work, and I will resent that my dollar becomes less valuable because there is more demand than supply.
    You can see this in my city, Detroit, which shows the limits of paying people to do nothing. The citizens of Detroit lack job and social skills and produce very little. They subsist, barely, on government handouts. But their meager income cannot sustain any kind of middle class.
    The problems are structural. You could give everybody a million dollars and in two years they’d be broke again. For proof of that, look to see what happens to lottery winners in this city.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Specifically the blogger uses that same quote in this piece:


  • http://brown-blog-5.blogspot.com/ Tom Brown

    JK, nice post. I wrote a response out myself, but wasn’t satisfied thinking someone else would probably do a better job… which turned out to be you!

  • http://brown-blog-5.blogspot.com/ Tom Brown

    “As a temporary measure, that might make sense.” … nobody claimed otherwise for the profession of “couch sitting” here either.

    Also, regarding your imagined resentment while mowing the lawn of your welfare queen client… imagine how the gardeners at Windsor Castle and Buckingham Palace feel? Talk about a true “welfare” queen! Ha! :)

  • http://oneconomist.com Hans

    Mr Roche, is that why you were so quick to denounce the findings of Reinhart & Rogoff study?

    If you are not an advocate of government spending, then why is “G” part of your economic theory..

    In fact, many believe government spending actually contributes to economic growth and GNP..Hence, without your governmental inputs, there would be no economy…

    Despite the facts that Trillions have been spent, (by taxpayers) the current growth rate is very sluggish, yet you continue to advocate for more..

    History, is replete with examples of failed government spending; yet men with advanced and educated brains continue repeat the past…

    “I am very much a believer in private sector based economic growth” (so to is Obomba, Krugman)

    Perhaps, in the form of a public/private partnership, since you are not in the least concerned about growing governmental debts nor regulations despite your occasional protests to the contrary…

    It is estimated to cost business $1.7 trillion bucks to comply with regulations…(source: SBA)

    I know, this falls under the “My spending is your income and your spending is my income” BS…

    “Government purchases don’t use resources that would otherwise be producing private goods, they put unemployed resources to work. Government borrowing doesn’t crowd out private borrowing, it puts idle funds to work.”

    You endorse such economic nonsense ! There is no capital or debt limit, it is infinite in the world of M.R., because, well because, we be the government…If you do believe this, then efficiency is not a matter of overriding concern… More so, when the government model breaks, it is just recast with another…

    Oh, BTW, could anyone, please give me an example of a federal department, that contributes to the increase of the GNP ? Or how does a government dollar spent actually increases or generates a profit or revenue?

    What I really need is the latest in their series: Government for Dummies..

  • http://oneconomist.com Hans

    Well stated, Mr Adkins, however, I am sure that the JMK crowd will look unlikely upon you…

    Krugman, is the most brilliant ignoramus I have ever read about…

    Those people whom read his material are simply lost sheepeos…

  • http://oneconomist.com Hans

    No, LVG, because he share a lot of values with him…

  • John

    All this time spent at 30,000 feet.

    Krugman says he’s talked w/ small business owners and that regulation is not a problem. Maybe he considers GE a small business.

    Hostility towards economic freedom and Say’s Law may not be the only thing holding Main Street business back. But the DC/ Brussels 30,000 foot mentality that ignores economic freedom and Say’s Law because it conflicts with power, control and manipulative concepts of social justice does no favors to those struggling to stay in the middle class.

    Ignoring the Rahn Curve and using Basil 3, Frank/Dodd FinReg and FOMC policy to steer banking credit to Sovereign issues/government spending at the expense of higher risk Main Street lending doesn’t help either.

    Sighting a spreadsheet error and defining austerity by implication as cuts to government when all it is really is a reduced rate of spending increases coupled with tax increases also fits well with the usual blind leading the blind.

    Maybe it’s time to come down to the ground where real life decisions are made or are NOT made everyday (why is monetary velocity still dropping?)

