Paul Krugman argues that success in business is not, by itself, a qualification for making wise economic policy, and I agree. But then he goes all looney-tunes on us:
A businessman can slash his workforce in half, produce about the same as before, and be considered a big success; an economy that does the same plunges into depression, and ends up not being able to sell its goods.
So according to Krugman, it’s better for you and your spouse to earn $40,000 each than for one of you to earn $80,000 while the other stays home with the kids. I wonder how many two-earner families would agree with him.
Perhaps Krugman hasn’t noticed that the US economy, over the past century or so, has managed to cut its per capita labor input roughly in half without plunging into a 100-year-depression. There are even some people who think we’re better off these days partly because we work 35 hours a week instead of 70.
Apparently business isn’t the only profession where success is not always accompanied by wisdom.
When Krugman says “an economy that does the same plunges into depression” he is clearly referring to the slashing workforce in half part, not the producing the same as before part. So your example about the household doesn’t follow.
Obviously if the economy were producing the same as before it would not be in a depression. One could only accuse Krugman of making this mistake if one were not trying very hard to understand his position.
> When Krugman says “an economy that does the same plunges into depression” he is clearly referring to the slashing workforce in half part, not the producing the same as before part.
That doesn’t make sense: if he isn’t referring to both, the economy is _not_ doing the same.
On the other hand, this doesn’t seem correct to me either:
> Perhaps Krugman hasn’t noticed that the US economy, over the past century or so, has managed to cut its per capita labor input roughly in half without plunging into a 100-year-depression.
Krugman is specifically talking about the case where the economy doesn’t grow, which the US economy over the past century doesn’t fit.
Following the lead of ignoring the “blind” posters, I ask the following (because I’m now paying for internet access until I get home when it is free to me): while we have seen labor inputs drop by 50% in the last century or so, how much has output increased? (excepting a big numbers—Dave)
Steve, I’m getting worried for Krugman’s sanity. Do read this and consider helping him out:
http://sabhlokcity.com/2012/01/im-worried-is-krugman-losing-touch-with-reality/
Alexey Romanov:
Krugman is specifically talking about the case where the economy doesn’t grow, which the US economy over the past century doesn’t fit.
Well, what he appears to be saying is that growth in output is good but reductions in labor input are bad. To which I reply that most people consider the reduction in labor input over the past century to be a good thing, not a bad one.
Lets say the CEO of Ford announced today that he discovered some productivity improvement, so next monday half his workers would be fired and the company would continue to produce the same amount.
Now assume that everyone knew that due to productivity improvements half the workers in the USA would be fired next week, while the country could still produce the same amount of goods and services.
Wouldn’t the second case cause a large drop in demand and a depression?
Mark:
Wouldn’t the second case cause a large drop in demand and a depression?
I doubt it. But even if it did, wouldn’t it be a depression well worth having for the enormous long-run improvement in our lives?
I’m surprised: The mass movement of women into the labor force coincided with a decrease in (yearly) labor input? Does this result depend on whehter you count domestic labor and/or labor not traded for cash?
“wouldn’t it be a depression well worth having for the enormous long-run improvement in our lives?”
Is it worth it? Ha ha. Wouldn’t that depend who you are? If I’m 50 years old and get fired and can’t get another job, then no, it wasn’t worth it. If I have lots of money in the bank and lots of marketable skills then its a great thing.
But all that is besides the point. Clearly we both agree that the firing of workers at a national level can have far different repercussions than firing at the company level. And that was Krugman’s point.
What ever happened to the good old days when liberals complained about how humdrum most union jobs were. Circa 1975 those jobs were inhumane, remember? Now, heaven forbid we increase productivity and reduce the number of boring jobs.
I’m starting to notice that the circumstances keep changing, but the whining is constant.
Luddites unite? Doesn’t ‘plunging into a depression’ require a decline in GDP? The key assumption is “can’t find another job”, so a distributional issue can impact AD. But seems more free time with the same (aggregate) wealth might create some new opportunities. And as described we’re not really talking about productive jobs (I don’t see this being restricted to instances of new technology). While one can talk about make-work stimulus if we’re already in a downturn, as a general matter (the case being made here it seems) this is a prescription for a permanently lower standard of living — i.e. for our grandkids too (to tie in with the last post, is that “greedy”?). And as SL notes, leisure is typically a normal good too; the reason we produce is ultimately to consume / enjoy ourselves…I recall a discussion in TBQ of a growing “leisure gap” that runs counter to the income gap.
