Short and Sweet Blog

Paul Krugman

Well, it’s finally happened.  Nobel prize winning economist, Paul Krugman, is throwing in the towel on the current crop of top politicians.  He has called the start of the Third Depression.  The hyper-rational Krugman has concluded that the G8 and G20 leaders are not about trying to save their countries or citizens through a frugal reappraisal of their economies.  Oh no, he judges that Merkel, Harper, et al., are marching to a different drummer and an anti-social one at that:

So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.

Although I am not a genius like Krugman, I believe that Keynesianism’s strength is that it addresses the economy as a dynamic whole.  The idea is that the more money that is moved (spent), the higher the incomes of the people.  Hence, in recessions and depressions Keynes prescribes a policy of forcing money to move. The problem is that when you move borrowed money through the system in a way which does not result in an increase in real wealth, you have wasted the money.  And the taxpayers still have to pay it back.  How much of the money increases real wealth?  I’m thinking that the $700 Billion stimulus bill, put together in a matter of months, probably has a lot more boondoggles than wealth creating projects in it.

It’s like the difference between borrowing $100 to buy a business tool and borrowing the same $100 to eat out.  The former increases your wealth, you are demonstrably better at making money.  The latter only makes you better off to the same extent that a patio grilled hamburger,  which would have fed you just as well, would have made you better off.  If you spent $100 to eat out and you could have served hamburgers on the grill for $10, you’re $100 in debt but only $10 better off.  Surely, the restauranteur and the waiter and the chef are better off but you’re still left in debt from the extravagance.  Keynes assumes that you’ll be better off in the long run when the money goes around.  Perhaps this is so but we’re all still in debt even though we made some money in the coming around going around merry go round. 

It can only be true that the political leaders of the largest economies on earth are sadistic ideologues if they believe that their borrowing money today is without negative economic consequences in the future and still they refuse to do it?  Are we really to believe Krugman cares more about their electorates than they do?  Is this refusal to accept purely rational Keynesianism just another example of populist anti-intellectual backlash ?  Being willing to allow “unnecessary” pain to be visited upon current voters in order to benefit those not yet alive or at least not old enough to vote is without a doubt politically difficult.  After all, it is not a political coincidence that Keynesianism, which minimizes short term pain, is the very ‘ism’ we in the US have been following since Bush and the Democratically controlled congress passed a $152 stimulus in 2007.   Krugman the intellectual simply denies even the possibility that the willingness to accept current pain is simultaneously the patriotic and responsible thing to do.  

Mr. Krugman, is it possible that the G8 and G20 leaders believe in the “new orthodoxy” of frugality because they have lost faith in the long term benefits of following Keynes?  We started with Keynesian policies in the 1930’s so it seems it’s fair to say we’re in the long run now. Keynes didn’t theoretically address the long term outcomes of continuously following his proposals over a long period since he suggested that in the good times which followed the bad ones we’d pay back the debt.  It should also be remembered that Keynes coined the phrase, “In the long run we are all dead.”   What’s happening right now in the Keynes driven economy?  Not much good that I can see other than an increased propensity to save.  The political leaders of much of the rest of the world, personally disdained by Krugman, seem to agree with my assessment of the situation. 

Keynes is Krugman’s intellectual hero.  A rejection of Keynes is in a real sense a rejection of Krugman.  Krugman obviously believes that rejecting Keynes and therefore Krugman is irrational.  The rejection of Krugman may be what he really has in mind when he calls the G8 leaders sadistic.

This entry was posted on June 29, 2010 at 1:20 am and is filed under Clash of Worldviews, Political Economy. You can subscribe via RSS 2.0 feed to this post's comments.

Tags: economics, U.S. Constitution