Krugman’s Green Cheese is All Rotten

by | Jun 17, 2000

I read a most outrageous article in last Sunday’s New York Times written by Paul Krugman, the Times’ Keynesian economist in residence. (Available with free registration) Entitled “Green Cheese Rules,” the article was inspired by a theory proposed by the famous economist Keynes. Krugman wrote that unemployment (and recessions) develop because people want what they […]

I read a most outrageous article in last Sunday’s New York Times written by Paul Krugman, the Times’ Keynesian economist in residence. (Available with free registration) Entitled “Green Cheese Rules,” the article was inspired by a theory proposed by the famous economist Keynes.

Krugman wrote that unemployment (and recessions) develop because people want what they can’t have, namely the moon (which represents money). To deal with this, the government must build a green cheese factory, give people free green cheese and tell them that it’s the moon, so they will all be happy and the economy will recover. This is the most bizarre and confusing economic allegory I’ve ever read. Fortunately, however, Krugman simplified it by writing “In other words, the government could and should print money to stimulate a depressed economy.”

For his fallacious “proof” of the “green cheese” theory, Krugman claimed that Brazil’s moderate economic recovery of this year is the positive result of 1999’s massive devaluation, while Argentina’s current recession is a result of “hard-money” policies. He wrote that “Brazil has bounced back.(and) devaluation has turned out to be just what the doctor ordered… Right now Argentina has the worst, not the best, of Latin America’s major economies.” As evidence, he pointed to Brazil’s positive GDP growth, and the fact that Argentina has higher unemployment than its neighbor to the north.

The problem is, in his zeal to prove his point, professor Krugman ignored some key statistics.

Brazilian unemployment has actually risen in recent years, while Argentine unemployment has declined. Further, Brazil’s inflation rose throughout 1999, while Argentina’s inflation was nonexistent. Lastly, devaluation has crippled the purchasing power of the Brazilian people, knocking per capita GDP down from US$4,815 in 1998 to US$3,396 in 1999 (a 29% decline versus a 6% decline in Argentina). And one key concept that Krugman completely ignored was that none of Brazil’s economic numbers improved until after its currency’s decline had been arrested, and partial stability returned.

Krugman then used some twisted logic to attack the gold standard and fill up some more column inches. Believing that his case for “green cheese” as the foundation for a currency was won, he noted that Argentina’s peso was not based on “green cheese” and similarly, that gold is not “green cheese.” And though the Argentine peso isn’t on the gold standard, a friend of the friend of the guys who manage the peso said she liked the gold standard, which means that the Argentine peso and the gold standard are both bad in the same way — because they’re not “green cheese.”

Are you confused yet?

No wonder economics is called “the dismal science.” And this guy aspires to a Nobel Prize for his efforts some day? Here’s the quickest way to see through Krugman’s word games and tortured logic: what would you rather have in your bank account — green cheese or gold?

As a practical investment matter, I’m concerned that Krugman and the NY Times are writing nasty arguments attacking Argentina and the concept of sound money.

I can imagine what got him on the topic – he was probably chatting with his buddies now running the IMF and the U.S. Treasury Department, and they were probably griping about the fact that Argentina refuses to listen to their advice to devalue its peso and get rid of its currency board, i.e. to get with the “green cheese” program.

So Krugman just borrowed their complaints, threw in a few cherry-picked statistics, made a few spurious attacks on the gold standard, and there was his article. The problem is that the NY Times is influential, and Krugman’s friends are powerful, and it’s possible that their institutions are preparing for a frontal attack on Argentina’s currency policies. As far as I’m concerned, that’s the last thing that the Argentine economy needs right now.

— Andrew West is a Contributing Economics Editor for Capitalism Magazine. He is Senior Portfolio Manager and Senior Vice President at Global Assets Advisors Inc., a subsidiary of International Assets Holding Corp. He is currently working at the firm’s New York City branch. Mr. West has worked in the field of global investing over eight years as both equity analyst and portfolio manager. Mr. West graduated Summa Cum Laude with a Bachelor’s degree in Finance from the University of Central Florida. In 1997 he received the Chartered Financial Analyst designation from the Association for Investment Management and Research.

Andrew West is a Contributing Economics Editor for Capitalism Magazine. In 1997 he received the Chartered Financial Analyst designation from the Association for Investment Management and Research.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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