@Mark and Steve: Steve has missed a trick here. If the firings can all happen instantaneously then *so can the adjustments*. If we play ‘what if’ let’s both play by the same rules. So OVERNIGHT half the workers lose their jobs but NEXT DAY all the new businesses emerge fully formed to hire them for new jobs.
To be fair he is consistent. I mean, he is just describing a reverse Keynesian stimulus. After all, the reverse situation is where half the population is unemployed and we hire 25% to dig holes and the others to fill up the holes. According to the Keynesian model, that creates growth. It’s only logical that if you fired the hole diggers and hole fillers, you would see a depression according to their model.
I like this blog, but come on, the guy is just arguing that success in business and success in economics cannot be measured by the same metrics and are doubly-disassociated. Admittedly, his example is bad, but calling him crazy based on one bad metaphor is a bit extreme. I don’t see much comments from you about any of his good columns — such as the recent one pointing out Mitt Romney’s dubious job claim lies.
Well, let’s give Krugman the benefit of the doubt- half the workers lose their jobs, but output stays the same, then it shouldn’t matter since the income nets out the same in either scenario.
I think the point that is being completely missed here is Krugman’s preamble to the statement. It is about why comparing an economy to a business, or a household is silly (and repeated in the post above):
“For the fact is that running a business is nothing at all like making macro policy. The key point about macroeconomics is the pervasiveness of feedback loops due to the fact that workers are also consumers. No business sells a large fraction of its output to its own workers; even very small countries sell around two-thirds of their output to themselves, because that much is non-tradable services.”
A better analogy would be for a two wage earner household to lay off one, continue to produce the same at the same time two thirds of what that houshold produces is no longer in demand. The houshold income then drops to $26,6K, and most would say at least in the short term the household is not better off. How long that remains the state of affiars is up for debate, but in this economy, with 4 job seekers for every opening, I’m guessing it’s going to be awhile.
The first reply post (made by “js”) is spot on. Where Krugman errs is not in his argument (which is coherent and compelling) but in sentence construction.
“A businessman can slash his workforce in half, produce about the same as before, and be considered a big success; an economy that does the same plunges into depression, and ends up not being able to sell its goods.”
Krugman is *trying* to say that it’s not possible for an economy to shed half its jobs and maintain the same production level, at least not within a presidential term.
Indeed, economies which become more labor efficient and don’t grow are in grave danger of non-growth; congrats to Krugman if he’s indeed identified that “(p and q) implies q”.
It’s strange that we never seem to observe that particular instantiation of the tautology occuring, but who knows? I hear American farming jobs have fallen 95%; we ought to be expecting the overwhelming unemployment reports any year now.
‘…assume that everyone knew that due to productivity improvements half the workers in the USA would be fired next week, while the country could still produce the same amount of goods and services.
‘Wouldn’t the second case cause a large drop in demand and a depression?’
Almost certainly not. We’d need the Fed to respond by collapsing the money supply to have a depression.
Under your scenario we’d now be able to produce TWICE as much as before, not the same amount. Sure, there’d be some friction (unemployment) during the trial and error period that followed, but we’d end up being much richer.
Once again I struggle to understand Landsburg’s views on individualism and collectivism.
Whose lives are included in the category “our lives”? Consider the example Landsburg offers:
But how does the person who stays home with the kids, and no income, survive? Oh, that’s right – the income of the person with the new-found growth in income is redistributed in a manner to benefit both parties. No one is left worse off.
When Landsburg declares his support for increased productivity (return on labor) on the theory that it helps “our lives,” I surmise he is speaking in the collectivist sense. When it comes to supporting policies designed to ensure that everyone benefits from increased productivity – supporting individuals, not collectives – I rarely hear the same clarity from him.
I doubt it. But even if it did, wouldn’t it be a depression well worth having for the enormous long-run improvement in our lives?
I know you haven’t been reading my comments, but have you been reading your own? Do you seriously believe that having 50% of the working age population suddenly involuntarily unemployed would be a good thing?
