13 Sep 2011

A Qualified Defense of Don Boudreaux

Economics, Krugman 11 Comments

I don’t know Don Boudreaux personally, and to be honest I wonder why he writes so many letters to the editor. But I want to give a qualified defense of him, because lately our friendly neighborhood Keynesians have been calling foul (e.g. here and here).

I’m not defending the tone of Boudreaux’s stuff; of course we could all stand to be a little more forgiving to the people with whom we disagree. What I want to clarify is where we nutty, strawmen’ing free-market guys could possibly get the idea, that Keynesians think it’s ultimately consumer demand that drives a recession and then a recovery.

I’ll tell you where: Paul Krugman.

For example, it was a Krugman column that forced me to write my own piece called, “Consumers Don’t Cause Recessions.” Now, was I being unfair to Keynesians with that title? Here’s what Krugman wrote:

The long-feared capitulation of American consumers has arrived….

To appreciate the significance of these numbers, you need to know that American consumers almost never cut spending. Consumer demand kept rising right through the 2001 recession; the last time it fell even for a single quarter was in 1991, and there hasn’t been a decline this steep since 1980, when the economy was suffering from a severe recession combined with double-digit inflation.

So this looks like the beginning of a very big change in consumer behavior. And it couldn’t have come at a worse time.

Sooner or later, then, consumers were going to have to pull in their belts. But the timing of the new sobriety is deeply unfortunate. One is tempted to echo St. Augustine’s plea: “Grant me chastity and continence, but not yet.” For consumers are cutting back just as the U.S. economy has fallen into a liquidity trap — a situation in which the Federal Reserve has lost its grip on the economy.

For the fact is that we are in a liquidity trap right now: Fed policy has lost most of its traction. It’s true that Ben Bernanke hasn’t yet reduced interest rates all the way to zero, as the Japanese did in the 1990s. But it’s hard to believe that cutting the federal funds rate from 1 percent to nothing would have much positive effect on the economy. In particular, the financial crisis has made Fed policy largely irrelevant for much of the private sector: The Fed has been steadily cutting away, yet mortgage rates and the interest rates many businesses pay are higher than they were early this year.

The capitulation of the American consumer, then, is coming at a particularly bad time. But it’s no use whining. What we need is a policy response.

The ongoing efforts to bail out the financial system, even if they work, won’t do more than slightly mitigate the problem. Maybe some consumers will be able to keep their credit cards, but as we’ve seen, Americans were overextended even before banks started cutting them off.

No, what the economy needs now is something to take the place of retrenching consumers. That means a major fiscal stimulus. And this time the stimulus should take the form of actual government spending rather than rebate checks that consumers probably wouldn’t spend.

Perhaps we free-market guys can be forgiven for thinking that Krugman was here saying that the federal government needed to step in and spend, because consumers no longer could. I confess that even after being scolded by Daniel Kuehn and Karl Smith, it still looks to me that Krugman is saying that. But it’s my anti-Keynesian bias no doubt.

I have an even better illustration of exactly the kind of thing Boudreaux was attacking. In November 2008, George Will faced off against Paul Krugman on a Sunday talk show. Will said that the problem with the economy in the 1930s was low business investment, caused by FDR’s constant assaults on property rights. (I’m paraphrasing; I couldn’t get video.)

Krugman came back and said something like, “It’s pretty easy to explain why businesses weren’t investing in the 1930s: there was weak demand for their products. Why would you invest in a bigger factory if you were already operating below capacity?”

I’ve tried to find the video of this, because (as I say) it was literally the exchange between the free-market guy and the Keynesian, that Daniel Kuehn says is a fantasy of our imagination. There are plenty of blogs referring to it, but YouTube pulled the video. Unfortunately no one is summarizing the part of the exchange that interests us here, but this post comes close when it quotes Krugman as saying: “There was a collapse of the financial system which was not restored for a long time. There was a deep slump in consumer demand and therefore no investment demand so we were stuck in this trap.” (Note that there is video at that link, but I can’t get it to play for some reason.)

