Tag Archives: Paul Krugman

Earth-Like Planet Discovered, Krugman Already Exploring Space Economics

This week, NASA astronomers at the SETI institute discovered a planet nearly the size of earth that may be the right temperature for liquid water. According to the Wall Street Journal’s report of the announcement, the planet Kepler-186f is located in the habitable zone of a star located around 459 light years away from earth in the constellation Cygnus. A habitable zone is the region around a star in which a planet receives just enough solar radiation such that it maintains a temperature where liquid water could exist without freezing or boiling, and thus may make this planet more likely to have life-sustaining conditions. While many scientists still contend that this planet may still be too cold to sustain liquid water without a greenhouse-like atmosphere, many astronomers are excited to add Kepler-186f to the list of 9 potentially habitable alien worlds that could potentially be studied in the far away future.

While its safe to say that we won’t be colonizing any of these planets for at least a millennium (a round trip to Kepler-186f would take over 900 years even if you travel at the speed of light), that hasn’t stopped Paul Krugman from using his clout at the New York Times to publicize his theories on interstellar finance that he published in 1978. In the realm of untestable economics theories (which is a pretty large area), this has to be the most ridiculous. On the other hand, it does appear to contain relatively logical rhetoric and a few equations borrowed from physics, so therefore it must be worthy of the grant funding Krugman obtained to write it, right? (He actually did get a grant to write this paper, albeit from the committee to re-elect William Proxmire, a Wisconsin Senator)

Despite eventually being published in an economic journal (which makes me wonder what won’t get published in economics), Krugman intends this article to be a well-crafted comedic article. In his quest to address the problem of computing interest charges on goods in transit while at the speed of light, Krugman writes:

“A solution is derived from economic theory, and two useless but true theorems are proved.”

In case the readers didn’t yet know that this work was meant as a farce, Krugman also adds:

“Is it too much to suggest that current work might prove as influential in this development as the work of Adam Smith was in the initial settlement of Massachusetts and Virginia?” (Hint: Adam Smith was born in 1723, while the Massachusetts Bay Colony was settled in the 1620’s)

Despite the humorous undertones, Krugman’s theory appears to be grounded in Einsteinian physics theory. The main problem in accounting for interest in interstellar trade addressed by Krugman is that time is relative to the observer. The theory of relativity explains that the time experienced by one observer, here described as (delta t’) depends on the velocity of the other observer.

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As the speed of observer A approaches the speed of light, the change in time experienced by observer B from the perspective of observer A will approach infinity. For a real life example, this means that a clocks on a satellite traveling around the earth in orbit at 7.7km/sec will be approximately 0.007 second slower than a clock on earth (GPS satellites have to correct for this effect in order to accurately track its position in orbit). So getting back to Krugman’s example, if a light-speed-traveling starship left earth to a far away planet to deliver a payload of goods to the planet “Tantor,” by the theory of general relativity the time experienced by those on the starship would be much shorter than that experienced by those on either Earth or Tantor. Therefore, assuming that the starship was only a transport vessel (rather than a traveling city), one should calculate interest based on the clocks in the “common frame,” or the clocks on the respective planets, rather than on the clock onboard the transport vessel. Furthermore, By Krugman’s second theorem, competition will equalize the interest rates on the two planets.

This analysis of course makes a few oversimplifications. First, although the interest rates may equalize between the two planets in theory, in reality it would take almost 500 years to even find out what the current interest rate is on the other planet. Therefore, it would be necessary for the interest rates to remain very static on each planet while the other planet waits to obtain the knowledge of the interest rate on the other planet, which would certainly be highly unrealistic given typical human political conditions (we might not even use the same currency, nor have the same governmental systems on earth by the time we found out the interest rate on Tantor. Second, it assumes that at some point we would be able to travel at near light speeds (no explanation needed).

