22 May 2012

Dog Bites Man! or, Another Klassic Krugman Kontradiction on Keynesianism

Economics, Krugman 46 Comments

A few days ago I began to doubt myself and said that after my two Krugman pieces ran this week in different outlets (still forthcoming), I would move on to greener pastures. I had become weary of pointing out every time Krugman pulled a rhetorical sleight of hand (often while yelling at what a bunch of jerks his critics were, while doing it).

But then “Dan” in the comments reminded me that with great recall comes great responsibility. Indeed, I have been reading Krugman faithfully lo these several years, and it is up to me to put a shoulder up against his forward rush. If not me, who?

Recall the debate we’ve all been having in the last few weeks over European austerity. Krugman et al. have been claiming that other governments tried fiscal austerity, and it blew up in their faces; clearly Keynesianism wins again, with flying colors. Boy oh boy, how much empirical evidence will these right-wing blowhards ignore in their quest to hurt poor people?

But then the Keynesians got some pushback. Veronique de Rugy, for example, produced a chart showing total nominal government expenditures for the past decade or so, and in all of the countries except Greece, spending in 2011 was higher than it had been in 2008. (It’s not in de Rugy’s chart, but Irish government spending in 2011 is about the same as it was in 2008, I get from eyeballing a different chart.) In France and the UK, spending had never gone down, in any year. (Recently it tapered off in the UK.)

So how did Krugman respond? Like this:

…some people who should know better are conceding the point that maybe there haven’t been big spending cuts. Yes, there have.

For the fact is that you can’t just look at spending levels to ask what is happening to spending programs. Here in the United States spending on unemployment insurance and food stamps has risen sharply, not because the welfare state has expanded, but because a lot more people are unemployed and poor. Similar effects are at work in European countries, which have stronger safety nets than we do. Also, some spending represents banking bailouts, not exactly what people have in mind when they talk about big government. [Bold added.]

Now if you go read the full post, and especially if you’ve been faithfully reading Krugman’s commentary on fiscal policy for the last year or two, it is crystal clear that he is basing the efficacy of Keynesianism on government consumption and investment spending. That’s why, when looking at Sweden, Krugman produced a chart comparing government C&I spending in the US versus Sweden, rather than looking at total government spending. Krugman is quite clearly arguing that (1) countries like the UK and Ireland are hurting now because (2) their governments cut back on C&I spending, and that is the relevant criterion, not transfer spending or bank bailouts.

Now I have been waiting for Russ Roberts or someone like him to pull out the trump card, but alas they haven’t yet. (Maybe they just like me to feel needed?) Anyway, here is Krugman in a NYT op ed from August 9, 2009. It’s going to be a long quote but I promise it is worth every clause:

So it seems that we aren’t going to have a second Great Depression after all. What saved us? The answer, basically, is Big Government.

Just to be clear: the economic situation remains terrible [and Krugman lists the problems with the employment situation–RPM]…

For all that, however, the latest flurry of economic reports suggests that the economy has backed up several paces from the edge of the abyss.

So what saved us from a full replay of the Great Depression? The answer, almost surely, lies in the very different role played by government.

Probably the most important aspect of the government’s role in this crisis isn’t what it has done, but what it hasn’t done: unlike the private sector, the federal government hasn’t slashed spending as its income has fallen. (State and local governments are a different story.) Tax receipts are way down, but Social Security checks are still going out; Medicare is still covering hospital bills; federal employees, from judges to park rangers to soldiers, are still being paid.

All of this has helped support the economy in its time of need, in a way that didn’t happen back in 1930, when federal spending was a much smaller percentage of G.D.P. And yes, this means that budget deficits — which are a bad thing in normal times — are actually a good thing right now.

In addition to having this “automatic” stabilizing effect, the government has stepped in to rescue the financial sector. You can argue (and I would) that the bailouts of financial firms could and should have been handled better, that taxpayers have paid too much and received too little. Yet it’s possible to be dissatisfied, even angry, about the way the financial bailouts have worked while acknowledging that without these bailouts things would have been much worse.

The point is that this time, unlike in the 1930s, the government didn’t take a hands-off attitude while much of the banking system collapsed. And that’s another reason we’re not living through Great Depression II.