  • http://oneconomist.com Hans

    Hear is what really happen in EuroLand and not the crisis of not having a home currency…


  • Yancey Ward

    Point 3 isn’t even correct, Mr. Roche. It isn’t like the government spending specifically targeted the unemployed resources of the country. Even in a deep, deep depression, the government will still be largely competing to utilize the same resources that the still active parts of the private sector is trying to use. I have seen Krugman make this same wrong point over and over.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    From the report you cite:

    “The PIIGS, however, were restricted in the tools they could use to fight a growing crisis. They were part of a monetary union. “Without control over interest rates (because they were in the euro), the PIIGS were limited in their ability to deal with the bubble,” says the Carnegie report. The European monetary policy was too loose for countries like Spain and too tight for Germany.”

    “To escape the debt crisis they need growth, but that depends on being competitive and the PIIGS are struggling to improve their competitiveness without being in control of their exchange rates.”

    How is that “not the crisis of not having a home currency?” It’s EXACTLY the crisis of not having a home currency! It both helped to get them (the PIIGS) into the mess they’re in and now making it hard to get out of it! Concluding thoughts (again, from the source you cite):

    “So the price of staying within the euro straitjacket is that the PIIGS will have to cut wages and embrace wide-ranging reforms to boost productivity .”

    … or they could shed the “straightjacket” and *perhaps* make some of these adjustments less severe. Granted they have some hard choices to make.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Government spending on developing the algorithms that underpin Matlab, Mathcad, etc…. resulted in Matlab, Mathcad, etc! Same could be said for the Sidewinder missle… developed on a shoestring budget by Naval personnel. Walleye, Snakeye, Polaris, etc. etc. etc. Space program. Human Genome project. Arpranet. Public Highways. Damns, bridges, K-12 education….

  • http://brown-blog-5.blogspot.com/ Tom Brown

    It’s interesting that the massive spending cuts in PIIGS have left them with… greater debt!

    Re: Say’s “law,” you might want to take a look at this:


  • http://brown-blog-5.blogspot.com/ Tom Brown

    Libertarian absolutist purity is as unrealistic as Communist absolutist purity. Here’s Rothbard (of all people!) on the cult of personality that inevitably developed around Ayn Rand and her determined attempt at achieving this purity:


    As always, it’s the purists that are the real scary ones! It hardly matters what they’re attempting to be “pure” about.

  • FrankH

    The debate about politics and economics is dominated by the most extreme views. People like Cullen get no airtime because they’re viewed as lacking conviction about a particular view and so there is no ideological connection to be made to their ideas. Which sucks because it’s those ideas that matter most.

  • Johnny Evers

    It sounds like stealth socialism. Because once you start sending someone a transfer payment, how do you stop? Transfer payments create a voting bloc determined to keep getting the handouts. And socialism doesn’t work, so your economy never recovers enough so that you can’t stop.
    That’s why I believe these are permanent measures being proposed.

  • Very Serious Sam

    “It’s interesting that the massive spending cuts in PIIGS have left them with… greater debt!”

    This was unavoidable. Since the private sector deleverages, and the overinflated public sector reduces his notorious deficit spending at the same time, and on top there is a zero lower bound causing financial repression.

    Today I visited a speech/lecture/discussion by and with Prof. Dr. Dr. Starbatty. One of the most renowned German economists, for several reasons.

    I don’t know if his books (especially the most recent one, ‘Tatort Euro’) are available in english language.

    Nevertheless I recommend that those who are interested in the history, present stage and possible futures of the Eurozone, do read it.

  • FrankH

    From reading the comments here it sounds like most of the readers don’t understand that MR is just a framework for understanding specific economic environments. Cullen only sounds like he agrees with Krugman because of the specific circumstances. As Cullen’s explained before, there are times when MR is supply side and would advocate less government spending and even a budget surplus (especially if we could get a trade surplus going). I recall Cullen saying he disagreed with the Keynesian demand side approach during the housing bubble.

