Monday, June 21, 2010

Spend Now and Save Later? Right

In the world of Keynesian economics, there really is no individual behavior that is purposeful. People don't "spend" because they believe that the purchase of a specific good or service will make them better off, but because they are "buying back the product" they have produced as workers.

This is what one might call circular logic, and it reminds me of the imaginary exchange that Professor Israel Kirzner used to explain the circular flow of Keynesianism:

FIRST PERSON to SECOND PERSON: Why do you eat breakfast?

SECOND PERSON: So I can go to work.

FIRST PERSON: Why do you go to work?

SECOND PERSON: So I can eat breakfast.

As I read Krugman's column this morning, I get that same sense of circularity, as he claims that we should be spending now to get the economy out of depression. Saving, he argues, can come in the future: "The responsible thing, then, is to spend now, while planning to save later."

Of course, when he speaks of "saving," he means government budget balancing, as though government were the only legitimate economic entity. In Krugman's view, government spending is a net plus; there is no real opportunity cost to borrowing and printing money. Instead, it is what Keynes called, "Turning stones into bread."

Furthermore, whatever the Congressional Budget Office presents (since Congress is controlled by Democrats) is taken as Gospel Truth:
At the moment, as you may have noticed, the U.S. government is running a large budget deficit. Much of this deficit, however, is the result of the ongoing economic crisis, which has depressed revenues and required extraordinary expenditures to rescue the financial system. As the crisis abates, things will improve. The Congressional Budget Office, in its analysis of President Obama’s budget proposals, predicts that economic recovery will reduce the annual budget deficit from about 10 percent of G.D.P. this year to about 4 percent of G.D.P. in 2014.

Unfortunately, that’s not enough. Even if the government’s annual borrowing were to stabilize at 4 percent of G.D.P., its total debt would continue to grow faster than its revenues. Furthermore, the budget office predicts that after bottoming out in 2014, the deficit will start rising again, largely because of rising health care costs.
This whole thing is predicated upon the Keynesian "solution" of massive borrowing and printing of money actually bringing about a recovery. However, what if this continues to make things worse?

He gives healthcare costs as a future problem, but what is his solution? Give the state more power:
So America has a long-run budget problem. Dealing with this problem will require, first and foremost, a real effort to bring health costs under control — without that, nothing will work. It will also require finding additional revenues and/or spending cuts. As an economic matter, this shouldn’t be hard — in particular, a modest value-added tax, say at a 5 percent rate, would go a long way toward closing the gap, while leaving overall U.S. taxes among the lowest in the advanced world.
Again, he speaks of lowering costs as being an administrative issue, as though government can simply order "costs" to be lower. That is nonsense. Costs are opportunity costs, but Krugman treats them as simply numbers that government can order to be lower, and that's that. Once again, he sees an economy simply as an administrative entity that can be controlled by fiat.

It is true that while he calls for a five percent Value Added Tax, he does hold to his Keynesian roots in saying that this is not the time for new tax increases. Yet, I have seen him writing NOTHING critical about current attempts by Congress and state governments to raise taxes, and he even has hinted that perhaps we should go back to the old rates that existed before 1981. (He told a public gathering at the Southern Economic Association meetings in 2004 -- in response to my question -- that the old rates were "insane," but he seems to have been backtracking some since then.)

So, while Krugman is being somewhat consistent with Keynesian thinking, he has not dealt with the problem of massive malinvestments in the economy, made worse by government policies. To Krugman, of course, there is only spending, so there can be no malinvestments -- by definition. There is only the administrative, fiat economy.

7 comments:

Anonymous said...

Could you provide evidence or a link showing Krugman backtracking on his statement regarding tax rates, and where he has hinted that perhaps we should go back to the rates of 1981?

William L. Anderson said...

Here is one link to a previous post linking Krugman's claim that the "old system" was great:

http://krugman-in-wonderland.blogspot.com/2010/05/krugman-once-again-contradicts-himself.html

Anonymous said...

From this you got he wants to raise top income tax rates to 70%? I guess I'm not smare enough to reach that conclusion. I mean he does say "We could have gone on with a more progressive tax system". And the merits of a more progressive tax system are debatable, but drawing the conclusion he wishes to return to a 70% tax rate is not up for debate, since he never said it.

Also, this comment is completely not true: "I have seen him writing NOTHING critical about current attempts by Congress and state governments to raise taxes".

http://krugman.blogs.nytimes.com/2010/03/11/fifty-one-herbert-hoovers/

Again, the merits of stimulus spending are up for debate, but for several months he has been critical of state cuts offsetting federal spending, so to say he has written NOTHING critical of state cuts is simply false.

Keith said...

This is the best line from the comments:

"If Dr. Krugman was an MD instead of a PhD, his prescription for an obese, diabetic, artery-clogged patient would probably be a double cheeseburger, large fries and a shake." - Frederick Singer
Huntington Beach, CA

Anonymous said...

VAT is regressive. One would think Krugman who supposedly cares about equality wouldn't propose a regressive tax.

dkuehn said...

Circular logic and simultaneous determination are not the same thing, Wayne.

There are such things as feedback loops.

dkuehn said...

"In the world of Keynesian economics, there really is no individual behavior that is purposeful. People don't "spend" because they believe that the purchase of a specific good or service will make them better off"

Again, I have to ask you as I did in an earlier post of yours - is this the version of Keynesianism they teach your students at Frostburg? If this is Keynesianism, it's the first I've heard of it.

Where do you derive this interpretation? You are aware, aren't you, that despite whatever Kirzner may have said, every Keynesian that has ever drawn breath has believed that people purchase goods because it makes them better off?