Last and probably least, but by no means trivial, have been the deliberate efforts of the government to pump up the economy. From the beginning, I argued that the American Recovery and Reinvestment Act, a k a the Obama stimulus plan, was too small. Nonetheless, reasonable estimates suggest that around a million more Americans are working now than would have been employed without that plan — a number that will grow over time — and that the stimulus has played a significant role in pulling the economy out of its free fall. [Bold added.]

So notice some interesting things about the above:

(1) First and most obvious, when the argument went his way, Krugman was more than happy to point to automatic stabilizers as being crucial in a discussion of the efficacy of Keynesian policy.

(2) Krugman next listed the bank bailouts as part of the broader package of “Big Government” that rescued the economy. So when he said a couple weeks ago in reference to the Irish bailout “not exactly what people have in mind when they talk about big government,” he must not have included himself in the category of “people.” (See? Krugman must be a shape-shifting lizard after all.)

(3) Krugman said of the Obama stimulus package that it was “probably least” important of the three main reasons for why Big Government averted the second Great Depression. So again, when it looks like automatic stabilizers and bank bailouts go hand in hand with an improved economy, Krugman is happy to say they are the primary things to focus on. But when automatic stabilizers and bank bailouts go hand in hand with a double-dipping economy, now Krugman says they aren’t what people mean by “big government,” and the thing to focus on is true stimulus spending.

Finally: for those who wonder why “my side” obsesses over Krugman so much, it’s because of stunts like this. He pulls this kind of thing a lot. He takes both sides of an issue, either one of which is defensible by itself, but then impugns the motives (“people who should know better”) of the people who happen to be on the other side, that day of the week.

Incidentally, if you want to see Keynesians take up these issues (responding directly to me, in part), here is “Lord Keynes” and here is Daniel Kuehn.

46 Responses to “Dog Bites Man! or, Another Klassic Krugman Kontradiction on Keynesianism”

  1. rayray says:

    All their last names start with a “K”. I think it’s all the same person.

  2. Major_Freedom says:

    Excellent blogging.

    I laughed out loud when Krugman said that government spending isn’t what we should be looking at, but rather government consumption and “investment”. Not just because of the blatant no true scotsman fallacy associated with that, and not even because it totally contradicts the entire Keynesian framework, but rather because he doesn’t grasp that all government expenditures are really consumption expenditures. They are all consumption expenditures because none of the expenditures are self-sustaining. The private market has to support ALL of it. These projects aren’t made for the purposes of bringing in subsequent sales revenues. Once the expenditures are made, that’s it, the money is gone. In order to repair or replace and goods as they are used up, as they erode, a fresh new outside source of funds is required, and in the government’s case, it is taxation and the printing press, which of course is also at the expense of the private sector.

    Even if government projects are elaborate, sophisticated, long lasting, and big like the Hoover dam, it doesn’t matter. They are all consumption activities because none of them are designed to recoup expenditures and all will eventually be used up without a fresh new set of outside funds to maintain them.

    But let’s suppose for the sake of argument that some government spending really is “investment.” Just look at what the implication of what Krugman is saying now. He is saying that the only government spending that “stimulates” private citizen’s lives, are A. Consumption activity of governmental employees, and B. Infrastructure projects.

    In other words, only when the state consumes resources produced by the private sector and introduces new infrastructure projects financed by the private sector, is government “stimulating” the private sector. Everything else is not “stimulative.” In other words, only when the state GROWS is the state stimulating the economy. If the state did not start any new projects, and only kept the ones they had, and only spent money to stabilize aggregate demand and whatnot, you know, in accordance with ACTUAL Keynesianism, then according to Krugman, that’s not “stimulative.”

    Does anyone else see the absurdity of this? By his account, if I merely consumed your production, and took your money to finance my own projects that could only benefit “the majority”, I am supposedly helping you in a way that you would be worse off if I didn’t do what I did. If I didn’t consume at your expense, if I didn’t start new projects at your expense, then I am not helping you!

    Where does PRODUCTION enter the picture in Krugman’s fantasy world? When it runs out of course, then he’ll know who actually benefits who.

    Krugman isn’t an economist, heck he isn’t even a Keynesian. It is clear Krugman is just another run of the mill, dime a dozen statist. Did the Swedish bankers give him the non-Nobel so that we’d waste time dealing with this putz. or what?

