Friday, May 11, 2012

Easy Useless Keynesianism

When it became clear in 2007 and beyond that the housing bubble was breaking up and the bills for the national spending spree were coming due, the Bush administration shifted into "stimulus" mode. (It was nice getting an extra $2,100 in my checking account, but I defied the government and paid some bills instead of buying that big-screen HD TV. Yeah, I'm a bad example to all of you.)

Barack Obama came into Washington with Big Plans For A Big Stimulus, and the Federal Reserve System has been spreading dollars everywhere. However, the economy remains mired in depression, and Paul Krugman believes he has the solution: more stimulus. Lots more stimulus.

In his recent column, Krugman claims that the problem is that we don't have enough government spending, and if we don't spend, expand the state, and employ more people as bureaucrats, our economy never will recover. Actually, if we continue to spend, expand the state, and employ more people as bureaucrats, indeed, our economy never will recover. Krugman writes:
Of course, structuralistas say they are not making excuses. They say that their real point is that we should focus not on quick fixes but on the long run — although it’s usually far from clear what, exactly, the long-run policy is supposed to be, other than the fact that it involves inflicting pain on workers and the poor. 

Anyway, John Maynard Keynes had these peoples’ number more than 80 years ago. “But this long run,” he wrote, “is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the sea is flat again.” 

I would only add that inventing reasons not to do anything about current unemployment isn’t just cruel and wasteful, it’s bad long-run policy, too. For there is growing evidence that the corrosive effects of high unemployment will cast a shadow over the economy for many years to come. Every time some self-important politician or pundit starts going on about how deficits are a burden on the next generation, remember that the biggest problem facing young Americans today isn’t the future burden of debt — a burden, by the way, that premature spending cuts probably make worse, not better. It is, rather, the lack of jobs, which is preventing many graduates from getting started on their working lives. 

So all this talk about structural unemployment isn’t about facing up to our real problems; it’s about avoiding them, and taking the easy, useless way out. And it’s time for it to stop. 
 And what constitutes "doing something"? According to Krugman, it is having governments increase their borrowing and monetary creation supposedly to start employing idle resources. Unfortunately, we are not dealing with idle resources per se; we are dealing with malinvested resources and every one of Krugman's schemes to deal with the problem only will make that problem worse.

Whether it is propping up the housing industry or creating new bureaucracies or subsidizing pet Obama-favored "clean energy" firms, the end result is expanding the malinvestments and ensuring that those still-healthy industries are unable to lead the recovery. Unfortunately, Krugman truly is stuck in 1939, refusing to acknowledge that the very things he claims will give us recovery are leading us into the abyss.

There is one more outrageous point that he makes. Earlier in the article, he writes:
O.K., there’s something I didn’t tell you: The paper in question was published in June 1939. Just a few months later, World War II broke out, and the United States — though not yet at war itself — began a large military buildup, finally providing fiscal stimulus on a scale commensurate with the depth of the slump. And, in the two years after that article about the impossibility of rapid job creation was published, U.S. nonfarm employment rose 20 percent — the equivalent of creating 26 million jobs today. 
 As Robert Higgs noted in his paper on the alleged "prosperity" of World War II, the notion that World War II was "good for the economy" and made Americans prosperous is fraudulent, period. Today, prosperity will come if Americans prepare for an invasion of space aliens.

28 comments:

Lord Keynes said...

"we are dealing with malinvested resources and every one of Krugman's schemes to deal with the problem only will make that problem worse."

Only if the fantasy Austrian business cycle theory is true; it isn't. So therefore your argument is unsound.

"As Robert Higgs noted in his paper on the alleged "prosperity" of World War II, the notion that World War II was "good for the economy" and made Americans prosperous is fraudulent, period. "

Except the US wasn't at war until 1941 - but the war mobilisation before that employed people, gave them an income, in fact raised income considerably and allowed them to accumulate savings, reducing the high levels of private debt, and allowing the drawing down of savings after 1945 to drive increased consumption and investment in the that post-war boom.

