Consulting by RPM || Free Advice Blog

Another Krugman Kontradiction?

Free Advice reader Matt Flipago tips us off to this Paul Krugman appearance on the Colbert Report. Start it around the 4:00 mark, and you will see Krugman explicitly say that the Great Depression was ended by the federal jobs bill public works program known as World War II.

Forget the sheer horror / craziness of that view; after all, most people think that, so we shouldn’t hold Krugman to a higher standard than the cashier at Starbucks. What is infuriating about this, is that when Robert Barro ran regressions to measure the multiplier of government spending during World War II, here is what Krugman said:

As I’ve already pointed out,the prospect of a Keynesian stimulus is having a weird effect on conservative economists, as first-rate economists keep making truly boneheaded arguments against the effort.

The latest entry: Robert Barro argues that the multiplier on government spending is low because real GDP during World War II rose by less than military spending.

Actually, I’ve already taken that one on. But just to say it again: there was a war on. Consumer goods were rationed; people were urged to restrain their spending to make resources available for the war effort.

Oh, and the economy was at full employment — and then some. Rosie the Riveter, anyone?

I can’t quite imagine the mindset that leads someone to forget all this, and think that you can use World War II to estimate the multiplier that might prevail in an underemployed, rationing-free economy.

Now as (almost) always with Krugman, this isn’t quite a literal contradiction. But note what Krugman is doing: He wants to take credit for WW2 military spending in ending the Great Depression. Robert Barro then looks at this period and actually runs neutral econometric analysis, and finds that the measured multipliers on government spending in this “classic” example of a pump-primed recovery, are much lower than the numbers being used by the Obama administration (and Krugman) when discussing the benefits of stimulus today.

In response, Krugman goes nuts at such boneheadedness and can’t understand why anybody thought World War II was supposed to be an example of the economic benefits of stimulus spending.

Now on Colbert, when asked why the government should extend unemployment benefits for purely economic reasons (i.e. not to alleviate suffering), Krugman matter-of-factly says it’s because that’s how we got out of the Great Depression.

Again, this isn’t quite a contradiction–Krugman could say, “Yes it ended the Depression but the measured multiplier was lower than it would have been in peacetime”–but that’s a pretty subtle distinction to use when calling someone else a bonehead. And of course, the whole point of Barro’s empirical exercise was to subject the Keynesian model to a fact-check. Krugman can simply assert that government spending would have a bigger effect without government rationing etc., but that’s the result of his model; Barro’s model would say the opposite. So Barro was trying to introduce some actual evidence (this is the point that Tyler Cowen made on their debate).

I am not making this up–and if any Keynesians are reading, please correct me–but Krugman et al. cannot point to A SINGLE EXAMPLE of a successful, demand-priming episode of government spending. In contrast, the pro-austerity economists can point to at least a handful of cases where cutting the deficit led to econometrically measurable growth. That doesn’t prove anything, of course, but it is very ironic in light of how “scientific” Krugman et al. think they are.

Last point: If you want to see (in my opinion) the most succinct demolition of the World-War-II-ended-the-Depression argument, check out my book.