In his The New York Times column, The Obama-Keynes Mystery, Paul Krugman starts with the following:

I’m not alone in marveling at the extent to which Obama has thrown his rhetorical weight behind anti-Keynesian economics; Ryan Avent is equally amazed, as are many others. And now he’s endorsing the structural unemployment story too.

To those defending Obama on the grounds that he’s saying what he has to politically, I have two answers. First, words matter — as people who rallied around Obama in the first place because of his eloquence should know. Yes, he has to make compromises on policy grounds — but that doesn’t mean he has to adopt the right’s rhetoric and arguments. The effect of his intellectual capitulation is that we now have only one side in the national argument.

Second, since Obama keeps talking nonsense about economics, at what point do we stop giving him credit for actually knowing better? Maybe at some point we have to accept that he believes what he’s saying.

I have been attributing this mystery to the fact that Obama spent time as a professor at the University of Chicago. My conjecture has been that the pernicious influence of Milton Friedman has lasted long after his demise. Friedman did build a department of like minded economists around him while he was there. Many of them are probably still there and exerting their influence.

I have just found an article, A Dark Age of macroeconomics (wonkish), by Krugman, himself, that takes a shot at some of the work that is still going on at the University of Chicago.

Obama was not in the economics department at the university, but he did pick his key economic advisors from there. I was going to do some research to see where his advisor, Austan Goolsbee, stands. All I had to do was look at a December, 2010 post of mine on this blog, White House White Board: Tax Cuts, Unemployment Insurance & Jobs.

If Goolsbee as an adviser to the President came up with this justification on his own, then he is not serving the President or the country very well. I have heard that the influence of Milton Friedman at the University of Chicago School of Economics is waning, but I think I see some of the taint of Friedman in what Goolsbee is saying.

Obama has continually ignored advice from economists not in tune with the Milton Friedman doctrine.

Even renowned Keynesian economists such as Paul Samuelson have admitted to having been bamboozled by Milton Friedman for a time. If these kinds of economists could succumb, even for a time, how can we fault Obama? Obama needs an intervention from some good, modern-day economists who understand the way Friedman fooled the world of economics for a time. The names Krugman, Stiglitz, Kuttner, Romer, Tyson, Reich, Galbraith, DeLong readily come to mind.

In the Krugman article, More On Friedman/Japan, he explains some of the bamboozling that Friedman did.

And this also calls very much into question Friedman’s famous claim that the Fed could easily have prevented the Depression, which gradually got transmuted into the claim that the Fed caused the Depression. Yes, M2 fell — but why should we believe that the Fed had any more control over M2 in the 30s than the BOJ had over M2 more recently?

In the online discussion that followed this article, I made the following comment in response to another comment explaining the importance of public investment.

Dave Baltimore said, “private investment has always followed public investment.”

I am afraid that this time might be different. In his book “Aftershock…”, Robert Reich tells of a part of Keynesian economics that was not taught to me in the early 60’s when I had a few college courses in economics.

The missing part was that the wealth could not be so heavily concentrated the way it is now for Keynesian stimulus to produce a follow-on self-sustaining recovery.

In the 60’s it probably was thought to not be necessary to cover this aspect, because at that time nobody could conceive of returning to wealth concentration that has occurred since the 1980s.

With the current wealth concentration, the money spent by the government on stimulus projects will go so predominantly to the rich that not enough purchasing power will be put in the hands of the middle class to stimulate private investment.

One take-away I got from Reich’s book is that even if public investment managed to achieve full employment, the middle-class would still not be getting a big enough share to buy the goods the economy produced so that full employment could continue after the public investment was scaled back.

Thanks to EricK, I found the above video on the www.carolineglick.com web site under the title, GOD BLESS MICHELE BACHMANN!!!!!!!!!!

Since, I just became aware of this posting, you cannot think that I had anything to do with the response by Esteban on June 22 (even though a name translation would make our names similar).

By Esteban on June 22, 2011 6:24 PM

Leaving aside the amusing delivery, it’s certainly a very friendly speech. The point about caution vis a vis the Arab Spring movements is also well-taken.

One wonders, however, if Rep. Bachmann really understands the role of the United States in the US-Israel relationship. The US has always been at its best with a sober hand on Israel’s shoulder, restraining its ally’s basest urges, and at its worst as the enabler of an unsustainable Greater Israel vision.

The annexed West Bank would forever remain an albatross around the nation’s neck, dragging it down from the humanity of Judaism to something much darker and uglier, quite akin to South Africa. It would have less of a chance of being a real Jewish State, in the values sense, than if it were flooded with right-of-return refugees.

The best thing the US could do for Israel would be to help it become a normal country, within clear, legitimately recognised borders, without the burden of overlordship over another resentful nation. It saddens me that the EU can do so little toward that goal. No other mediator than a US president will be trusted on both sides, regrettably.

Without even having noticed this comment, I also made reference to South Africa in my response to EricK.

How many different ways does Robert Reich have to tell you that the Bush tax cuts for the wealthy are part of the cause of our high unemployment? If we don’t get rid of them, we won’t get a self-sustaining recovery.

Every time you hear someone tell you that we must not raise the taxes on the rich during a recession, go to your window, open it up, and yell, “I am mad as hell and I am not going to take it anymore”

Executive Summary

Rising prices in the face of rising supply is not a violation of the law of supply and demand. If the demand curve shifts upward faster than the supply curve shifts upward, then prices will rise even as supply rises. This is what the law of supply and demand tells us.

Now For The Rest Of The Story

There is a long and circuitous path to the article, DeLong: Sorrow and Pity of Another Liquidity Trap.

On Brad Delong’s web site he posts the article Paul “Cassandra” Krugman Croaks Again! in which he praises Krugman’s article.

