Krugman's Keynesian Cash Con

In the Keynesian system, spending IS demand, and the more spending, the more demand, and the more demand, the more production to meet the demand. There is a nice logic to the system, which is why it has a widespread appeal.

Economics, however, looks under the surface to deal not only with issues of causality, but also to take apart that which seems to be true and to ferret out those things which others taking a superfluous view have missed. For example, the typical "man on the street" believes that the value of, say, gasoline is derived from the value of crude oil and the various aspects of cost of production.

Thus, when the U.S. Government slapped price controls on domestic crude oil in the name of making it less expensive to create gasoline, the typical politician, journalist, and Keynesian economist, as well as the "man on the street," believed that was supposed to be the case. It was as though the Marginalist Revolution of 1871 and the development of Neoclassical Economics had not happened, that Alfred Marshall's "Derived Demand" of the factors as well as Carl Menger's important insights never existed.

I say this for two reasons. First, much of what Krugman writes is in the line of the discredited "Cost of Production" Theory of Value. Here is a guy who along with other "liberal" economists during the California electricity crisis of a decade ago (brought about by price controls levied by California authorities) declared that the way to "solve" the problem was...more price controls. (He even said that price controls would increase the supply of electricity, which even for Krugman is an amazing thing in its repudiation of Neoclassical value theory.)

Second, in recent commentary, Krugman has turned to the situation of so-called "corporate cash" in which banks and corporations are making paper profits, but holding onto large sums of money. Now, I have no problem with the numbers he is using, and I have no doubt that banks are not loaning out a lot of their excess reserves (and Krugman hardly is the only one saying this, given Robert Higgs has written similar things and his perspective of this crisis is 180 degrees opposite of what Krugman is saying).

People can agree on basic data, but the interpretation not only of why banks and corporations are not loaning and investing long-term but also of the reason that we don't have more inflation is where the debates exist. Krugman, not surprisingly, takes the Keynesian view:

So here’s what you should answer to anyone defending big giveaways to corporations: Lack of corporate cash is not the problem facing America. Big business already has the money it needs to expand; what it lacks is a reason to expand with consumers still on the ropes and the government slashing spending.

What our economy needs is direct job creation by the government and mortgage-debt relief for stressed consumers. What it very much does not need is a transfer of billions of dollars to corporations that have no intention of hiring anyone except more lobbyists.

Elsewhere, he writes:

In fact, that idle cash has become a major conservative talking point, with right-wingers claiming that businesses are failing to invest because of political uncertainty. That’s almost surely false: the evidence strongly says that the real reason businesses are sitting on cash is lack of consumer demand. In any case, if corporations already have plenty of cash they’re not using, why would giving them a tax break that adds to this pile of cash do anything to accelerate recovery?

In other words, all that needs to happen is for the government to accelerate spending, either by taking some burdens off consumers or for the government to seize and spend the money itself. That is why Krugman has reversed his view that he told other economists and me in 2004 that 70 percent tax rates "were insane," and now is endorsing higher income and corporate taxes in order for government to confiscate money and spend it.

What I find interesting is his utter dismissal of Higgs' contention that "regime uncertainty" has anything to do with corporate investment. Even if government is to confiscate most corporate profits in the future with high taxes, not to mention the imposition of more regulations, in Krugman's view, the band in "Animal House" will continue to try to march through the wall. As long as there might be "spending" in the future, corporations automatically will engage in capital investment. That is nonsense.

Furthermore, as Higgs pointed out, if banks start making loans wily-nily from their huge monetary base, we WILL see a big rise of inflation. For Krugman, inflation is good; it will "stimulate demand" and repudiate debt, and magically remove us from what he calls a "liquidity trap." Higgs, on the other hand, who is a far wiser person than Krugman ever will be, has much better insights. Uncertainty really does matter, and while Keynesians refuse to read Higgs, the man is right.

Krugman writes that we are forgetting the "lessons of 2008" as though his view were self-explanatory. He refuses to acknowledge that the housing bubble occurred because government guarantees and the infamous "Greenspan/Bernanke Put" in which the Fed promised to backstop whatever foolishness the banks engendered was a major reason that banks and other lenders ran over the cliff.

To Krugman, profits and losses mean nothing, and prices and interest rates don't send any meaningful economic signals. The regulator under the Democratic administration is All-Knowing and All-Wise, while the regulator (usually the same person) under the Republican administration is a devotee of Ayn Rand.

So, Krugman actually wants us to believe that if government confiscates large amounts of corporate cash and spends them on politically-based projects, that corporations automatically will start investing for the future. Apparently, one of those projects must be that proverbial bridge in Brooklyn that Krugman is trying to sell us.