Monday, February 6, 2012

Krugman Keynesian Quackery

Paul Krugman writes the following, which completely ignores what government deficit spending is really all about.:
Keynesian and Pseudo-Keynesian Propositions

Just a brief further thought on the anti-Keynesian flip-out. Consider three propositions:

1. Deficit spending is expansionary, other things equal.
2. Deficit spending is always expansionary.
3. Only deficit spending is expansionary.

Keynesian economics basically asserts proposition 1. Testing that proposition is tricky, but that’s always the case in economics; you have to look for natural experiments, or be very careful about controls. Christy Romer talks about this in her excellent speech (pdf) on the topic. But when you do it right, the evidence strongly supports proposition #1.
Proposition #2 is, well, stupid. It’s what you see in bad comment threads, where people rant about how if Keynesian economics was right, Greece would be a miracle economy.

And proposition #3 is worse. Which is why I am boggled to see professional economists apparently believing that this is the proposition to focus on.
How about the following?:

Deficit spending means that money is borrowed by the government that would have been otherwise loaned to the private sector or saved directly, held, or used in consumption. Thus, deficit spending does nothing but distort the direction of the economy in the toward government bureaucratic waste, which means it is always suffocating the economy and never "expansionary" in any good sense.


  1. My question is, if the private sector isnt taking out those loans [or giving out any] due to low sales [or demand], how is the economy distorted?

  2. This goes back to Hazlitt's chief fallacy in Economics in One Lesson. Bad economists only see the visible cause and effect - more deficit spending among other things and at the same time their is a decrease in unemployment. The good economist sees what would have been had it not been for deficit spending. In this case, the good economist would recognize that savings has an incredibly important role in economics - much more than I've ever seen Krugman acknowledge. During the boom phase of the business cycle, thanks to fractional reserve banking, real credit is actually in short supply - the recession is where the economy tries to rebuild its former capital base. Deficit spending simply makes this more difficult by taking it out of the hands of the private sector. The focus on maximizing spending, especially in a recession, is the complete opposite of what should be done...