Instead of going after Krugman's Monday NYT column, instead I want to deal -- using economic analysis -- with a recent Krugman blog post entitled: "Against Willful Denseness, The Gods Themselves Contend In Vain," in which he declares:
From the very beginning of the Lesser Depression, the central principle for understanding macroeconomic policy has been that everything is different when you’re in a liquidity trap. In particular, the whole case for fiscal stimulus and against austerity rests on the proposition that with interest rates up against the zero lower bound, the central bank can neither achieve full employment on its own nor offset the contractionary effect of spending cuts or tax hikes.He adds:
This isn’t hard, folks; it’s just Macro 101. Yet a large number of economists — never mind politicians or policy makers — seems to have a very hard time grasping this basic concept.
We’re not talking about stupid people here; clearly, there’s something about the notion that the rules for policy depend on the situation that some economists just don’t want to understand.In other words, Krugman has explained it, so it must be true, and anyone who might disagree with him either is hopelessly ignorant or, frankly, evil. There can be no honest disagreement, since to disagree with Krugman on this point is dishonest.
Understand, I am taking his words and, I believe, interpreting them fairly.This is what I learned in Logic 101 as the "appeal to authority," which here means that since the term "liquidity trap" is taught in macroeconomics, then there can be no argument against it, any more than one is permitted to claim that FDR's New Deal extended the Great Depression or that high tax rates just might squelch capital investment.
Moreover, just because Krugman appeals to the "liquidity trap" does not mean it is a legitimate economic concept. Murray N. Rothbard 50 years ago took on this doctrine and had a number of criticisms, writing:
The ultimate weapon in the Keynesian arsenal of explanations of depressions is the "liquidity trap." This is not precisely a critique of the Mises theory, but it is the last line of Keynesian defense of their own inflationary "cures" for depression. Keynesians claim that "liquidity preference" (demand for money) may be so persistently high that the rate of interest could not fall low enough to stimulate investment sufficiently to raise the economy out of the depression. This statement assumes that the rate of interest is determined by "liquidity preference" instead of by time preference; and it also assumes again that the link between savings and investment is very tenuous indeed, only tentatively exerting itself through the rate of interest. But, on the contrary, it is not a question of saving and investment each being acted upon by the rate of interest; in fact, saving, investment, and the rate of interest are each and all simultaneously determined by individual time preferences on the market. Liquidity preference has nothing to do with this matter.Furthermore, interest rates are not low because people's time preferences have changed and they are saving more. No, they are low because the Federal Reserve System has pushed them down to artificially-low levels, while at the same time, the Fed is trying to prop up malinvestments not only here but also across the globe.
I would add the the "liquidity trap" doctrine also is based upon the economic fallacy that government essentially can do away with the Law of Scarcity by pushing down interest rates and by printing money. If one were to ask Krugman how this is possible, he would counter that there are "idle resources" (including lots of unemployed labor) that are sitting fallow because of a "lack of demand."
If one were to continue the questioning with, "What caused the 'lack of demand'?" he would answer, "Because people stopped spending." And if one asked, "Why did people stop spending," he most likely would answer, "Because of the financial crisis."
Yet, what caused the financial crisis? Malinvestments. That's right, malinvestments, those very things that Keynesians claim can be turned profitable with just a little more "stimulus" money, created the crisis in the first place. (Kind of like the housing market, which the government unsuccessfully has tried to reflate since its collapse in 2008.)
Now, that is interesting, given that malinvestment is an Austrian term, and Austrians are not supposed to know anything about economics. The idea behind "stimulus" and ratcheting up spending is that if the government spends enough money on lots of things, somehow those malinvested items will be resurrected and become profitable again. Now, why these things would supernaturally become profitable is another question, but Krugman and the Keynesians seem to believe that as long as the government is throwing money at something, sooner or later it will become a winner. (Krugman's insistence that massive government subsidies of "green energy" some day will magically transform that industry into something genuinely profitable is an example of the wishful thinking that accompanies Keynesianism.)
I also would add that the "liquidity trap" doctrine assumes that even though mutually-beneficial exchanges would be possible, individuals will act irrationally refuse to act on those opportunities. Why? "Because we are in a liquidity trap," and everyone knows that the liquidity trap overturns logic, the Law of Opportunity Cost, and probably the Law of Gravity.
My larger point is that Austrians really do have a basis for disagreeing with the Keynesian viewpoints, and the basis is grounded in logic and fundamental laws of economics. That Krugman interprets this disagreement as nothing more than yahoos wallowing in their willfulness says much more about Krugman than it does the Austrians.