That the war mobilisation was wasteful spending is obvious, but a peacetime stimulus involving deficit spending, public works/infrastructure, useful social spending, perhaps R&D and employment programs could have been done at any point from 1930, 1931, 1932, 1933 etc. to end the US depression and unnecessarily high involuntary unemployment.

Other nations like New Zealand did in fact use a peacetime stimulus to successfully end their depression in the 1930s:

http://socialdemocracy21stcentury.blogspot.com/2011/09/keynesian-stimulus-in-new-zealand.html

Pulverized Concepts said...

Why do the Keynesians and their ideological allies never fail to bring up the policies of the Great Depression as some sort of affirmation of their ideas. It was an era of economic hardship and their prescriptions didn't make it better. Sure, eventually things did improve but giving the New Deal and the alphabet soup government agencies credit for it is mistaking correlation for causation.

Even more relevant, however, is the fact that the debacle occurred over eighty years ago, before most of the current world population was even born and in a very different time, technologically, politically and socially. We've had other financial problems during the country's history, the efforts, or lack of them, to alleviate those conditions don't seem to get the same kind of attention. Why not?

Hoodnick said...

LK Wrote:

Except the US wasn't at war until 1941 - but the war mobilization before that employed people, gave them an income, in fact raised income considerably and allowed them to accumulate savings, reducing the high levels of private debt, and allowing the drawing down of savings after 1945 to drive increased consumption and investment in the that post-war boom.

Does that mean LK that savings from the war years cause the post war boom? How does that fix in with the Post-Keynesians theory of the business cycle?

Zachriel said...

William L. Anderson: (It was nice getting an extra $2,100 in my checking account, but I defied the government and paid some bills instead of buying that big-screen HD TV. Yeah, I'm a bad example to all of you.)

Which is why tax cuts, especially those directed to those with higher incomes, don't have as large a multiplier as direct spending. Much of the recent stimulus was ineffective for this reason.

William L. Anderson said...

Ah! I knew it! I PROVED that tax cuts are bad, bad, bad!

Hey, Zachriel, I have a better idea. Why not tax all incomes at 100 percent and have government spend ALL of the money? We'll all be both equal AND rich!!

Zachriel said...

William L. Anderson: Ah! I knew it! I PROVED that tax cuts are bad, bad, bad!

Well, not necessarily. They just don't have as high a multiplier, which can be important during a contraction. Reducing a bloated government, then reducing taxes by a corresponding amount, can be very good economic policy.

William L. Anderson said...

Sorry, Zachriel. The statements are inconsistent. According to Keynesian dogma, government always has a higher multiplier than private individuals and everyone knows that the multiplier is the key to great wealth.

By the way, for all of the ballyhoo regarding the multiplier, readers need to know that the multiplier is equal to 1 over the rate of savings. Thus, the less people save, by definition, the higher the multiplier.

However, Keynes said that a multiplier of 0 would lead to lots and lots of inflation. But a multiplier of 1/0.0000001 will make us rich. It's in the math.

Jones said...

From the Higgs paper you cited...his last point:

"Which brings us to what may be the most important factor of all: the performance of the war economy, despite its command-and-control character, broke the back of the pessimistic expectations almost everybody had come to hold during the seemingly endless Depression. In the long decade of the 1930s, especially its latter half, many people had come to believe that the economic machine was irreparably broken. The frenetic activity of war production—never mind that it was just a lot of guns and ammunition—dispelled the hopelessness. People began to think: if we can produce all these planes, ships, and bombs, we can also turn out prodigious quantities of cars and refrigerators."

How is this point any different from what Krugman has been saying all along? This basically states that that WWII got the economy out of its funk through massive fiscal stimulus and created "traction" by hiring workers and increasing aggregate demand.

I see this as a ringing endorsement of Krugman's policies.

Zachriel said...

William L. Anderson: The statements are inconsistent.

Which statements? You said all tax cuts were bad, and we gave an example of when they are not.