Overall, the article makes for a fun and interesting read. It’s unlikely that these theorems would be used in the next millennium (who knows, maybe Krugman will become the future Socrates for his far-reaching philosophical theories). In the end, I’m still confused about how such a busy intellectual academic like Paul Krugman found the time to write this.

Krugman Versus Mankiw on Capital Income Taxation

This morning’s New York Times featured an op-ed from Paul Krugman titled “Wealth Over Work.” In the piece, Krugman warns that we are on a dangerous path towards an oligarchical society, where inequality is rampant and wealth accumulates in the hands of a small group of powerful elite. The government enacts policies that promote the accumulation of this wealth and living off of capital income over deriving income from working in the labor force.

While the inequality argument is certainly a relevant and important topic, Krugman’s finger pointing seems over the top to me. Krugman, in his typical fashion vilifies the GOP:

Despite the frantic efforts of some Republicans to pretend otherwise, most people realize that today’s G.O.P. favors the interests of the rich over those of ordinary families. I suspect, however, that fewer people realize the extent to which the party favors returns on wealth over wages and salaries. And the dominance of income from capital, which can be inherited, over wages — the dominance of wealth over work — is what patrimonial capitalism is all about.

Some of his points are valid but there are two problems I have with Krugman’s argument:

  1. Krugman claims that one of the contributing factors to his claimed shift towards an oligarchical society is the favorable tax treatment capital income receives. Based on my experience studying taxes in Jim Hines’s government revenues class, this statement struck me as off. Taxes on investments such as capital gains and dividends are some of the most inefficient taxes a government can impose. I was happy to see that Greg Mankiw publicly called Krugman out on this on his personal blog. Mankiw points out that it is not class warfare that drives the rationale for lower capital taxes, but rather the fact that it is optimal economically. At its heart economics is about trade offs and governments are faced with a serious tradeoff when designing a tax system: the tradeoff between efficiency and progressivity. Capital taxes are extremely inefficient because capital owners can choose to not sell their assets very easily if they face the tax, distorting economic activity and producing dead weight loss, which is a net loss to society. Therefore having lower capital taxes if efficient. The tradeoff here is that the bulk of capital income goes to the wealthy and so a lower tax is also regressive. Our tax system corrects for this in other areas.
  2. My other problem with Krugman’s article is the borderline conspiracy theorist perspective he advances as to why this shift is occurring, “Why is this happening? Well, bear in mind that both Koch brothers are numbered among the 10 wealthiest Americans, and so are four Walmart heirs. Great wealth buys great political influence — and not just through campaign contributions. Many conservatives live inside an intellectual bubble of think tanks and captive media that is ultimately financed by a handful of megadonors. Not surprisingly, those inside the bubble tend to assume, instinctively, that what is good for oligarchs is good for America.” To me this argument sounds a little too extreme. Yes money can buy power and influence, but politicians ultimately must answer to all of their constituents in our democratic society and ultimately those well off can be heard. The adoption of Obamacare (which the Koch brothers strongly oppose) is one example of a the less powerful majority winning a battle.

Overall, Krugman provides a thought provoking piece but his points seem drastic and overblown, especially from an economic perspective.

Trade Guru’s Doubtful on TPP

How come did the eminent trade economist Paul Krugman say that the fallacy of TPP (Trans-Pacific Partnership)’s negotiation is not a big deal?  Here is what he said:

“It’s far from clear that the T.P.P. is a good idea. It’s even less clear that it’s something on which President Obama should be spending political capital. I am in general a free trader, but I’ll be undismayed and even a bit relieved if the T.P.P. just fades away.”

Here, he was not saying in term of what it used to be to explain the advantages and disadvantages of a free trade agreement in international trade class that a free trade agreement would cause a trade creation—represent a good thing in some extent—and a trade diversion—a bad thing. He argued that the successfulness of TPP is nothing to do with reducing trade barriers such as tariff, quota, and so on since currently tariff in the U.S. has been quite low.