@nobody.really
yes, you’re right. The only way this post and Steve’s subsequent posts make sense is if Steve now supports massive redistribution of wealth from the rich to the poor. Otherwise his example is flawed, his comment about the benefits of unemployment are flawed.
Well, Steve? What redistributionist policies are you now going to support? Capital Gains tax? Taxes on the underconsuming wealthy?
On second thought I’m not even seeing the broader relevance of this to the campaign — has Romney pledged to cut the US workforce in half? True we don’t know how anyone would ‘manage’ the entire economy who’s never been in a position to do so — which is the case for every non-incumbent. All we know is Bain did its particular ‘job’ fairly effectively, leaving us to speculate to what extent being successful in one avenue makes someone more likely to be successful at something else; but surely it’s not a negative data point. And surely slashing jobs isn’t all that PE firms do. Sometimes restructuring prevents ALL the jobs from being lost (perhaps preserves the ‘real’ jobs).
Let me summarize:
Business execs claim they have a knack for cutting head count but keeping total productivity (relatively) high — more bang for your buck. Krugman says that, in government, this type of leader would be bad for the economy.
Landsburg, rightly, calls BS on Krugman’s statement.
Sentence structure? No, Krugman’s just wrong. This skill IS good in government.
Krugman’s example is silly because the bad things are happening because of the suddenness of the proposed change, not because the change itself is bad. If there were enough adjustment time, the change would be extremely beneficial — a DOUBLING of productivity.
As another ceommenter mentioned, make the rules fair by allowing equally unrealisticly quick adjustment. The number of firms instantly doubles and instantly hires the unemployed. Production instantly doubles, income and demand instantly double. A great world.
Another way to see the silliness of Krugman’s argument is to apply it to something he loves, say education. What if the government instantly put 50% of the country in college classrooms. People would be stacked 8 deep in the classrooms and would suffocate. Mothers with newborns would be tranported hundreds of miles to college campuses and their babies would starve to death. Half of the countries motor vehicles would be suddenly driverless and so would crash and burn.
Therefore, QED, while a company may put a few people in college, the government cannot do the same! It would be crazy I tell you, just like it would be crazy for the government to ever fire anyone because of those darned feeback loops.
Seriously. What change would not be catastrophic if it happened on the scale and with the suddeness that Krugman assumes? So what he is saying applies to pretty much everything. So what does it prove? That everything is bad?
No. It just proves that you can’t endure massive changes instantly.
@ Terry
Krugman’s argument is stupid even if you remove the superlative aspects. Imagine Mitt reducing federal employee headcount by 5% and increasing productivity by 5%. He would be a hero. Those business skills definitely translate to government skills. Krugman is wrong.
Also, as an exercise, it’s fun to take Krugman’s logic and throw it in reverse… If we INCREASED federal employment by 100% and DECREASED federal productivity by 50% then prosperity would go through the roof! Wow.
It seems many here on hung up on the SL example of the two-earner family becoming a one-earner family (with the same income). In a world of no couples, half the workers become unemployed and don’t have a spouse with doubled income. So, let’s have all the workers work half the hours they did before for the same pay. Or, workers can make the same lifetime income that the currently have after 40 years of work in just twenty, so the new retirement age is twenty years sooner. But, wait, those are exactly the same kind of things that have happened in the last century and a half. Typical jobs aren’t 7, 10-hour days now. People can retire decades before their expected death, not work until they die.
@Mike & NR — I know what you’re saying, I’ve been a bit puzzled by SL’s take on things like the ‘trolley examples’ which clearly involve sacrificing one person (against their will) for the benefit of others. But this case I think is less problematic. When you oppose companies doing things to improve efficiency, you’re really endorsing a claim of some individuals (to an unproductive job) against others (e.g. a ‘tax’ on consumers). “By what right?” The fact that an example can also be argued to have net economic benefits perhaps makes it even more determinative, but maybe this also blurs the philosophical line you’re describing.
@iceman – “When you oppose companies doing things to improve efficiency”, and yet yours is the first comment I’ve noticed where it is hinted that anyone is saying that. I get the feeling, with this thread, that lots of people are saying whacko things in response to stuff other people didn’t say.
