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Matt Yglesias is considered one of the smartest bloggers around and a rising star on the left. I read his blog and have linked him here many times. I don't agree with much he writes but we try to offer a balanced view around here and there's no doubt he writes an entertaining blog post. He's written some great posts about Scott Sumner's NGDP targeting monetary regime.
A recent post called The Myth of Malinvestment though might be better titled The Myth of Matt Yglesias' reasoning skills. A reader requested that Matt refute the Austrian theory of malinvestment and he takes his best shot. After first crediting Paul Krugman for a "takedown" of the theory a decade ago, he says:
I'm no more an economist than Matt Yglesias but that explanation just doesn't make much sense. Malinvestment is always at the margin and its existence doesn't mean that no useful investment is being made. It does mean that capital is being wasted though and there is a cost involved. And the cost has a human face; how many Chinese workers will lose their jobs if that factory built for export turns out to be worthless? Wasting capital has consequences.
His views on the malinvestment in housing here in the US are hard to fathom:
Really? It's not immiserating anyone? What the heck has this entire financial crisis been about if not the malinvestment in housing? The capital wasted on unwanted housing is gone and despite Mr. Yglesias' fervent desires, cannot just be conjured up by the Fed at will.
Mr. Yglesias does get one thing right:
Unfortunately, both the Bush and Obama administrations, along with the Fed, have done everything in their power to prevent the write offs. All they've accomplished so far is to delay the process that would allow us to "move forward".
Mr. Yglesias would have us believe that this is just a normal part of a market system:
What Mr. Yglesias doesn't seem to understand is that the number of lemons and white elephants matters. Wasting capital on a grand scale has severe consequences as we are now finding out.
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