William L. Anderson: According to Keynesian dogma, government always has a higher multiplier than private individuals and everyone knows that the multiplier is the key to great wealth.

The multiplier depends on slack in the economy.

Jones: People began to think: if we can produce all these planes, ships, and bombs, we can also turn out prodigious quantities of cars and refrigerators.

Turns out they were right. If anything, the post-WWII consumer society overwhelmed the American culture.

William L. Anderson said...

Tsk, tsk. Referring to any economic confidence that came during the war is not permitted in Wonderland. Krugman already has written against the "Confidence Fairy" on a number of occasions, so claiming that World War II boosted consumer confidence is cheating.

Keynesians assume that "full employment" always increases wealth, yet two countries that had full employment, the USA and Germany, did not create new wealth during the war, or certainly not much new wealth.

Jones said...

I'm not sure how your comment addresses what I said in the previous post.

Krugman wrote of the confidence fairy in a very specific context...which has nothing to do with fiscal stimulus.

Anonymous said...

Does Prof. Anderson publish in peer reviewed scholarly journals where his assertions (that's really all they are) can be properly vetted? Or does he just blog? I suspect blogging is much easier...

Kyle said...

Yes, and the necessary resources for these solutions would have materialized from thin air, and therefore are not subject to the pesky notion of opportunity cost. And, since we know that personal responsibilty plays no role in the efficient allocation of resources, these government programs would present no welfare loss and would obviously not constitute malinvestment.

If war mobilization is wasteful, then how can other projects which are not the result of human wants, like government sponsored r&d, not be subject to the same logic? Obviously, war spending benefits SOME, as does r & d. Both are the result of central dictates as well. What is the difference between the former and the latter? War spending itsel does include r&d for military capabilities anyway. If you concede that war mobilization is wasteful, how can other centrally planned projects escape this logic?

Mike M said...

LK said: "Only if the fantasy Austrian business cycle theory is true; it isn't. So therefore your argument is unsound."

LK made a definitive declaratory statement, suit must be true. Nothing else to see here. We can all move along. Thanks

Anonymous said: "Does Prof. Anderson publish in peer reviewed scholarly journals where his assertions (that's really all they are) can be properly vetted?"

Because peer review is the pinnacle of wisdom and the absolute final arbitrator of truth right? How well has that global warming peer process gone? Errr I mean "climate change". Peer review usually ends up being nothing more than an intellectual circle jerk for the proper political opinion of the day. I wonder what Copernicus thought about "peer review?"

Jones said...

"Peer review usually ends up being nothing more than an intellectual circle jerk for the proper political opinion of the day."

This is how those who do not get published in top journals typically console themselves at the end of the day...in the end if you cannot show some sort of empirical support for your claims, they will go to the journals(?) where Anderson probably tends to publish.

Mike M said...

I guess you’re correct Jones, because self appointed peer review intellectuals have a monopoly on truth. History never shows otherwise. Right?

William L. Anderson said...

Actually, I have been published in a number of peer-reviewed journals and last year received the university's academic award for my publications.

I'm of two minds about publications and journals. I do try to publish 2-3 papers a year, but I am not particularly enamored with journals. American Economic Review pretty much has gone to the left, and most of the other "top" journals are run by people whose viewpoints are on the left.

There is a very interesting paper by Richard Vedder in the Quarterly Journal of Austrian Economics (I believe in 2000) on escapades about publishing. Vedder is well-known as a labor economist and is well-respected in economic circles, and his paper lays out a lot of the ridiculousness of the "top" journals.

Anonymous said...

I love the trashing of peer review by know nothings. Yes, the Nobel Prize and The Proceedings of the National Academy of Sciences are meaningless, tut tut. I prefer just shooting my mouth off. And I love the climate change denialism! Too funny! Professor Anderson, I think your CV would be interesting to read. Maybe you should post it.

Anonymous said...

BTW, how is that Austrian thingy working out in Europe?

Anonymous said...