Assuming that’s an accurate quotation, do y’all see the work that the word “therefore” is doing in the above? This is exactly the mindset Boudreaux was attacking, and which Kuehn, Smith, and presumably other Keynesians are denying is their position.

Also, although it’s clouded by many other issues, Krugman’s “what a lazy idiot!” reaction to Barro reaffirms Boudreaux’s point, when Krugman writes:

You can see right away that [investment is] strongly affected by the business cycle: investment is high when demand is strong and firms see a good reason to expand capacity. So the best thing we could do to spur business investment would be to get a recovery going by whatever means necessary, including fiscal stimulus.

The true irony in all this, is that when Krugman smacked down George Will–by matter-of-factly pointing out that it wasn’t regime uncertainty, but rather weak consumer demand, that explained lackluster investment in the 1930s–Krugman’s colleagues and fans didn’t recoil in horror, wondering why Krugman had uttered such heresy. No, they high-fived him and said he “schooled” George Will (I seem to recall a lot of “pwn”s being tossed around too at the time).

Similarly, when Robert Barro tries to suggest that long-run policy certainty is necessary for a rebound in business investment, Krugman’s fans love it that the Great One smacked around the moronic Barro for not realizing that investment is pro-cyclical because of consumer demand. I mean duh, what could be more obvious than that? These RBC guys are so freakin’ dumb! (Not to mention evil.)

Then, when Don Boudreaux complains that Keynesians think total aggregate demand is ultimately driven by changes in consumer spending…the Keynesians can’t believe such a lazy liar would attribute such simplistic ideas to them.

So in conclusion, yes, Boudreaux was condescending in his post. But he’s not inventing a strawman. If Keynesians actually don’t believe that businesses invest less during a recession because of low final demand for their products, then you should tell one of your leading lights to stop blogging this and saying it on TV.

11 Responses to “A Qualified Defense of Don Boudreaux”

  1. PrometheeFeu says:

    It must be added that while Don Boudreaux is quite condescending and even sometimes lacking in the most basic of courtesy, I don’t remember seeing the Keynesian bloggers lash out at Krugman or Brad De Long for their insulting style. While I would rather see Don Boudreaux raise the level of the debate, it is hypocritical for Keynsians to complain too much about the tone of their opponents while high-fiving those on their side who are equally lacking in basic courtesy.

    • Cahal says:

      Actually we do quite often. EVERYONE is critical of Delong in particular, but I have seen plenty over at Crooked Timber, Naked Capitalism, Keynesian commenters at MR and those at Econospeak criticise Krugman too, though he is obviously more civil than Delong.

      I could trawl through the internet to find examples but I honestly can’t be bothered. If you really don’t believe me then I might.

      • PrometheeFeu says:

        I am quite ready to believe it. Perhaps I am not reading the right Keynesian blogs.

  2. Bob Roddis says:

    The great Robert Higgs calls it a baby toy:

    Thus, vulgar Keynesianism, which purports to be an economic model or at least a coherent framework of economic analysis, actually excludes the very possibility of genuine economic action, substituting for it a simple, mechanical conception, the intellectual equivalent of a baby toy.


    Calling it adolescent isn’t as bad as calling it the intellectual equivalent of a baby toy.

    Of course, I think it’s all a big ruse to fool the weak-minded and was purposefully intended to destroy notions of private property, contract and due process of law.

  3. Daniel Hewitt says:

    Then, when Don Boudreaux complains that Keynesians think total aggregate demand is ultimately driven by changes in consumer spending…the Keynesians can’t believe such a lazy liar would attribute such simplistic ideas to them.

    Just today Krugman said that!

    So: an overall shortfall of demand, in which people just don’t want to buy enough goods to maintain full employment, can only happen in a monetary economy; it’s correct to say that what’s happening in such a situation is that people are trying to hoard money instead (which is the moral of the story of the baby-sitting coop).


    • Daniel Kuehn says:

      Demand includes investment and investment goods, Daniel. “Demandism” is not “consumptionism”.

      • Daniel Hewitt says:

        “Demandism” is not “consumptionism”.

        That sounds reasonable enough, DK. How do you reconcile that with statements like this from Krugman? I’m sure I could find more – this is just one in particular that I remember.

