Wednesday, June 26, 2013

Zombie Math

Paul Krugman claims today that “tougher climate policy will, almost surely, be job-creating, not job-destroying, under current conditions.” His reasoning seems to involve unicorns and magic ponies because of a “termite theory” which was debunked under it’s former name of the “broken window theory,” but which he says is “right under these conditions.”

Paul Krugman again confuses his mathematical models with real world conditions when he says that a policy that raises energy prices will do no harm because “our economy isn’t supply-constrained right now, it’s demand-constrained.” Meaning, of course that people are not buying enough. So, he says, “Even if prices go up a bit, how will this reduce real demand?”

The stupidity of that statement is really hard to fathom. Will people spend less money if prices go up? No, they are already spending all of the money they have, and borrowing to spend more. That is not the point. The point is where that money is being spent and how that spending pattern affects the economy. The point is that when their electric bill doubles and the heating bill goes up they will spend less on other things.

They will spend less, for instance, on clothing, and when clothing makers are selling less clothing they lay off workers. So there are fewer clothing workers, but there are no additional electric workers because only the price of electricity went up, not the amount being used. That, my good Doctor Krugman, is a net loss of jobs, caused by the price increase of electricity.

The problem for Dr. Krugman is that he deals in mathematical models. For him “real demand” has nothing to do with what real people are doing in a real world, it is simply the amount of consumer dollars that are flowing in an outward direction. So he’s right in that prices will not change the amount that consumers spend. But the real world does not allow that to be extended to mean that jobs will not be affected merely because the amount of spending is unchanged. One cannot merely plug in mathematics; one has to actually think logically in the framework that exists outside of the ivory tower at Princeton University.

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