    • Anonymous says:

      Geez, bub

      I laughed out loud when Krugman said that government spending isn’t what we should be looking at, but rather government consumption and “investment”.

      Laughter is your nest argument against this? Geez.

      You idiot.

      • Major_Freedom says:

        I didn’t say it was my argument against it. I said I laughed out loud. Why? Because it was hilarious.

        Geez.

      • Richie says:


        Laughter is your nest argument against this?

        Um, did you not read the rest?

  3. Dan says:

    (2) Krugman next listed the bank bailouts as part of the broader package of “Big Government” that rescued the economy. So when he said a couple weeks ago in reference to the Irish bailout “not exactly what people have in mind when they talk about big government,” he must not have included himself in the category of “people.” (See? Krugman must be a shape-shifting lizard after all.)

    Lol! See, how can you possibly even consider denying us this kind of golden material?

  4. Yosef says:

    You know those tangled up things that a psychologist gives you as a test to see if you can untangle it…

    So, Krugman says that automatic stabilizers and bank bailouts helped stave off Great Depression 2: The Legend of Curley’s Gold Standard. That is, while it wasn’t enough (according to him) to actually get us of of the problem, it meant that things were not as bad as they would have otherwise been. That is, automatic stabilizers helped from things being really bad, but did not help in and of themselves. As for the bailouts, I think Krugman’s point was not that they were stimulative or Keynseian, but that letting the banks fail would have been catastrophic.

    So, automatic stabilizers and bailouts help things from getting worse, but don’t make things better. By contrast, government consumption and investment (according to him) actually can make things better, and it is exactly this which the Europeans have cut.

    There, has it be untangled? Am I sane?

    • MamMoTh says:

      That was easy, wasn’t it?

      • Richard Moss says:

        But, Yosef didn’t mention sectoral balances….

        • MamMoTh says:

          He just untangled Krugman’s points (I guess, I didn’t read Krugman) that made no reference to sectoral balances.

          • Richard Moss says:

            The sectoral balance comment was meant as joke. You have been presenting it as the explanation a lot lately.

            Anyway, I am not sure how Yosef “untangled” Krugman. To do so, I think one would have to at least read Krugman as rejecting “stabilizers” as an important part of stimulus and recovery back before his recent post on de Rugy. I don’t think he did that.

    • Major_Freedom says:

      That is, automatic stabilizers helped from things being really bad, but did not help in and of themselves.

      This is tortured logic.

      If automatic stabilizers prevented a fall, then they must have helped in and of themselves.

      • Yosef says:

        Major,

        I don’t argue that it’s tortured logic, Krugman is a tortured soul. (I thought my comment about psychologists and tangled things made that point)

        Still, something can prevent a fall without helping to rise back back. Let’s say stabilizers stopped the bleeding, but didn’t give the patient an infusion or cured the illness.

    • Richard Moss says:

      Yosef,

      Interesting point, but it is not clear to me in the 2009 quote that Paul Krugman is writing that only the ‘stimulus’ can bring about a recovery.

      In that quote he notes how important the automatic stabilizers and bank bailouts were in were in preventing a replay of the 1930’s, and then follows this with;

      “Last and probably least, but by no means trivial, have been the deliberate efforts of the government to pump up the economy”

      It’s not clear to me that he is writing that only the stimulus is required to “pump up” the economy from where it is now thanks to stabilizers and bailouts. One can fairly read that to mean that he is including it along with stabilizers and bailouts as a significant but less important means of stimulating the economy.

      I also think Dan Hewitt’s comment below and comments in previous threads are important here. As he notes, Dr. Krugman has previously written that taking money from people who are more well off and giving it to people who are less well off (e.g. through automatic stabilizers) will help stimulate the economy.

  5. Daniel Hewitt says:

    More evidence that Krugman used to consider transfers stimulative:

    If this description is correct, the stimulus bill will be a real disappointment. As I pointed out in an earlier post, economic theory — Milton Friedman’s theory! — suggests that if we want stimulus funds spent, they should go to people in temporary economic difficulty who are likely to be liquidity-constrained. But it appears that most of the measures that would do that — benefits to the unemployed, food stamps, aid to state and local governments — are being bargained away. Even the tax credit is apparently not fully refundable, so those who need it most, and are most likely to spend it, won’t get the full amount.

    http://krugman.blogs.nytimes.com/2008/01/24/stimulus-disappointment/

    • von Pepe says:

      Nice catch Daniel Hewitt.

