Tuesday, April 6, 2010

Some Comments on Recent Krugman Posts

According to Paul Krugman "textbook economics" teaches that in a recession, it is the duty of government to spend. Thus, when Michael Barone writes that the recent federal "aid" to state government mainly benefited unionized government employees, Krugman and the New Republic are all over this point, despite the fact that Barone is correct.

Krugman praises Jonathan Chait's attack on Barone, as Chait claims Barone is promoting "Hoovernomics." Writes Chait:
Sine (sic) it's pretty clear that Barone does not understand the theory he's arguing against, let me sum it up. Keynesian economics suggests that, in a severe recession, the government wants to pump demand into the economy through deficit spending. The federal government does this in part through "automatic stabilizers" -- during a recession, the decline in income and profits decreases tax revenue, and the increased need for food stamps, jobless benefits and other programs increases. States, however, are required to balance their budgets. Since revenues are falling and expenditures rising automatically, this forces them to cut spending and/or raise taxes automatically just to stay level. In other words, state fiscal policy has a large pro-cyclical effect, deepening the recession. The states lay off police officers, and then those officers stop going out to eat, forcing the local restaurant to lay off waitresses. Etc.

The purpose of providing aid to state and local governments is to help soften the pro-cyclical effect. Even with that aid, state government jobs have decreased by 5%, and local government jobs by 4%, over the last year.

The ideal fiscal policy during a massive economic crisis would be to temporarily increase the number of government employees, in order to soak up some of the enormous slack in the labor market. Mainstream economists believe aid to state and local governments is one of the most efficient ways to stimulate the economy. (But -- a ha! -- many economists work for universities, which are part of the public sector, so obviously they're trying to pay off the public employee unions, too.)
Well, Houston, we have a problem. First, Barone clearly is NOT advocating "Hoovernomics," since Herbert Hoover was the first president in U.S. history to have the federal government massively intervene in a downturn. (Chait believes that Hoover was a True Believer in free markets and did nothing, which means he has not read Murray Rothbard's book, America's Great Depression. Not that he really cares about the truth, anyway.)

Second, Barone is correct. The "textbook economics" really is Keynesian "economics," and just because a textbook tells us that government can bring prosperity by spending lots of money does not make it so. Chait and Krugman are people who seem to believe that government can create wealth by printing money. Not so. (According to Keynesians, government prints money and then wealth magically appears, which really is something akin to Harry Potter, not reality.)

As for Krugman's other column, "Me and the Bubble," he makes the point that the government should both artificially hold down interest rates and then regulate where the new money is going.

This is most interesting. Why does government hold down interest rates below market levels unless it wishes to subsidize those economic entities that are substandard? Yet, regulation is supposed to prevent substandard investments. So, on one end, Krugman wants people who are not creditworthy to have credit, but he just does not want them to be able to use that credit anywhere. That does not compute.


charliemax said...

Let Paul know that his theory doesn't work. The people are going to cut off spending before you loons bankrupt the country. Having the Nobel prize doesn't mean you're right, just politically correct. Krugman,Gore,Obama=Axis of Nobel propaganda.

Max said...

We all know how this one would work:
"The ideal fiscal policy during a massive economic crisis would be to temporarily increase the number of government employees, in order to soak up some of the enormous slack in the labor market."

When, in the history of the USA, was there ever such a thing as a "temporary" increase of government employees. It is a bit like the Keynsian myth that during a boom the government will use the surplus to REDUCE its deficit. This is just plain unsustainable as we have seen time and time again. So, instead of temporarily "soaking up" unemployed private sector actors, government would expand and stay that way thus shrinking the share of the private sector. I suspect this is also the ultimate ideal of guys like Krugman (as they find so much fault with the "free" market).