Sunday, July 4, 2010

Why Paul Krugman is a Crude Keynesian

The short answer is because all Keyensians are.

Here's why I bring up this point. Krugman has a post out titled,  I’m Gonna Haul Out The Next Guy Who Calls Me “Crude” And Punch Him In The Kisser .

In his post, he quotes The Economist which said about him:
Mr Krugman’s crude Keynesianism underplays the link between firms’ and households’ behaviour and their expectations of future tax and spending policy.
In his own defense, Krugman writes:

All through this debate, a recurring theme among anti-Keynesians has been that Keynesians like me or Brad are ignorant primitives who don’t know anything about modern macro. It’s really hard to see where that comes from, since I’ve done plenty of intertemporal optimizing in my time. Part of the problem seems to be that the people saying this are taken aback by what we’re saying because they don’t actually understand the implications of their own models.

But anyway, for the record: I understand the importance of expectations perfectly well — well enough to know that taking such expectations into account makes the case for stimulus stronger, not weaker.
What Krugman, as a Keynesian, fails to take into consideration in his modeling is the inter-sector transfers that go on when the Fed increases the money supply (that the money goes into specific sectors--which results in the manipulated unsustainable boom). Further, the Keynesian prescription, for deficit spending during a downturn, fails to take into account the drain from sectors of the economy that occurs because of money not available for borrowing elsewhere, namely the private sector, because those funds are borrowed by the government for make work crony projects, as opposed to private sector projects that are attempting to grow the economy by pleasing the consumers.

So, yeah, Krugman is crude, but not for the reasons he thinks. His getting the "importance of expectations" plays a minor role. It's the general design of  the model he is using that is the problem. Any model that fails to take into consideration all the points detailed in the above paragrapgh must be called "crude", if you are being polite about it, but perhaps an even better description is seriously flawed reasoning.


  1. Krugman is too much of a pussy to punch anybody in the kisser.

    Seriously, can anyone with a beard that wuss be taken seriously?

  2. Can we agree with the a priori observation that the same purchasing power cannot be used in two transactions at the same time? And this rule applies to both Keynesian spending and Keynesian money dilution. Money dilution ALWAYS consists of the generally unrecognized stealing of purchasing power from those holding the existing money.

  3. RW,

    Your right, but this won't due for a vulgar Keynesian. Of course public spending will cause a crowd out. BUT THAT IS WHAT THEY WANT. If you think that I'm overstating same, go back and read Bruce Bartlett's piece "What Would Keynes Do?"(

    In this piece, BB states very clearly that in a bust there is no inflation and people aren't willing to lend/spend. The Gov. should run huge deficits financed by Fed QE, this will cause resources to be crowded out and lead to actual price inflation. After which, since this will cause interest rates to tick up commensurate with an inflation premium, the Fed can inflate in the traditional way to "lower" the (newly) increased interest rates. This really is how they see things. Just read the article.

  4. As K-mann linkes expectations, my expectation is that he will be killed by the american people while eating hummer with el presidente. He will try to flee to europe, but we kicked him out about a month ago. Then he will finally flee to cuba, where his economic expertise is not challenged by reality or (gasp) the people.

    Such small limitations are stupid for a free-thinking geniuses as K-mann. As long as the models work and are congruent, realityshow will surely adopt.