Wednesday, November 28, 2012

Is Virtue Rewarded?

Here’s Paul Krugman again, explaining why inflation is good, and going back to the 1920’s and European economics to prove his point. He even has charts, in which the blue line climbs more rapidly and rises above the red one, to illustrate his point. Omigod.

What he is pointing out is that both Britain and France emerged from World War I with large national debts. Britain, he says, “was a model of orthodoxy, returning to the gold standard and running huge primary surpluses to pay its debts.” We all know from the history of his manic scribbling that he regards such behavior as unbearably foolish.

France, on the other hand, “ended up inflating away much of its debt,” which he has always advocated as the proper way for nations to handle debt. The nation ignores the debt and engages in inflation so that the debt becomes an ever smaller percentage of GDP until it disappears altogether.

Of course it doesn’t actually disappear, so the term “inflating away its debt” is utterly absurd, but if Paul Krugman says it then everyone is going to accept it as gospel.

He claims that “virtue was not rewarded” since Britain’s virtue of paying off their debt resulted in a less favorable debt:GDP ratio than France wound up with by ignoring their debt. He assumes that no other factors than the payment or non-payment of debt were involved in that outcome, which strikes me as a bit simplistic, to say the least.

Like, for instance that Britain had almost no natural resources and had to import them, while France had tons of natural resources. But that would complicate his argument so he conveniently ignores it.

What his chart actually reveals is not the value of inflation in resolving debt, which is actually sheer insanity on the face of it, but the absurdity of using GDP as the measure of a nation's economic success. That GDP number is merely a measure of cash flow, which is nothing more than a snapshot of momentary activity and does nothing to measure what a nation is actually doing economically.

If I pay you to mow my lawn and you pay me to mow your lawn we are creating cash flow and contributing to the GDP. But what are we creating that is of any value? If I pay you twice as much to mow my lawn and you pay me twice as much to mow your lawn, we have doubled our cash flow and increased our contribution to the GDP by a factor of two, but to what degree has our economy actually grown? None.

So Krugman’s chart of the ratios of debt to GDP of Britain and France actually tell us nothing about the actual value of paying off debt because they tell us nothing about the real economies of the nations involved.

To add insult to injury, he's not even comparing the actual GDPs of the two nations, or perhaps the rates of growth in GDP, either of which might mean something at least, but the two nations' ratios between GDP and debt and calling that "economic performance."

1 comment:

bruce said...

And two countries can have equal percentages of GDP to whatever, but have vastly different economies and GDPs. The US and Spain can have equal debt to GDP rations, but I'll bet our is a lot more robust than theirs is. Those are just two countries I pulled out of thin air, just to make a point.

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