        The good news from the consumer spending release is that consumers are, in fact, spending. The bad news is that they’re not saving: personal savings are now back down to 2.7 percent of income.

        This can’t go on; American households have to bring their debt levels down. And yet …

        We’re still in a liquidity trap, with Fed policy constrained by the zero lower bound. And a liquidity trap world is a paradox-of-thrift world, in which the virtuous individual decision to save more is a vice from the point of view of the economy as a whole. For now, it’s actually a good thing that consumers are behaving irresponsibly.

        So my wish is that we be made chaste, continent, and thrifty — but not yet.


        • Daniel Kuehn says:

          What am I supposed to say to it?

          Consumption doesn’t drive the Keynesian system but it’s not irrelevant to it. Nobody is saying Boudreaux is wrong because Keynesians don’t think current consumer spending would be good for employment. They’re saying he’s wrong because this is apparently all he thinks Keynesianism amounts to.

          Krugman has slipped into consumptionism before – I’ve pointed that out and criticized it on my blog.

          • Secret Agent says:

            Consumption doesn’t drive the Keynesian system

            Oh yes it does my embarrassed little Keynesian fish. It’s why arch-Keynesians like Paul Krugman keep making consumptionist statements like the one above.

            Keynesianism is consumptionism because Keynesianism does not contain any limits to how much consumption is economically viable. It holds that there is a limit to investment, and that is why you see doctrines spewing out of it like “the marginal propensity to consume”, and “the paradox of thrift” and “marginal efficiency of capital” and the notion that “technological progress thankfully and with relief enables an increase in profitable investment of capital goods that would otherwise have been impossible to invest due to a decline in profitability due to, you guessed it, a lack of adequate consumption.

            All these concepts and more are borne out of Keynesianism due its philosophical adherence to consumptionism. The principles that people hold which lead them to consumptionism is too much to get into here, but it will suffice to say that in general, it is due to a pathological fear that the economy will produce more than people are willing to or capable of consuming, and of only considering the immediate economic effects on those directly concerned and ignoring the effects on the rest of the economy.

            Paul Samuelson, the mastermind interpreter of Keynesian orthodoxy, writes:

            “No proof has yet been presented to show that the multiplier will be greater than 1. But the discussion up to now indicates how, when I hire unemployed resources to build a $1000 woodshed, there will be a secondary expansion of national income and production, over and above my primary investment. Here is why. My carpenters and lumber producers will get an extra $1000 of income. But that is not the end of the story. If they all have a marginal propensity to consume of 2⁄3, they will now spend $666.67 on new consumption goods. The producers of these goods will now have an extra income of $666.67. If their MPC is also 2⁄3, they in turn will spend $444.44 or 2⁄3 of $667.67 (or 2⁄3 of 2⁄3 of $1000). So the process will go on, with each new round of spending being 2⁄3 of the previous round.”

            “Thus an endless chain of secondary consumption respending is set in motion by my primary $1000 of investment spending. But, although an endless chain, it is a dwindling chain. And it eventually adds up to a finite amount.”

            and then

            “This shows that, with an MPC of 2⁄3, the multiplier is 3, consisting of the 1 of primary investment plus 2 extra of secondary consumption respending. The same arithmetic would give a multiplier of 4 if the MPC were 3⁄4, for the reason that 1 + 3⁄4 + (3⁄4)^2 + (3⁄4)^3 + . . . finally adds up to 4. . . . In other words, the greater is the extra consumption respending, the greater the multiplier. The greater the MPS “leakage” into extra saving at each round of spending, the smaller the final multiplier.”

            Then there is Keynes’ terrible understanding of Say’s Law, which is also brought about by consumptionist ideology, contemporary Keynesians focus on what the government can do instead of what the market should be allowed to do, and it is plain as day to see that Keynesianism is anti-productionism.

  4. RG says:

    I could say that Me + You + Condom = Love, put it in some textbooks, and say that I just need more condoms for more love, but it doesn’t necessarily follow. Any difference w/ GDP?

    • Daniel Kuehn says:

      No difference at all – anyone that makes that argument from the national income equation is making a fallacious argument.