(I countered Peterson with Henry Hazlitt's The Failure of the New Economics, which I featured yesterday.)
So, in his post today, he repeats Keynes' silly phrase, "In the long run we are all dead," as though it had great economic value. Now, perhaps certain self-absorbed people might think that when they pass, there are no more generations, but in the real world, the present generation will hand off its economy to the generations of the future -- and in THAT long run, they will very much be alive.
Krugman uses this line to insist that we really cannot afford at the present time to get our financial house in order. We need to borrow, spend, inflate, all to give that perpetual motion machine called an "economy" enough "traction" to where it can move on its own without government spending.
Now, I would love to know what plant Professor Krugman occupies, for on that planet, spending exists to bolster production for its own sake. Indeed, spending replaces consumption, for in the Austrian paradigm, people acquire goods they believe will meet their needs by purchasing them in the marketplace. "Spending," in that view, is a purposeful activity done by individuals who wish to satisfy their needs.
However, on Planet Krugman, spending is an activity that is done for the sole purpose of keeping people "employed." It does not matter what is produced just as long as the government (or someone else) purchases it. If one steps back and takes a hard look at this paradigm, one can see that it is not "economics" at all, but rather something that turns production and exchange upside down.
Now, I can appreciate Krugman's point regarding the long and short runs. He is saying that if governments do not try to borrow and spend us into prosperity, then in the "long run," there will be no opportunity at all to bring prosperity, since the economy will be in permanent doldrums. He writes:
I mean, why shouldn’t we be focused on the business cycle? We’ve suffered the worst cyclical downturn since the Great Depression; in terms of unemployment and output gaps, we have recovered almost none of the lost ground. Millions of willing workers are idle because of lack of demand; let them stay idle, and we can turn this into a long-term structural problem, but right now it is precisely a short-term, cyclical problem.When Krugman uses "demand," he means "aggregate demand," which economically speaking is a nonsensical term. There is no such thing as "aggregate demand;" Furthermore, people are trying to build up their savings precisely because they want to have some cushion for the future. If they are abstaining from some present spending, it is because of the current recession/depression.
In other words, personal cutbacks in spending are occurring because the economy is in recession; to say otherwise is to violate what Carl Menger calls The Law of Cause and Effect. Yet, Krugman and his followers continue to believe that the recession came about because people stopped spending, period.
I will go further. If governments cut back on present spending and start to get their financial houses in order, then the long run actually will hold much more promise than what will be the case if governments continue their suicidal attempts to spend resources that, frankly, we no longer have.