I understand Steve’s point (made elsewhere) that employment per se is desirable, and people would rather work less if this didn’t affect their income. He seems to have forgotten here the distinction between voluntary and involuntary unemployment. A company firing people causes people to involuntarily work less (and earn less), presumably making them worse off. This is quite distinct from the examples Steve raises – a couple switching from 2x40k incomes to 1x80k, or a country moving over the course of a century from a 70hr week to a 35hr week, which both involve people voluntarily working less (and earn less), presumably making them better off.
All of which completely misses the point Krugman was trying to make — that a company’s revenue is not affected by the loss of income of its ex-employees, but a country’s GNP is affected by the loss of income of its newly unemployed – unless perhaps they can quickly get new jobs, which they can’t right now.
GNP is affected by the loss of income of its newly unemployed
If productivity stays as before then GNP remains as before. GNP is a measure of output (= income).
nobody.really refers to “policies designed to ensure that everyone benefits from increased productivity” as “supporting individuals, not collectives”.
Mike H says “you’re right”.
If you like, substitute “express concern over” for “oppose” in my comment. But on the philosophical ‘puzzle’ you raise, you both suggest, correctly, that the only way “everyone” in “our lives” can benefit (in the SR) is through collectivist redistribution. My point was this does not represent “supporting (all) individuals (equally), not collectives”, but quite the reverse. Creating a conflict for one who ostensibly believes in individual rights would require one to endorse a priori claims by some individuals (those who held the now-unproductive jobs) on others (consumers or taxpayers). My guess is SL doesn’t recognize those claims as valid. Doesn’t mean we can’t try to provide transitional support to people, just that it’s not an issue of rights.
The bottom line is, if PK is simply saying “just because Romney was a successful PE manager doesn’t automatically mean he’ll make a great president”, that’s a true and fair point, but not a particularly interesting or profound one. (Like I said it’s not a negative data point.) If what he’s really trying to suggest/imply is “all Romney knows how to do is slash jobs so he’d make a lousy president”, it’s not just a weak point but a baseless one.
Apparently there are no automatic stabilizers, no income transfer mechanisms, in Krugman’s model. There is only one product or service and everything happens all at once. No one goes back to school or retires.
I can imagine a candidate saying “elect me and half of you will never have to work again but we’ll all have just as much income as before, due to the miracles of technology.” If true, it would seem to be a hugely successful campaign.
Umm..yes, e.g. if the government slashes the economy’s workforce by instituting high minimum wage, then yes, you would expect a depression.
That’s probably not what he meant. Did he mean when the government slashes the government’s workforce? Well, why should that have a different effect that when a company slashes a workforce…? Are we to dismiss companies slashing workforce, because, macroeconomically, it leads to depression?
Krugman seems to live in a one stage world.
When a workforce is cut in half, yet produces the same amount, several things could happen:
Wages are doubled – Those that were making $40,000 now make $80,000. When they go to spend that extra $40,000 each one of those workers creates jobs. The jobs created could be more or less lucrative than the jobs lost, depending on job requirements.
Cost savings go to profits – The company would then have additional resources to take on new projects. Those projects might require the same or new skills, but new workers would be required.
Cost savings go to investors – Those investors would either reinvest in a new company or they would increase consumption, in both cases increasing employment.
Most likely is some blending of the three, but in all cases, the economy is significantly more productive as a whole.
@Scott H. – “Imagine Mitt reducing federal employee headcount by 5% and increasing productivity by 5%. He would be a hero”
Almost. This would result in a 0.25% drop in gross production so I’d probably be after his head.
“So according to Krugman, it’s better for you and your spouse to earn $40,000 each than for one of you to earn $80,000 while the other stays home with the kids. I wonder how many two-earner families would agree with him.
But how does the person who stays home with the kids, and no income, survive? Oh, that’s right – the income of the person with the new-found growth in income is redistributed in a manner to benefit both parties. No one is left worse off.”
The person who stays home with the kids is now free to take care of the kids and the house, resulting in a net increase in overall productivity for the couple. Although, if they have a comparative advantage in doing something compared to the cost of daycare and housekeeping, they could then go off and do that instead. When people lose their job and aren’t equipped with any skills to make them eligible to find a new one, they need to learn things.
I don’t think it should be the government’s job to spend taxpayer money subsidizing an unwillingness to adapt or pursue further skills and education. I’m sure buggy whip manufacturers were pissed when the car became popular, and I’m sure a large proportion of them never found new trades, but a lot of them had to and that’s just how it goes.