In turn Krugman’s article Liquidity Trapped praises a previous DeLong article.

Finally we get to DeLong’s article in Bloomberg, DeLong: Sorrow and Pity of Another Liquidity Trap. In this article DeLong sets up the premise to justify explaining a seemingly odd deviation from economic law.

There is only one real law of economics: the law of supply and demand. If the quantity supplied goes up, the price goes down.

…

Thus by late 2007, the 10-year U.S. Treasury rate was exactly where it had been when the Clinton surpluses ended at the close of 2001. “How long could this go on?” we wondered. Eventually the market’s appetite for Treasury bonds at high prices and low interest rates had to reach its limit, right? Supply and demand isn’t just a good idea — it’s the law.

Now, maybe the setup is just a strawman for the purposes of easily knocking it down. Otherwise, I am surprised that two economists who have my deep respect can fluff such basic stuff as the law of supply and demand.

I have plotted some hypothetical and simple examples of some supply and demand curves to show what the law of supply and demand is really about and how the experts proceeded to miss the details.

Hypothetical, Simple Supply and Demand Curves

DeLong’s premise is that If the quantity supplied goes up, the price goes down. We see that in the first scenario in the following table.

However, the second scenario shows that the supply can go up and the prices can go up, too. This is not a violation of the law of supply and demand as long as the inferences from the law are stated in all their details.

If the quantity supplied goes up due to a change in the monotonically increasing supply curve and the demand curve does not change and the demand curve is monotonically decreasing, then the price goes down.

In the second scenario, both the supply curve and the demand curve have changed, thus breaking the assumptions of the fully stated inference. This is why, though the supply goes up, so does the price.

It is not unreasonable that with earth shaking events going on in the world that affect the economy, both the suppliers of the product will change their supply curve and the customers for a product will change their demand curve. Where the final numbers for supply and demand match up depends on how those curves change. Just about any combination of rising or falling supply can result in a rising or falling price.

Could both of these world renowned economists have forgotten that when you study an economic situation by changing one variable, that the usually stated or implied assumption is all other things being equal? You are not allowed to assume that the results apply when you violate the assumption.

I used to consider Mark Zandi in my universe of economists who talked sense about the economy, until recent comments seemed to put him on my questionable list. In my mind, this recent interview puts him firmly back on to the list of economists who can get past ideology. This is despite the fact that he had been an adviser to John McCain in the 2008 presidential campaign.

The following quote is from the article Imagine a MoveOn That Doesn’t Answer to Democrats.

I’m not suggesting we devote our energies primarily to criticizing those who are gently nudging in the general right direction. I’m not saying there’s anything wrong with opposing Tea Party lunatics. I’m suggesting that we need to understand what’s happening in order to create something better that is desperately needed and could alter our entire public discourse.

What if we had an online organizing force that answered only to concerns of peace, civil liberties, and social and economic justice? What if this new movement opposed Wall Street bailouts regardless of partisan positions? What if it opposed wars no matter who was commander in chief?

Here is their video:

My Senator, John Kerry, sent me a link to view his question and answer session.

It is at 2:51 into the video that I realized that Kerry has turned Republican.

On YouTube, I have posted the comment:

Senator Kerry ought to consult with some real economists – Krugman, Stiglitz, Kuttner, Tyson, Reich, Galbraith and the like to find out what this economy really needs for job creation. That is economic demand from the middle class. That is what is missing. A big part of that is the money shifted to the ultra-wealthy, Sen. Kerry, from the Bush tax cuts.

As suggested in the video, I have already sent a couple of questions to Senator Kerry about his false understanding of how to get the economy moving again. How about you? Send questions to question@kerry.senate.gov

Since posting “Aftershock: The Next Economy and America’s Future”, I have come to realize that even many of the Democrats don’t seem to get the point that putting more purchasing power into the hands of the middle class is the only way to get a self-sustaining recovery. What Kerry mentions as solutions to high unemployment miss the mark by a mile.

Other posts of mine on the same theme:

• Schumer: Cuts to Medicare Benefits “Not On the Table”
• Comparing Conservative and Progressive Economic Policies
• Barack Herbert Hoover Obama
• Overworked America: The Great Speedup
• Obama’s News Conference On Economy
• Senator Sanders Tells Obama: Don’t Let Republicans Blackmail You Again

I almost forgot to mention the post Higher Marginal Tax Rates Spur Economic Growth

Oh, if only … President Obama could and would explain things in this way.

I am beginning to think that President Obama just doesn’t understand economics as well as Bill Clinton does. It is no surprise that Obama can’t explain what he doesn’t understand.

Overall, the above interview is very good. However, Schumer says too blithely that sure there is waste in Medicare. He should never say such things without pointing out that one of the biggest wastes was put in there (probably at the insistence of Replubicans). That waste is the 15% subsidy over the normal cost of Medicare to give incentives to private insurers to take responsibility for the benefits for some Medicare recipients. This wasteful policy (which is a good deal for the recipients so I am enrolled) is called Medicare Advantage.

If the government is going to give some people an unfair advantage and I am qualified, I am going to take it. I play by the rules even when I don’t think the rules are fair. I’d prefer the rules to be changed so that they are fair. I can adjust.

In his blog Grasping Reality with Both Hands: Fair, Balanced, and Reality-Based: The Semi-Daily Journal of Economist Brad DeLong, Brad Delong offers a history lesson for Michell Bachman.

He ends with the statement:

Ms Bachmann can easily correct the record, and sound smart to boot, by insisting on a distinction between those founders who really did fight tirelessly to end slavery and those who fought tirelessly to tilt the young country’s balance of power toward states filled with human chattel who could not vote. And she ought to stop name-checking John Quincy Adams and start agitating for the eternal glory of John Jay. Or Gouverneur Morris. He had a peg leg.