    I don’t think people are fully appreciating the beauty and flexibility of MR’s approach.

  • Windchaser

    A veritable Gish Gallop. /applaud

  • Windchaser

    Government borrowing may not crowd out private borrowing, but government *spending* does crowd out private spending.

    When the government buys oil to power the Navy’s destroyers, it pushes the cost of oil up for everyone. When the government hires engineers to build military equipment or roads, it raises the competition for engineers in the job market, and takes those engineers away from private enterprise. Etc., etc.

    Higher government spending contributes to inflation. That’s no surprise for the MR/MMT crowd.

  • InvestorX


    MR is nice and good, but does it have to also import the Keynsian fallacaies of MMT? The Balance sheet recession is correct in the fact that too much private debt is causing it, but just automatically “keeping the flow” by mindless deficit spending will only seem to work over the short term (5-10) years, while it probably will use scarce resources (resources are not homogeneous and the last bubble is never reblown).

    Anyway keeping the flow is maybe a necessary but not a sufficient condition for recovery. And maybe a reset allows the recovery to start quicker, be it from a lower point. But it will be on a sound Basis as opposed to stretching the mal-adjusted Status quo over 20 years.

    Not that all you / Koo / Krugman say is competely wrong, but you and they often act as if the medal has only one side.

    This is not very far from giving policy advise. I thought you wanted to avoid that.

  • Dennis

    Frank, I agree. You can’t have opinions that matter if you don’t have a correct understanding of how things actually work today. Thanks Cullen

  • http://orcamgroup.com Cullen Roche

    Exactly! Keynesians are one trick ponies for the most part. They’ll ALWAYS advocate govt spending. MMTers are one trick ponies. They’ll ALWAYS advocate govt deficits (and their job guarantee). Austrians are one trick ponies. They’ll always advocate an anti govt spending approach. Monetarists are one trick ponies. They’ll always advocate using the Fed to steer the economy. MR is different. MR is just a set of understandings and can provide someone with a framework from which to work and solve problems. In the current environment where I believe the disease was a debt bubble and insufficient aggregate demand I sound like a Keynesian because I think the solution to the problem is govt deficits (which add net financial assets to pvt balance sheets thereby healing the balance sheet issue and also keeps the “flow” going when the pvt sector saves). You might come to totally different conclusions using the MR framework (as some here obviously have). You might believe that the govt spending will make matters worse in the long-run. That’s fine. But MR doesn’t have a specific policy approach. It just provides the framework for understanding the monetary system so you can build out from there. There are times when MR will appear to be taking an Austrian stance, a monetarist stance or a Keynesian stance. But it always depends on the environment….

  • http://orcamgroup.com Cullen Roche

    MR is just a framework for understanding. You can understand MR and you come to different policy conclusions than I might. That’s the beauty of MR. It’s not a cookie cutter one trick policy pony. You can understand MR and come to differing conclusions than me so long as they’re in-line with the basic principles of MR. For instance, if you understand MR you understand that private output steers the economy. So you might be against govt spending during a recession because you believe that more govt spending could dilute the quality of private output. That’s possible. Or you might believe the Fed, as monopoly supplier of reserves, can do more in this environment than they’re doing. Or you might take more of a Keynesian approach. That’s the strength of MR. It’s just a set of understandings that allows for one to more clearly decipher a potential policy path. The conclusions you come up with based on those understandings are up to you and your evidence.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Well if “crowding out” entails hiring an engineer who’s given up a job search in his profession and is about to start working at McD’s, then I’m personally OK with that… as long as he’s actually doing something that needs to be done (like helping to fix our broken infrastructure). I would expect some govt inefficiency perhaps, but I think that might still be worth it.

  • InvestorX

    I agree with you. But then, why not separate MR from the Keynesian policy advocacy or explanatory language? Say one is part of MR and the other is Cullen’s policy flavor.