Labour requirements change over time, and it is the job of the labour force to evolve along with those changes. If we pay people to sit at home and be sad about not having the job they had for a long time any more then they will be less motivated to learn how to do something new.
Nobody.really’s recap:
I understand Krugman to argue that the dynamics that make a person a successful businessman may be quite unlike the dynamics that make a person a successful president. More generally, Krugman argues that a strategy that produces externalities may achieve net benefits within one frame of reference, but may achieve no or negative benefits within a larger frame of reference. I share the view that this seems like a fair, if unremarkable, observation, applicable to pretty much everyone who has ever aspired to a larger role that he or she currently has.
I understand Landsburg to take issue with one of Krugman’s examples. Arguably Krugman was inartful in stating the example, and inadvertently stepped on one of Landsburg’s nerves – the nerve that senses when people treat labor as an end in itself, rather than as a means to an end.
So Landsburg offered his own counter-example. Arguably Landsburg was inartful in selecting his counter-example and inadvertently stepped on one of nobody.really’s nerves – the nerve that senses when people overlook the distinction between Kaldor-Hicks efficiency and Pareto efficiency.
I suspect that there’s less actual disagreement here than simple differences in emphasis – or topic.
Having steered things this far off topic, I’ll repeat that I would be quite interested in hearing people’s thoughts on the efficiency/equity trade-off. I’m less interested in whether or not someone has a “right” to benefit from societal gains in efficiency – I’ll consult lawyer blogs for that – as to hear whether providing mechanisms to share the gains is good public policy. Perhaps a topic for another post.
@ Martin
You understand that losing 5% and gaining 5% don’t get your back to your starting value. However, you don’t understand this example very well. Those 5% that get the axe end up going on and producing somewhere else. You would be foolish to be upset with Mitt.
@ nobody.really
I think there are plenty of valid arguments as to why successful CEO traits might not be successful Presidential traits. However, Krugman stepped on two landmines in my opinion. First, he mentioned a trait that, ironically, would be great for both CEOs and Presidents. Second, his example also provided a glimpse into just how illogical his version of Keynesianism can be. It wasn’t inartful in my opinion. The example was entirely consistent with the Krugman world view. The resulting attacks are on that world view, not CEO versus President.
Krugman’s point is pretty easy to grasp: jobs not production are good things. In other words: costs are good, productivity is bad. It’s a profoundly mistaken argument — looney tunes is fair — but it’s quite clear and quite common. Now why would he make it? Well Krugman has explained why himself. He got into a spat with Tyler Cowen last week and stated that this is not a game and he wants to advance his side by the most effective argument he can make. And this argument is intuitively appealling vulgarnomics. We can see that appeal on display in several comments here.
Krugman didn’t say his job was to make correct arguments; he said it was to make effective ones.
Now that Krugman has posted his promised expansion of his original idea, we can all stop talking at tangents to one another…. >suppresses laughter<
http://www.nytimes.com/2012/01/13/opinion/krugman-america-isnt-a-corporation.html
New story just out: ‘Obama Proposing Agency Consolidation to Trim Government’
Excerpts: ‘The president is scheduled to speak today…on steps to make the U.S. government leaner and more consumer-friendly…including…abolishing some agencies and reducing the workforce.’
‘The reorganization plan was welcomed by the president’s allies. “Just like any successful business, the federal government itself needs to streamline and organize for global competition,” said John Podesta…“That is what this plan will do. It launches a long-term strategy that ensures American businesses find more investors and customers, that more jobs are created here – and that workers enjoy a rising standard of living.”‘
If candidates like economists are entitled to make “effective” arguments, it sounds like Romney has found one. The irony is most observers would say he seems the least likely of the GOP candidates to actually cut spending.
@nobody.really: Good recap. But I’m not sure how you insulate a discussion of “equity” from some notion of “rights”?
I think PrometheeFeu is exactly right: Krugman’s observation is in line with his orthodox Keynesian view of the world.
