Streetwise Professor

February 10, 2010

Slaves of Some Defunct Economist

Filed under: Economics,Politics — The Professor @ 2:57 pm

Via Economist’s View, a couple of articles that demonstrate how some people are, as Keynes said, the slaves of some defunct economist.  The economist in this case being, ironically, Keynes himself.

First Robert Reich:

1. Government spending needed to offset the continued reluctance of consumers and businesses to spend. You don’t have to be an orthodox Keynesian to understand that as long as the private sector is deleveraging, the public sector has to borrow and spend in order to keep the economy moving forward.

No, you don’t have to be an orthodox Keynesian.  That is a sufficient but not necessary condition for believing such silliness.  Note the confident, imperative language: “As long as the private sector is deleveraging, the public sector HAS TO BORROW and spend.”   In other words, people individually have decided to reduce their leverage, so the state has to borrow on their behalf, promising to use compulsory means to repay said borrowings.  Yeah?  Says who?

Wouldn’t it be wise to ascertain just why people want to adjust their leverage before rushing out to undo their choices using fiscal policy?  Doesn’t it raise at least a few doubts to recognize that since one of the contributors to the financial crisis was arguably excessive household and corporate leverage that deleveraging might be a good idea, not to be reversed by government fiat?  It’s hard to imagine a more succinct expression of the we-know-better-than-you-idiots mindset that lies at the root of the stimulus tribe.

And the chief of that tribe is, of course, Paul Krugman, who said this:

What has been lost above all, Krugman argued, is an appreciation of ideas developed in the 1930s — most notably the economist John Maynard Keynes’s broad view that in certain circumstances government spending is the best tool to instigate an economic recovery. [Revolt, Paul: All you have to lose is your chains!]  At a time when interest rates are minimal and can hardly be lowered to spur private investment, Krugman argued, Keynesian thought is especially vital, despite some loud arguments to the contrary.

. . . .

“In the 1970s, a lot of schools stopped teaching old-fashioned macro,” said Krugman on Friday. “MIT being one of the places you could still get it.” (In addition to receiving his PhD at MIT, Krugman taught at the Institute in two stints, totaling more than 15 years, between 1980 and 2000, when he moved to Princeton.) As a result, he added, “What’s striking is how many people there are in their 30s and 40s in the profession who haven’t encountered this idea, that fiscal stimulus helps.”

Uhm, people stopped teaching it because it didn’t work.  And “this idea, that fiscal stimulus helps” is, just that: an idea, and not one that has received empirical support.   Indeed, most of the empirical evidence goes the other way: fiscal stimulus either has no effect, or is actually counterproductive.

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1 Comment »

  1. Craig,

    Are you aware of Modern Monetary Theory? Trust me, I despise Krugman and most of the MMT people do as well. However,it does make sense that Gov spending and Private saving are ying and yang it seems to me. The money people want to save needs to come from somewhere. IT will either come very slowly and via automatic stabilizers like unemployment or it will come from a well designed stimulus like a payroll tax holiday. We are in a fiat system. So stimulus is good. Obama’s stimulus (with cover from partisan hacks like Krugman) which favors cronies like bankers and is slow as well is bad. More here.

    Comment by Matt P. — February 10, 2010 @ 6:50 pm

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