    See for example Hussman has many elements of MR understanding. Or even people like Mish or Keen or van Hoisington or…


  • http://orcamgroup.com Cullen Roche

    I guess I mistakenly intermingle the two at times. But in my mind, the policy ideas are always separate from the understandings. For instance, my big MR paper is just a set of understandings that form a foundation for my understanding. From there, I might discuss policy, but those policies aren’t explicit and inherent parts of the MR view. They’re just MY personal prescriptions based on my understanding. They can change and will change over time. There’s no one size fits all approach to fixing the economic problems we approach. That’s why I try to emphasize the open-minded approach of using MR’s understandings.

  • http://highgreely.com John Daschbach

    Keynes was not a one trick pony always advocating for more government spending. He argued for government deficit spending during downturns and debt reduction during upturns. Also, few note that more than anything, he argued against running a current account deficit. Of course, he was writing during a period with a gold based money system.

    However, the view that the housing collapse was caused by a debt bubble is not supported by a thorough analysis. The per-capita gdp normalized debt cost associated with housing at the peak of the housing bubble was lower than it had been from 1977 to 1995 and less than 70% of the peak reached around 1982. In fact, what the housing collapse clearly shows is that developed economies are very far from equilibrium, and so it is not difficult for a small perturbation to push the system out of a local minimum.

    True equilibrium only obtains at the point where all productivity goes to the base requirements for life. The arguments that people have about policy (from the Ayn Rand’rs to the MMT’rs and everything in between) are about how we maintain local stability that best benefits our tribe.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Cullen, does your “short supply of assets” post represent a change in your thinking regarding the effects of QE on asset prices?

  • inDC

    I WANT TO PULL MY HAIR OUT because of this: “Things aren’t always this way, but when they are, the government is not in competition with the private sector.”

    The government is not in competition with the private sector?! What do you call it when one industry (government) gets to TAKE from all other industries to exist? That is certainly competition to me because it is competition for efficient use of the same dollar!

    Look, I WORK in government. Do you want to know the effect of the sequester, this little itty bitty 3% cut? NOTHING. Absolutely nothing. We cancelled boondoggle training trips which weren’t needed. We cancelled operational travel which was not needed. If I was king for a day, I would happily cut 50% of the workforce where I work and the taxpayer would get the SAME SERVICE they did the day before. Krugman’s only purpose in life to to see government, and government’s role in our lives, become bigger and bigger and bigger — that is why he stands on his soapbox declaiming “austerity” and the “danger” of cutting government spending. But Krugman doesn’t work INSIDE government and has NO idea how much waste exists. You think the GSA extravaganzas in Vegas and IRS “Star Trek” video are it for waste? They are the tip of the iceberg. But Krugman doesn’t know that, so he goes on and on about how necessary all of this government is. Maybe if he could see what I see, he would finally figure out that excessive government spending of taxpayers dollars is what is killing us.

  • Dismayed

    “Government borrowing may not crowd out private borrowing, but government *spending* does crowd out private spending.”

    Government spending does not crowd out private spending when there is unutilized capacity in the economy. Look around! Millions of people want to work and can not find it. People are paying down debt and a frantic pace. But there is a choice – let the ‘free market’ fix the problem by plummeting us into a Fischer debt deflation.

  • http://economicdisconnect.blogspot.com/ GYSC

    I would be interested to get your thoughts on something. If, for argument, the tech stock bubble and credit bubble spending put the economy at 3X what spending/jobs/etc can support and after all that mess the economy runs at 1X; do you think it’s prudent or even sustainable to force money velocity/credit/spending back to 2-3X? Whatever monetary theory is in place, have you ever considered that 1X is the normal rate of the economy and all this effort to push it higher is not a good idea?

  • http://brown-blog-5.blogspot.com/ Tom Brown

    I worked for the government too… as a civilian engineer for a Navy research, development and test range. We did quality work for the government and developed many weapons systems which were eventually commercialized. Some in record time!



    The Navy used in-house development which in several cases (not just the Sidewinder) proved to be superior to the Air Force approach of contracting development of weapons system out (the disappointing Falcon missile, for example… the Air Force ended up dropping it and adopting the Navy developed Sidewinder instead).