      I’ve said this before, but no way krugman can get out of this, right?

      “…benefits to the unemployed, food stamps, aid to state and local governments”

  6. Nikhil says:

    Bob, never stop. Only you can provide the insightful analysis that most of us untrained readers miss. We need you!

    • MamMoTh says:

      ha, ha! you nearly got me.

      • Jason B says:

        I don’t post often, but I read this blog regularly. In fact, I read almost every post made on this blog everyday for the past several years. Of the plethora of posts I’ve read authored by you I have yet to be convinced, even for a second, that you know what the hell you’re talking about.

        • MamMoTh says:

          that’s your problem, not mine

  7. Daniel Kuehn says:

    Some thoughts – not entirely new – I’ve shared them on my blog, comments here, and in emailing you recently about it Bob:

    1. First, as you know I don’t think he ever said that automatic stabilizers weren’t part of stimulus. He’s talked about them explicitly many times before. What he said in the recent post on Ireland (quite explicitly, in fact, which is why I’m surprised you’re taking this line) is that the change in welfare and social insurance spending is not the result of an expansion of the welfare state. It’s the same welfare state we had a decade ago, just doing what it does during recessions (there are a few exceptions where the welfare state has expanded… CHIP, and the TANF job subsidy comes immediately to mind for me – but he’s basically right that the welfare state has not expanded). I’m still not seeing where he says that automatic stabilizers are not stimulus, but I think you and I have agreed to disagree on this.

    2. The bailout: excuse my all-caps but OF COURSE THE BAILOUT HAS BEEN ESSENTIAL TO THE PREVENTION OF A DEPRESSION! I agree with Krugman – something like a Swedish model might have been better for dealing with the banks. But we did what we did and it was far better than doing nothing. Here’s the thing, Bob – not every policy in a recession that Keynesians think is good policy is thus a “Keynesian policy” or “fiscal stimulus”. I think cleaning up the Potomac river is good policy too, but that doesn’t mean it’s “fiscal stimulus”. I think health reform is good policy but that doesn’t mean it’s “fiscal stimulus”. Social Security in the 1930s was a fantastic policy, but that was actually contractionary at the time! Not every policy a Keynesian considers good is a “Keynesian policy” in the sense we traditionally think about it. And the bailouts weren’t. You’re purchasing assets. You’re stabilizing the financial system. But you’re not buying output or giving someone else money to buy output.

    3. OK, he seems to be using “Big Government” inconsistently. My impression is he uses it to mean “active government” in the first quote and “Keynesian policy” in the second quote, and perhaps he’s referencing the fact that a lot of “big government” liberals don’t like the bailouts. This is the only Kontradiction here that seems to hold much water. This is why we think the critiques go overboard – because we think you misdiagnose the “taking two sides of an issue”.

    • Daniel Kuehn says:

      Another thing – so in this post he seems to be distinguishing between discretionary fiscal policy and automatic stabilizers that are in place whether John Boehner likes it or not.

      That seems reasonable to talk about the two separately: they’re very different things with different institutional contexts. But I don’t think he’d say that automatic stabilizers don’t have Keynesian impacts. He’s said on many occasions that they do.

    • Daniel Hewitt says:

      I’m still not seeing where he says that automatic stabilizers are not stimulus, but I think you and I have agreed to disagree on this.

      DK, the sudden focus on government consumption and investment, and ignoring transfers, when assessing how “austere” a nations behaviour has been is what is contradictory (or Kontradictory?)

      FWIW, I think you are correct about the bailouts. As I recall, Krugman said they were more of a necessity to prevent an economic catastophe. I do not recall him ever saying that they were stimulative or expansionary.

      • Daniel Kuehn says:

        He does use different measures – sometimes focusing on government purchases specifically. But he’s never said it’s not stimulative and in the Ireland post where he highlighted changes in spending from automatic stabilizers, Russ said he was not counting it! And Bob actually endorsed that rather than pointing out Russ’s error!