It seems that this is rather unbelievable to be said by such a person who attributes himself as a free trader. He might be correct that trade barriers—but not for nontrade barriers—have already been no longer a barrier in the U.S. and many other advanced economies, except for few areas with high protection and subsidy such as agriculture and so on. Yet the trade barriers now have been transforming to nontrade barriers. I remember how weird it was when several years ago, American catfish farmers successfully urged Congress to ban Vietnamese catfish from being labeled as catfish. Another trial to manipulate food names is an action done by the Maine lobster industry to deter restaurants to label Chilean lobsters as lobsters. The European Union also tried to do so by renaming sardines from Peru and elsewhere with another name to confuse consumers. Those examples are just the tip of the iceberg. Many developing countries have often been frustrated facing many kinds of nontrade barriers on their exports ranging from this such name manipulation to environmental issues. Moreover, this silly thing indeed has been spreading a skeptical view over folks in developing countries that it potentially harms every single effort to promote free trade in the future.

TPP is not the same as other FTA (free trade agreement/area)  that usually consist of very limited countries or sitting in a particularly small area, rather TPP involves a wide variety of countries with different economy levels and in different regions though still in the pacific rim. The successful of this FTA would invite wider participants and it might ease the path of multilateral agreement initiated by the WTO that has been bogged down for a long time since the Doha round.

I see his argument is more like if he were a protectionist fearing a free trade as a threat rather than a chance. I imagine this argument has never been told by this trade guru or otherwise it would make TPP, which has not been in good progress, even harder to make further progress.

How may lower growth rate affect to make debt harder not easier?

On March 1st, 2014, Paul Krugman wrote a supplementary blog post, CBO Mix-And-Match, supporting Floyd Norris’s criticism about the inconsistency in budget projections done by Congressional Budget Office (CBO). Krugman’s main argument was that CBO seems to leave out the expectations for future interest rates in CBO’s budget projection calculations. Paul Krugman commented that this will lead to “excessive fiscal pessimism”. I do not blame him for using such as strong negative word, because future interest rate is used in just about every financial projection calculation.

Paul Krugman then further gives the reason that this miscalculation is important; that is because its relationship with debt as share of GDP. When real interest rate “r” is further greater than “g” economy’s long-term growth rate, this can cause recession, such as debt spirals, Paul said. In terms of economic growth, I partially agree with Paul saying that “lower g to lower r too”. I understand how lowering real interest rate can favor the economic growth rate; however I do not quite grasp the entire picture when Paul Krugman says “lower g to lower r too”. For example, when economy is running well and more people enjoys economic prosperities, I suspect to rise in price levels. People will try to make more money out of their business because they can assume that people’s willingness to spend is high when economy is in a boom than in a recession. Of course, this is not a hundred percent true, because we have witnessed the people were afraid to spend money even after when recession ended.

On March 2nd, 2014, Paul Krugman wrote a following blog post, Growth and Interest Rates: I Appear to Be Wrong, and gave this graph to show the title of this blog.

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According to Paul Krugman,

Postwar US history broadly breaks into two eras: a fast-growth generation after World War II, and generally slower growth thereafter. If my hypothesis had been right, r-g should have been lower in the second era than the first. Well, it looks as if the opposite was generally true, even if you ignore the spikes around big recessions.

As Paul mentioned, in Japan, GDP growth rate was lower in the presence of low interest rates, of course this fact is bounded by the zero lower bound problems, yet in some extent, we cannot ignore this contains some degree of truth. By looking the graph above, Paul concluded that “lower growth does appear to make debt harder, not easier, to carry.” And I wonder if this can be related to what I said earlier. I said, when Economy is boom, people tends to make more money out of their business by assuming that people’s willingness to pay is high. In a similar way, when economy is running in a recession or when economic growth level is low, people are afraid to lend out money because they are afraid that borrower may not repay them back interests on time. My logic is more based on behavior economy rather than a theory. However, many times we see what constitute the world is people’s behavior rather than a solid theory.