Oh, and when you receive your diagnosis of acute myelogenous leukemia (AML), all of you peer review thrashers are going to insist your oncologist treat you based on hearsay, anecdote and opinion. Yeah right.

Rick T. said...

Anonymous said: "BTW, how is that Austrian thingy working out in Europe?"

I've noticed that Krugman has started to use the word "Austerians" to mean those who support the current "austerity" policy in Europe. I put quotes around "austerity" because it isn't really austerity at all in the sense of drastically slashing wasteful spending, but rather token spending cuts at best and mainly raising taxes to pay for continued waste, a combo which naturally doesn't help the economies in question.

I wasn't sure whether Krugman created the term to intentionally confuse people with "Austrian", but there is clearly plausible deniability involved; Krugman I guess if challenged would say that Austerian is not Austrian, as it certainly isn't, but if there are idiots out there who get confused and think they are the same thing, then he is just as happy.

Anonymous here is clearly one of those idiots. Do you actually think that any government in Europe is operating on principles even remotely connected to Austrian economic theory? If so, then please don't comment here on anything until you have at least read the most elementary material on the latter, so at least you have some idea of what people are talking about.

Rick T. said...

And the same proven idiot Anonymous asserts that macro-economics is a science, every bit as much as medical research is, on the grounds that both fields have peer reviewed journals.

Perhaps then Anonymous can offer some examples, or even any examples, of macro-economics research that make use of the scientific method http://en.wikipedia.org/wiki/Scientific_method

You'll find that none exists because country A is always different than country B, and country A in the 1930s is not the same as country A in the 2010s. There are no control countries, and no experiment can be correctly replicated. That is the difference, not whether or not there are peer reviewed journals.

That doesn't mean that no economic theories can be shown to be better than others, but that can't be "proven" scientifically. Some theories are more consistent with human nature, and some are proven failures no matter how often tried. Communism, socialism, and Keynesianism so far are firmly in the latter camp.

Anonymous said...

So idiot Rick, why is there an academic discipline known as economics if it's all just a matter of opinion? I was trashing those who were trashing peer review. If peer review is useless in economics than all opinions are equally valid or vapid, depending on your biases. Next you are going to tell me you are not biased. Yeah right .

Anonymous said...

Oh and if country A and B are different at different time periods, then it would follow that any number of economic theories might apply at any given time, including Keynesian.

Zachriel said...

Rick T: You'll find that none exists because country A is always different than country B, and country A in the 1930s is not the same as country A in the 2010s. There are no control countries, and no experiment can be correctly replicated. That is the difference, not whether or not there are peer reviewed journals.

The experimental method is only one application of the scientific method. Otherwise, astronomy would not be scientific. Rather, science is characterized by hypothetico-deduction, and tests can also be made through natural experiments.

Mike M said...

Anonymous my criticism of peer review was directed at economics. Your failure is to distinguish between what peer review could be if applied honestly, (the abstract) and what it has become, mostly political demagogy (the reality).

Chris Barcelo said...

Anonymous: Oh and if country A and B are different at different time periods, then it would follow that any number of economic theories might apply at any given time, including Keynesian.

Deductive reasoning alone doesn't always allow for such an idea.

What they are trying to explain to you is you can't make a model of something as dynamic and complex as human action so therefore you can't 'plan' for it.

No doubt you are going to try to attack that so, please as suggested read at least a little on Austrian theory before you continue to insert foot in mouth. In the very least before you rile yourself up with a rejoinder think about what was said first and what it may mean.

http://www.mises.org will allow you to download FREE many books or buy them for print as well as many other resources.

Dennis said...

Just a short comment on World War II: it created an eventual labour shortage by slaughtering the unemployed.

Aside from that, Krugman attacks a straw man by claiming that Austrians are in favour of doing "nothing" about high unemployment. Far from it. Austrians would cut taxes (especially taxes on capital formation)and eliminate restrictive labour legislation that makes it uneconomical for businesses to hire new workers. Measures like that would ensure that a period of high unemployment would be brief.