        He’s pointed out the fact that Germany has a bunch of good automatic stabilizers a gazillion times. I don’t understand how Bob can think he’s rejecting the idea.

        If Bob had a point-blank sentence where Krugman says “automatic stabilizers, of course, are not Keynesian stimulus”, that would be one thing. But he never seems to be able to find that sentence. It’s always Bob divining what Krugman REALLY means in other statements. Makes you wonder… maybe the simplest explanation is that there was never a contradiction in the first place.

      • Daniel Kuehn says:

        There’s a good reason to emphasize government consumption and investment, by the way – it’s got a much higher multiplier than you’d expect from temporary transfer payments. That hardly means transfer payments aren’t stimulus.

        • Daniel Hewitt says:

          DK, the use of different measures appears to be strategic!

          Do you consider these posts, which use government consumption and investment, to be misleading? Or at best, incomplete analyses?
          http://krugman.blogs.nytimes.com/2012/05/16/sweden-sweden-as-conservative-icon/
          http://krugman.blogs.nytimes.com/2012/03/03/reagan-obama-austerity/

          About the multipliers, Krugman has favorably cited Mark Zandi, who has them about the same as temporary transfers. (I am considering infrastructure spending to be government consumption and investment). Zandi’s multipliers:

          Spending Increases
          Extend Unemployment Insurance Benefits 1.64
          Temporarily Increase Food Stamps 1.73
          Issue General Aid to State Governments 1.36
          Increase Infrastructure Spending 1.59

          http://www.economy.com/mark-zandi/documents/Small%20Business_7_24_08.pdf

          • Daniel Kuehn says:

            I think you’re reading way too much into it.

            I looked at some Sweden total spending data and the same story seems to fall out: http://www.factsandotherstubbornthings.blogspot.com/2012/05/krugman-and-european-stimulus.html

            If you look just at the federal government, as Bob does, it looks a lot like the U.S. was more stimulative, but the total government picture looks pretty comparable. So I’m not sure he was trying to be strategic there.

            If you’re comparing presidents and Congresses, I imagine part of the point is also that the transfer payments don’t really operate according to Congressional or Presidential discretion. They tell you more about how deep the depression is than they tell you about presidential choices – that probably has something to do with the choice on the Reagan post.

          • Daniel Kuehn says:

            You are absolutely right on the multiplier point. I’m not sure why I wrote that. I said to Blackadder in the other post that I’d expect the multiplier to be similar too.

            I think I was crossing wires with the multiplier differences between taxing and spending (the deficit vs. total spending point). My mistake.

            • Ken B says:

              “My mistake.”
              I’m pretty sure you just violated a FreeAdvice house rule here.

              • Joseph Fetz says:

                You do realize that Bob has always admitted when he was wrong. He’s even posted it loud and clear. Luckily, he isn’t wrong too often.

              • Bob Murphy says:

                Yeah it’s pretty funny coming from Ken B of all people. “When I’m not correcting Steve Landsburg on measure theory, I like to tell Bob’s readers all about the mindset of the Christian.”

              • Joseph Fetz says:

                Haha! Yeah, I don’t really debate too much anymore, but I do like to read the comments, and you just nailed it.

              • Ken B says:

                Yeah, tell me this isn’t a blog prone to lots of long screedy “I wuz never wrong” postings. Better yet, tell LK and MF.

              • Bob Murphy says:

                Ohhh, OK my bad then Ken B. I thought you were referring to me.

                Watch me now, Ken: I MADE A MISTAKE and TREATED YOU UNFAIRLY.

              • Ken B says:

                Oh Bob, you need a rubber stamp for that it applies so often!

                No I really wasn’t thinking of you. I maintain you see your errors all too rarely on the religious threads, but I do agree with JF that when you do see you are wrong you don’t try to hide it, you ‘fess up. [Was that backhanded enough or should I try again?]

              • Major_Freedom says:

                I’ll show you my mistakes if you show me yours, Ken B.

              • Ken B says:

                “The mistakes are all there, just waiting to be made.” — Siegbert Tarrasch.

            • Bob Murphy says:

              BTW Daniel I probably can’t keep up with this stuff now, because I’ve been spending too much time on the blog and not enough on things that actually pay down my fractional-reserve mortgage. But, I wanted to say that you have been cool with this stuff the last few days. I had no problem with your big post about how you think we should measure stimulus etc. from a Keynesian perspective.

