As usual, I have been saving links waiting to write a piece de resistance. Instead, I’ll give hors-d’ouevres….
==> In this post Scott Sumner riffs on a recent Krugman post. Did you have any idea that Sweden ran a budget surplus of 2% of GDP in 2011? Me neither. Reading Krugman certainly did give me any reason to suspect that. Krugman had produced a chart and implied that the United States was engaged in more austerity than Sweden. Go look at his post. He calls it “spending side austerity” presumably to cover his bases. But it’s not like he says, “Oh, admittedly, Sweden is running a budget surplus, but I’m saying that’s because of their loose monetary policy which has boosted revenues and allowed them to reduce transfer payments…” No, none of that. He just implies that conservatives are insane, puts up an irrelevant chart, and then gives a very misleading analysis of it.
==> Sumner’s fun with Krugman is in line with Russ Roberts’ sarcasm from a week ago (HT2 von Pepe). The big picture is that in order to make the European situation fit his rhetoric, Krugman has decided to reclassify the relevant item as being government spending on consumption and investment, as opposed to all government spending (including transfer payments). That’s the trick he pulled to try to paint Sweden as being more profligate and “Keynesian” in the slump than the US, even though Sweden is currently running a budget surplus (or at least did in 2011). And he earlier did it in order to impugn the chart that Veronique de Rugy had assembled. (And I use the verb “impugn” with conviction. Go read how Krugman bit her head off, for having the audacity to chart a bunch of government spending figures in a debate over government spending.) Here’s a good summary of Krugman’s new rhetorical trick, in his own words:
…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.
And here’s how Russ responded:
I get it. An increase in spending that doesn’t reflect a desire for bigger government but instead reflects automatic stabilizers, say–well, that’s not a spending increase. It’s the intention that counts when you evaluate the impact on aggregate demand.
Silly me. I didn’t realize that in the Keynesian model it isn’t government spending that affects aggregate demand, but only certain kinds of government spending. Krugman goes on to show that much of the increase in spending in Ireland is due to bank bailouts and increases in transfers because of the “dire state of the Irish economy.” But I thought those transfers were supposed to stimulate the economy. Joseph Stiglitz taught me that it doesn’t matter what government spends money on, it’s all stimulus. And when Krugman was touting a two trillion stimulus package, I don’t remember hearing the part about making sure it was pushed through with the right kind of spending and the right kinds of motives. Who knew that government spending only stimulates when it springs from a desire for bigger government?
==> Last point I want to make: After seeing the actual spending figures (that de Rugy had compiled), my confidence in my own position went down. In other words, the European governments had slowed or reduced their nominal spending more than I would have guessed.
The irony here is that I was only really familiar with the UK’s figures, and that was the one Krugman had been harping on (saying the UK’s double dip was the death blow to austerity). I saw that the UK spending at best had merely tapered off, and so I assumed that other states (except Greece and Ireland) had probably just cut the rate of growth. I was actually surprised by how many had lower total nominal spending levels in 2011 than in 2010.
So I think Krugman should have simply said, “Yes, this is too austerity, spending went down. Now are you conservatives trying to say, ‘Oh it wasn’t big enough’? Are you kidding me? You didn’t like it when I said the same thing about the Obama stimulus package, so don’t you dare try to pull that move on me, now.”
That would have been a decent move for him to make. Instead, he throws up this nonsense point about the composition of spending. That issue could conceivably be relevant when evaluating claims like “Obama is a Big Government Man who grew the welfare state,” but it’s hardly relevant to evaluating whether demand-side policies are good at restoring economic growth.
Just to warn you, kids, I have a double shot of Krugman critiques being published next week in different outlets. After that, I really think I have to stop jumping up and down every time Krugman says something ridiculous and incredibly misleading. The novelty is wearing off.
UPDATE: David R. Henderson has some good thoughts on all this, too. He points out that whenever the debate came up over extending unemployment benefits, Keynesians touted the benefits to stimulating demand.