What is Paul Krugman Smoking?

I’m finding it hard to have any respect for Paul Krugman.

Ten years ago, I read a book of his, “The Conscience of a Liberal” and wasn’t terribly impressed. Here is my review of it. Krugman seems to agree with the general liberal consensus that the law of supply and demand is magically suspended when it conflicts with Democratic Party policy — that is, he claims higher minimum wages won’t kill jobs, and immigrating vast numbers of low-skilled workers won’t have a significant effect on wages.

But what he says about Mike Bloomberg and Wall Street in this recent column really takes the cake.

Krugman says “there is no evidence that Wall Street’s mega-expansion made the rest of the economy more efficient. On the contrary, growth in family incomes slowed down as finance rose”. Krugman’s playing tricks with the data — the way to tell whether “the economy is more efficient” is to look at average income, which has been increasing a lot, but Krugman’s source on “family income” tracks median family income. Yes, most of the spoils of increasing productivity are going to the most highly skilled and that is a problem, but since when does any economist in his right mind think that it’s Wall Street’s role to counter economic inequality? And the increases in productivity were not caused by the efforts of low-skilled people, but rather by the innovations of the highly skilled, so is it hardly surprising, or even all that unjust, that those are the people that the market assigns the rewards for the gains they have created. And it is disingenuous to complain about the lack of increase in low-skilled wages without mentioning that 75% of legal immigrants don’t get in on skills, and our borders are very poorly enforced against low-skilled illegal immigrants, resulting in a flooded low-skilled labor market.

And he goes on “And the runaway growth of finance set the stage for the worst economic crisis since the Great Depression.”. Yes, the mainstream media has told everybody that no one but the finance industry had any role in the financial meltdown, but it’s a lie: the primary cause of the meltdown was that 90% of everybody in the country, the politicians, the home buyers, the bond rating agencies, and yes, the big banks, believed that it was a fundamental law of physics that, at the national levels, real estate values were guaranteed to rise. Anytime everyone is thinking that way, there will be a bubble, and when bubbles burst, it’s painful, especially when the bubble was financed with borrowed money.

Krugman describes the product that made Mike Bloomberg his billions, the “Bloomberg Terminal”. And Krugman has no idea what he’s talking about. He says that the advantage of it is that “traders with Bloomberg Terminals can react to market events a few minutes faster than those without.” and says “After all, does getting financial information a few minutes earlier do anything significant to improve real-world business decisions that affect jobs and productivity? Surely not. Bloomberg has, in effect, made his billions off a financial arms race that costs vast sums but leaves everyone pretty much back where they started.”.

If the Bloomberg Terminal were used for high-frequency trading (HFT) I think Krugman might have a point, but it isn’t, and he doesn’t. The terminal is useless for HFT — it gives information to human traders, who are many orders of magnitude too slow to do HFT. The advantage of the Bloomberg terminal is not simply that it gets information to the trader more quickly than he could otherwise get it, but that it has thousands of functions to do financial analysis that the trader can’t do at all without it. In other words, it does exactly what Krugman says it doesn’t: it helps to significantly “improve real-world business decisions that affect jobs and productivity.”.

The quality of investment decisions is very important — it means capital is going to companies most likely to make the most optimal use of the money, and that capital loaned to consumers and home buyers will be allocated according to those who need it most yet are most likely to pay it back, meaning that capital will go the furthest.

OK, so Krugman doesn’t like billionaires or bankers all that much more than Bernie Sanders does, so he’s going to try to trash Bloomberg, but that doesn’t justify a Nobel prize-winning economist saying such profoundly ignorant things.