              The only thing I can’t believe you are saying, is that you don’t see how Krugman has been trying to take automatic stabilizers out of the discussion lately. Yes, you’re right that he doesn’t literally come out and say, “Social Security checks contribute nothing to GDP since 2010,” because that would obviously be a false statement.

              Instead, in a debate over whether European nations are double-dipping because they cut government spending, he is redefining “government spending” to “the scope of government programs from a philosophical perspective.” So yeah, his chart on Swedish government C&I spending versus US government C&I spending is the right chart, I’m sure–i.e. he didn’t make up numbers–but it’s not relevant to the debate.

              Back when assessing whether “Big Government” turned around the economic decline, he listed transfer payments as being more important than government purchases. Now that such a move wouldn’t give him what he wants–i.e. he wants to show the double-dipping nations have foolishly cut back–he says transfers aren’t the issue and we need to look at C&I.

              This isn’t a coincidence.

              • Major_Freedom says:

                The only thing I can’t believe you are saying…

                Oh come on, we all believe it, we all know why he is saying it, and at this stage in the game we all know that DK has shown himself incapable of doing what you expect him to do, which is call Krugman out for intellectual dishonesty.

                The ideal type DK sees in Krugman is a Jesus figure. Krugman’s sermons are music to DK’s ears that no logic or reason can shake him from considering Krugman as “untainted”. Not the high priest!

              • Daniel Kuehn says:

                MF – I’ve never once refrained from criticizing Krugman, given a legitimate criticism. Not once.

                How about you just acknowledge that there are legitimate disagreements instead of accusing me of worshipping him. I’ve never met the guy, I probably never will meet the guy. I gain nothing from thinking he writes worthwhile stuff. What could possibly be in it for me to act the way you say I act?

              • Major_Freedom says:

                I’ve never once refrained from criticizing Krugman, given a legitimate criticism. Not once.

                Well there you go.

                How about you just acknowledge that there are legitimate disagreements instead of accusing me of worshipping him.

                I will, as soon as I see you cease refraining from criticizing Krugman given a legitimate criticism, just once.

                I’ve never met the guy, I probably never will meet the guy. I gain nothing from thinking he writes worthwhile stuff. What could possibly be in it for me to act the way you say I act?

                As Rothbard called it: psychic profit.

                As I said to Murphy in another post, it’s an ideal type worship, not Krugman qua Krugman worship. You refrain from criticizing the man who closely represents the ideal type. Criticizing the person would be tantamount to criticizing your ideology, and hence yourself. To increase your psychic profit then, to avoid discomfort with your own ideology, you refrain even in legitimate scenarios like this.

                You are well known for defending Krugman even when defense is unwarranted.

          • Daniel Hewitt says:

            DK, no problem either with your exploration of what constitutes stimulus and how to measure. But I simply do not find it believable that other circumstances just happen to force Krugman to highlight consumption & investment.

        • Daniel Hewitt says:

          Thanks for your reply. I did reply right here, however the comment is awaiting moderation. But I would be interested to hear your feedback, whenever my comment gets though.

    • Major_Freedom says:

      What he said in the recent post on Ireland (quite explicitly, in fact, which is why I’m surprised you’re taking this line) is that the change in welfare and social insurance spending is not the result of an expansion of the welfare state. It’s the same welfare state we had a decade ago, just doing what it does during recessions (there are a few exceptions where the welfare state has expanded… CHIP, and the TANF job subsidy comes immediately to mind for me – but he’s basically right that the welfare state has not expanded). I’m still not seeing where he says that automatic stabilizers are not stimulus

      It’s not that they are not stimulus, it’s that he’s tacitly saying they’re not government spending. In his NYT post, he said there were large government spending cuts, then he proceeded to say don’t look at government spending, look at government C&I only.

      What else does “there have been government spending cuts” mean other than denying automatic stabilizers are government spending?

      The bailout: excuse my all-caps but OF COURSE THE BAILOUT HAS BEEN ESSENTIAL TO THE PREVENTION OF A DEPRESSION! I agree with Krugman – something like a Swedish model might have been better for dealing with the banks. But we did what we did and it was far better than doing nothing.