    Also, a lot of government spending doesn’t have as much overhead and bureaucracy as you’re depicting. Block granting funds from producer states (CA, NY, MA etc) to taker states (ND, MS, AL, etc.) doesn’t require huge amounts of bureaucratic overhead.

    Also it’s hilarious to me that congress got on the ball to make sure their lives weren’t inconvenienced by a lack of government (air traffic control) or that meat inspectors weren’t taken off the job. If these congressmen were such anti-government zealots, why not get rid of the FAA altogether… let the freedom of the skies begin! … Um.. perhaps because they value their lives and they don’t like the idea of their meat being tainted or their flight plans being dangerous.

    Reminds me of the clueless folks out there with placards protesting “Keep your dirty govt hands off my Medicare!!!” … completely ignorant that Medicare is govt!… and yes, chances are they are taking OUT more than they ever put in. It’s fashionable to bellyache about govt now days… until some service that you depended on or were convenienced by suddenly is defunded.

    Is there fat and waste! Sure. Is that bad? Absolutely, but lets not paint with too broad a brush!

  • Andrew P

    Isn’t that sort-of what is going on right now? About 65 million people are simply being paid to exist with SNAP, Disability, Unemployment, Welfare, etc.. Wouldn’t it be better to pay those people to do something productive? At least then there would be something to show for it afterward.

  • Andrew P

    Is there any evidence that the general public turned into “savers” after the crash, more than very briefly (about 1 year)? Yes, people stopped borrowing, but I haven’t seen much evidence of the public saving much. Most people spend every dollar they get, and the individual savers are the ones who have always been savers. True, he corporate sector may be saving (and earning) much more, but the public sure isn’t.

    “When the debt bubble hit spenders turned into savers because they were concerned about the health of their balance sheets as asset values collapsed and incomes declined. “

  • http://orcamgroup.com Cullen Roche

    Personal consumption expenditures fell at unprecedented levels. And remains at a level consistent with previous recessions….

  • John


    no doubt Krugman would find common ground on Say’s Law w/ most who advocate increased central planning

  • John


    The Euro currency straitjacket hurts all major EMU countries exporters except Germany and maybe Finland

    But Brussels knows best

    UK has done a lot wrong…staying out of the Euro they got right

  • Andrew P

    I guess that is the same thing. The real estate crash stopped people from using their houses as ATMs to run up debt, but people still aren’t really saving. They are just doing much less dis-saving.

  • John

    a decent exploration of Say’s Law


    Thomas Sowell has done extensive work on this…but you will likely have to buy the book.

    Notables most hostile to Say’s Law: Malthus and Marx….Krugman is in good company

  • TNO

    I don’t know how to take someone (Krugman) seriously who talked about space aliens reviving the economy. And if being apolitical is a goal then Krugman is as far from that as space aliens are from earth. IMO.

  • InvestorX

    I would make that distinction more explicit.

    And my “dream” would be if people like you, Hussman, van Hoisington etc. unite efforts around an MR understanding of the economy.

  • InvestorX

    That is what I do not understand from Cullen and Keynesians:

    Why don’t you recognize that demand was artificially high for an extended period of time (e.g. 5% higher than without rising HH debt:GDP for 20 years) and that this artificial height is not sustainable? And should not be sustained probably because of the bubbles in some sectors? The drop in demand is because of the previous long-lasting pump of demand on credit. When you consume on credit there will be a point in future when you will have to consume less. And it arrived in 2008. Maybe an even higher debt:GDP is achievable, but that is a speculation.

  • kman

    I’m not new and this does apply to the US and canada if you oversimplify and follow the argument to it’s logical conclusion. You cna’t ignore productivity and innovation as they play a mjor factor that is being ignored by policymakers.

    In the end you do need growth = a killer app. It’s either that or find your new balance in the scheme of things.The sooner you fnd the balance the better as long term imbalances can correct in a painfull way.

