A Krugman Dictionary for the Un-Wonkish

  Just getting started. Krugman explains most of this, but it can be hard to find.  (How Krugman changed the NYTimes.)

Austerians vs. Keynesians:  Most of Krugman’s posts pertain to this epic battle. Austerians (some of whom subscribe to Austrian economics) believe that cutting public spending (austerity) will cure a depression, while Keynesians believe that more public spending will do the trick. In other words, Austerians believe the cure is the hair of the dog that bit you, while Keynesians say that when the problem is unemployment and too little spending, the government should spend and hire. (PK, )

Austerity:  A government policy of reducing spending. In a recession, people and corporations earn less and pay less in taxes, while unemployment insurance payouts increase. So the government has less income and more outgo and, hence, runs bigger deficits and must borrow more. Very Serious People think that big deficits cause recessions because of a lack of business confidence (see Confidence Fairy), so they advocate cutting spending (imposing austerity). In the absence of a business response (that is, because there is no Confidence Fairy), austerity makes the recession worse (see Keynesian Policy).

Bond Vigilantes:  Make frequent appearances in WSJ. (May 2008Nov. 2011PK).  As the WSJ explains (May 2009), “They’re back. We refer to the global investors once known as the bond vigilantes, who demanded higher Treasury bond yields … whenever inflation fears popped up, …  they appear to be returning with a vengeance now that Congress and the Federal Reserve have flooded the world with dollars to beat the recession. After three years, the WSJ’s bond vigilantes have had no luck whatsoever; interest rates having trended lower over the whole period.   (see Invisible Bond Vigilantes).

Chicago School:  The same group of economist that are often referred to as fresh-water economists. This school has been centered at the university of Chicago since at least the 1960’s when Milton Friedman was the de facto dean of the school. Back then the it was Monetarist, now it is dominated by “rational expectations” theorists, prominently including Lucas and Cochrane. These two rant against Keynesian economics, which they do not understand and have consequently been caught with their pants down (PK).

Confidence Fairy:  The fairy (photo) who makes businesses hire more people and perhaps makes the public spend more when government reduces its spending and thus its future debt. In spite of the photo, there is no evidence of the powers attributed to her. K-Links: IntroducedBest example

Debt:  You know what it means literally, but Krugman argues that since we Americans owe it too ourselves, it would mean nothing economically if it weren’t for that American debtors cut their spending more than American lenders increase their spending. This is not always true, but when the recession hit, it became true. Also it’s not dollar debt that matters, but national debt relative to the size of the economy. (PKPKPKPK,) more >>

FRED:This is where Krugman gets most of his data—the Federal Reserve board of St. Louis’ Economic Data. (PKFRED)

Fresh-water economists:  See Chicago School and Salt Water Economists. (PKPK,PK)

Invisible Bond Vigilantes:  Bond vigilantes are invisible for the same reason leprechauns are, and it is quite rude of Paul to point this out. (Nov. 2009,June 2010Dec. 2010May 2011.)

Income Inequality: No need to define it, but here are links to some of Krugman’s best gaphs. (PKPKPKPK, PK


Keynesian policy:  When the economy is in a serious slump, and interest rates are so close to zero that Monetary policy loses its power, Keynesian policy recommends temporary fiscal policy lasting until the economy is back close to full employment. Fiscal policy can be tax cuts or government spending, but spending (which requires borrowing) is a stronger and more reliable policy. Krugman links to Brad DeLong‘s 1997 explanation/prediction.

Keynesian models:

Krugman’s predictions: In 2005 Powerline attacking him for predicting “a catastrophic collapse in home prices.”

Macroeconomics:  The economics of nations — growth, unemployment, national debt, etc. (Microeconomics covers how business compete or exercise market power, and consumer behavior.)

Minsky moment: “the point at which margin calls force deleveraging” —PK. (PK,Wiki)  A MM occurs when over-indebted investors are forced to sell the assets they’ve gone into debt to purchase (houses, securities, whatever) to pay back their loans. This causes the asset value to fall, which causes more selling, sometimes because of margin calls. So the MM is the beginning of  a major sell-off and precipitous collapse in asset prices.

Rational Expectations:  The hypothesis that enough people are so rational that they make unbiased forecasts of the impact the government policies will have for decades to come, and as a consequence, monetary policy (as recommended by Milton Friedman) and fiscal policy (as recommended by Keynes) will have no effect. The hypothesis is based on a ludicrous assumption and extremely sophisticated mathematics.

Ricardian equivalence:  “The proposition that the timing of taxes doesn’t matter for consumer spending, so that temporary tax cuts don’t change spending.” 

Salt-water economist:  Economists on the East and West Coast tend to be Keynesians, while “fresh-water economists, at places like the University of Chicago tend to dislike and not understand Keynesian economics. (see “Chicago School”)

Very Serious People (VSPs):  (a.k.a. policy elite) Those with power who are taken seriously because they pretend to be serious, but who just spout popular nonsense. A surprising number have PhDs in economics.

Say’s Law:  The proposition that income must be spent, so that shortfalls of demand are impossible, and government spending in particular cannot add to demand. (PK, )

WSJ:  Wall Street Journal.

Zombie ideas (aka zombie lies):  Original definition (Nov. 2007) — “Many politically charged topics are overrun with zombie ideas — false stories that refuse to die, and just keep coming back.”  Zombies are people (usually VSPs) that spread zombie lies. (Structural unemployment.)