      Forgive my all caps and bolded words:

      OF COURSE THE BAILOUTS MADE THINGS WORSE!!!

      Letting bad investments be liquidated, and having the banks taken over by better managers, is a GOOD thing for the economy. The bankrupted banks wouldn’t have crumbled to the ground. All the offices, PCs, vaults, and probably a good chunk of employees, would still be there if the bankruptcy process was allowed to function.

      Bankruptcies are an integral aspect of healthy economies. Bank bailouts encourage moral hazard, they prolong the correction process by preventing liquidation of bad debts, they encourage more undue risky lending in the future, they cause political problems, the list goes on and on. Letting the big banks fail would have been a boon for the economy, but instead we are lagging like Japan, who also refused to let their big banks fail.

      What the bailouts did was set the economy up for an even greater crash in the future, just like the bailout of LTCM led to the banks relying on the “Greenspan put” whilst lending money to poor people to buy half million dollar homes.

      Here’s the thing, Bob – not every policy in a recession that Keynesians think is good policy is thus a “Keynesian policy” or “fiscal stimulus”.

      Of course, not, because then Keynesians would actually explicitly define what is Keynesian stimulus and what isn’t, thus subjecting themselves to possible refutation in the future if things get worse.

      It’s better to never define it, so that government spending can keep increasing and the blame can always be put on something they didn’t do enough of. “Oh yes, spending did increase, but not the “right” kind of spending, and that’s why the economy is slumping!”

      I think cleaning up the Potomac river is good policy too, but that doesn’t mean it’s “fiscal stimulus”. I think health reform is good policy but that doesn’t mean it’s “fiscal stimulus”. Social Security in the 1930s was a fantastic policy, but that was actually contractionary at the time! Not every policy a Keynesian considers good is a “Keynesian policy” in the sense we traditionally think about it. And the bailouts weren’t. You’re purchasing assets. You’re stabilizing the financial system. But you’re not buying output or giving someone else money to buy output.

      Why wasn’t increased spending to clean up the Potomac a stimulus? Why isn’t increased spending on healthcare a stimulus?

      Joe Stiglitz said that ALL government spending is “stimulus.”

      Why can’t you Keynesians agree on what is and what is not government stimulus? You’re like a bunch of chickens running around without heads.

      You seem to believe that Keynesian stimulus is consumption activity only. Either consumption activity of the state, or the state finding money somehow to give to people who will then engage in consumption activity.

      Remember about a year ago when you bit my head off when I called Keynesianism nothing but consumptionism? I remember it very clearly, because so many deny it like you do. Now here you are, a year later, saying that the only legitimate Keynesian stimulus is consumption activity. You’re something else.

      PS I’m almost afraid to ask, but how in the world is promising a supply of unproductive consumers a benefit to producers? What good does it do for me if people consume my products without them producing anything that I could buy? It’s like you believe I am benefited if someone takes my money but promises to buy the goods I sell.

      The money that is spent on consumption has to come from somewhere. If it comes from the printing press, or if it comes from taxation, that is consumption being carried out without prior production. It is therefore a DRAIN on production.

      Leave it to Keynesians to really believe in the myth that the problem of economic life is how to consume enough wealth due to misguided fears of overproduction in the free market.

      Leeches, all of you. Nothing but leeches.

  8. The Gold Standard says:

    Bob, you are one of my favorite economists, but I wonder if you aren’t fighting a losing battle here.

    When looking at Europe (and the U.S. these days), when the government is such a large part of the economy it is pretty much common sense that cuts in government spending would reduce GDP numbers, which Keynesians point to as proof that austerity hurts the economy. It doesn’t hurt the economy, it hurts GDP, which they consider one and the same.

    On the other hand, expansionary monetary policy will always help the GDP statistic since the deflator is not a sufficient measure of the impact of monetary policy. Flooding the U.S. with more dollars will increase the GDP whether or not the actual economy grows.

    To prove your point you would have to find a situation where a recession hits and that country cuts spending and allows interest rates to rise and implements zero stimulus, like the U.S. in 1920. Even then though, the statistics may look as good or better for the Keynesians. There also aren’t a whole lot of examples of that anymore, if any. Anyway, I wish you luck.

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