To nobody.really and Mike H:
The question at hand is whether an economy, as a whole, is better or worse off if productivity doubles. You want to focus on how individuals fare in this situation, which is a fine discussion to have, it is just not this one. These are Krugman’s premises, not Landsburg’s. Krugman said, “an economy that does the same…”
*Agrees with sean and js*
Here’s the whole quote from Krugman:
For the fact is that running a business is nothing at all like making macro policy. The key point about macroeconomics is the pervasiveness of feedback loops due to the fact that workers are also consumers. No business sells a large fraction of its output to its own workers; even very small countries sell around two-thirds of their output to themselves, because that much is non-tradable services.
This makes a huge difference. A businessman can slash his workforce in half, produce about the same as before, and be considered a big success; an economy that does the same plunges into depression, and ends up not being able to sell its goods. Nothing in business experience prepares one for the paradox of thrift, or even the inflationary impact of increases in the money supply (which is real when the economy isn’t in a liquidity trap.)
If Steve is any bit honest, he’ll make this a ‘D’oh’ post. I’m not so sure of this, as I’ve witnessed Steve gets more dishonest as time goes on with his posts.
Krugman was saying that if you slash the workforce in half the economy will plunge into a depression, not that it can slash it in half and produce the same output (or even if it *magically* did, no one would have a steady income to buy enough. Hence the whole feedback loop.) I would assume that people here know enough basic macroeconomics to understand that in a depression the economy’s GDP isn’t growing, therefore total aggregate income is falling. I’m not reassured of this, however.
@Mike H: In the column you link Krugman drops his premise that output stays the same. So right or wrong he is making a different argument than the one Steve ridiculed.
Richard,
The businessman “slash[es] his workforce in half, produce about the same as before” and the economy “does the same.” This is from your own quoted paragraphs. Why would we read this as saying the economy reduces its output?
I’ll throw out something positive about PK: once upon a time he wrote what I thought was an excellent piece called “Competitiveness: Does It Matter? A Lot For Companies, Hardly At All For Countries”, a critique of ‘strategic trade’ policy that really impacted my thinking. I’ve been waiting and hoping for him to reiterate that message amid all the rhetoric about “winning the future” and “competing in the global economy” that continues to permeate our political discourse. His voice could really be helpful here.
Around the same time in his book “Peddling Prosperity” he wrote “we really don’t know very well why inequality has increased”, and specifically said we couldn’t blame govt policy because most of the increase was at pre-tax levels. (He also ruled out globalization, and speculated about media-based “superstar” models or early-cycle effects of technological innovation.) I see today (courtesy of Mike H’s link) he attributes much of it to ‘policy based on greed’.
It’s observations like these that beg the question maybe one of his fans can answer: what’s changed, the economic analysis or his objectivity?
And I’m still not sure who else is talking about LBO-ing America or slashing the US workforce.
Krugman is fine. He was talking in units of jobs, you switched to units of hours worked. A country that was able to hold production constant while slashing everyone’s hours equally across the board would be a great place to live. A nation of 50% millionaires and 50% homeless people would be awful, and that’s the scenario Krugman was alluding to.
In today’s column Krugman adds mind reading to his repetoire:
‘[Martin Luther] King [jr.]— who was campaigning for higher wages when he was assassinated — would surely have considered soaring inequality an evil to be opposed.’
I think he should have saved it for next week when he could have said, ‘I cannot tell a lie, the father of our country would have agreed with me.’
One man’s theory on Krugman…
Krugman’s economics/reason is only useful to the extent that it supports Krugman’s morality/politics. Krugman is a class warrior. Every policy he endorses involves wealth transfer from the richer to the poorer. He tries to find economic justifications for the policies he recommends, but after the real wealth transfer, any economic success would really just be the icing on the cake.
He doesn’t really care about what is causing the inequality and whether it’s “legit” or not — even though speculation can be fun. The mere fact that the inequality exists means that it must be combated — truth, context, and decorum be damned.
@Scott H: Yes but let me add an important caveat.
Krugman is a class warrior. Every policy he endorses involves power transfer from the masses to the Ivy-leaguers.
I guess the bigger question is, while it’s important to discuss distributional issues, where exactly does the ad hominem stuff about “greed” enter in? (It IS pure ad hominem.) Seems to me the honest utilitarian recognizes that “rights” has little to do with the matter. Yet many people seem to employ a model that presumes wealth is not created but appropriated. Maybe it’s just salesmanship.