  • Matt Gilbert

    This makes sense and it might be helpful for everyone to read your primer on the subject before posting (don’t flame – just suggestion). But I need to ask you again and would very much appreciate just a simple response: What does the post-qe American look like? I cannot find any – ANY – post monetary stim conclusions from the Krugman side only the Austrian side. Are higher taxes inevitable? Do we even need to “pay back” this private gov debt? I agree with one poster here about pump priming – it seems we are dangerously close to going beyond pump priming and into subsidization of the welfare state. “What the world looks like post Fed QE” — I think this would be a great piece for you to write – I know for a fact my hundreds of clients and my colleagues thousands of clients would appreciate it. We cannot just put our hands together and pray that all turns out well and the austrians are the only ones putting out the end-game scenarios which don’t paint a pretty picture. Who knows – your piece could single-handedly end the Gold bull market! Thanks again Cullen – very much appreciate your measured POV.

  • Matt Gilbert

    What if personal consumption is falling because producers/savers are thinking we’re in for a very rough ride ahead and are buying/saving in gold? The people I talk too – mostly 65+ – even middle income people are pulling out mentally. They think Washington’s gone nuts. And without a clear, concise “how this ends well” picture painted by our current “leadership”, the ship of state is being steered by Capt. Bernanke who, while being a laurel-leafed princeton grad, I don’t believe has ever had to make a personal payroll in his life. Cullen – I think YOU could win the Nobel Prize if you wrote an article about how this all ends – or could end – that could calm down the austrians and perhaps kick the keynsians in their a$$. The left is saying “trust us” while the right is saying, “we’re effed”. With a h/t to Mr. Lucas, “Help us Roche-y-wan kenobe! You are our only hope!”

  • Andrea Malagoli

    Yes, it probably would. However, it would be highly inflationary because it would rise demand without an increase in supply.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Workfare? Maybe… however, it probably would be more expensive to do that. But then maybe that’d be better!

  • Dennis

    This chart from Citi seems very important to me http://pragcap.com/wp-content/uploads/2013/04/assets.png My question is “where does money come from”. The scale on the left is $trillions. Isn’t that new credit (fiat money), that has been issued by the entities listed. So that money was created out of whole cloth, then lent, sold or whatever thus: is that where net new money in the world comes from each quarter??? If that’s the case then WOW every year “where money comes from” changes dramatically!

  • http://brown-blog-5.blogspot.com/ Tom Brown

    I think your complaint might be with a broader set of schools of thought than just “Cullen and Keynesians.” The free-market loving libertarians (and self-proclaimed Milton Friedman followers) who call themselves the Market Monetarists would disagree vehemently with you… saying that the very concept of a “bubble” is a falsehood, an impossibility, and an illusion perpetrated by people that just don’t understand economics. They claim that the so-called “bubble” concept is at odds with the efficient markets hypothesis (which they believe is absolutely true), and that the ONLY reason that 2008 (and the Great Depression for that matter) amounted to anything other than a very temporary “nominal shock” (which could have easily been rectified) is that the Fed was way WAY too tight with money in both cases! MMers say we don’t just need QE, we need QE on steroids all the time until 5% NGDP growth is achieved… even if that means a 5% inflation rate.

  • Ted

    Agreed, I enjoyed his column very much. Many of the individual points had been made before, but this was a great aggregation and summary of where things stand, written for a wide audience.

  • http://oneconomist.com Hans

    Really, Mr Brown, could you tell me where the government unit marked profits or revenues from the items you listed…

    An since when does a missile produce economic gains ?

  • http://oneconomist.com Hans

    Mr Brown, why do you not look at what the Baltic States did after 2008; in which the budgets and costs were reduced with very positive results…

    I realize it does not fit the MO of MR.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Here’s an article on Latvia. Sounds like a bit of mixed bag. Emigration of a large percentage of the population seems to have played a key role… as well as a docile national spirit.