President Bush imposed a so-called stimulus plan in 2008 and President Obama imposed an even bigger “stimulus” in 2009. Based upon the economy’s performance over the past five-plus years, those plans didn’t work.
Japan has spent the past 20-plus years imposing one Keynesian scheme after another, and the net effect is economic stagnation and record debt.
Going back further in time, Presidents Hoover and Roosevelt dramatically increased the burden of government spending, mostly financed with borrowing, and a recession became a Great Depression.
That’s not exactly a successful track record, but Paul Krugman thinks the evidence is on his side and that it’s time to declare victory for Keynesian economics.
Those of us who have spent years arguing against premature fiscal austerity have just had a good two weeks. Academic studies that supposedly justified austerity have lost credibility; hard-liners in the European Commission and elsewhere have softened their rhetoric. The tone of the conversation has definitely changed.
But Krugman doesn’t just want to declare victory. He also spikes the football and does a dance in the end zone.
I’m always right while the people who disagree with me are always wrong. And not just wrong, they’re often knaves or fools. …look at the results: again and again, people on the opposite side prove to have used bad logic, bad data, the wrong historical analogies, or all of the above. I’m Krugtron the Invincible!
So why does Krugman feel so confident about his position, notwithstanding the evidence? Veronique de Rugy has a concise and fair assessment of the Keynesian rationale. Simply stated, no matter how bad the results, the Keynesians think the economy would have been in even worse shape in the absence of supposed stimulus.
…the country’s economic performance of the last four or five years can hardly be described has a rousing success for Keynesian economics, at least as implemented by the administration. In fact, measured by the unemployment rate, it hasn’t been a success by the administration’s own standards. To that, Krugman says that the stimulus implemented by the administration wasn’t big enough and, as such, that Keynesian economics hasn’t been tried yet.
Veronique, by the way, points out why this argument is utterly unpersuasive by using the same logic to declare victory for markets.
But by this logic, free-market economics is doing pretty well, too: I think we can all agree that free-market economics wasn’t tried. The economy hasn’t really recovered properly. This must mean free-market economics has won.
But I think the best part of Veronique’s article is the section explaining that not all austerity is created equal. Simply stated, why expect better economic performance if “austerity” means that taxes go up and the burden of government spending stays the same?
Here’s some of what Veronique wrote on this issue.
…austerity, as defined by economists, represents the measures implemented by a government in order to reduce the debt-to-GDP ratio. Unlike Keynesians, I do not think that debt is good for economic growth, but I would prefer the word “austerity” to describe the measures implemented to shrink the size and scope of government… In other words, the important question about austerity has less to do with the size of the austerity package than what type of austerity measures are implemented. …when governments try to reduce the debt by raising taxes, it is likely to result in deep and pronounced recessions, possibly making the fiscal adjustment counterproductive. …austerity measures implemented in Europe are not the kind of austerity we actually need. In fact, the data shows that it has mostly consisted in raising taxes.
Since I’ve repeatedly made these same points, you can understand why I’m a big fan of her analysis.
Moreover, I think this gives us some insight into why Krugman may actually think he has prevailed. Simply stated, he’s comparing Keynesianism to the IMF/European version of austerity.
But that type of “austerity” – as you can see from one of Veronique’s charts – is overwhelmingly comprised of tax hikes.
Yet is anybody surprised that we haven’t seen much – if any – growth in tax-happy nations such as Greece, Portugal, Italy, Ireland, Spain, and the United Kingdom?
What we really need are examples of nations that have reduced the burden of government spending. Then we can compare those results with nations that have tried Keynesianism and nations that have tried tax increases.
Sadly, we only have a few examples of this smaller-government approach. But we get very positive results.
The burden of government spending was reduced during the Reagan years and Clinton years, for instance, and the economy enjoyed good growth in both periods.
Canada was even more aggressive about reducing the size of the state during the 1990s. Their economy also did quite well, notwithstanding Keynesian dogma.
I suspect Keynesians would respond to these examples by asserting it’s okay – at least in theory – to restrain spending if the economy isn’t in recession.*
But then how do they respond to the experience of the Baltic nations? When the financial crisis hit a few years ago, those governments imposed genuine spending cuts and largely avoided the big tax hikes that have plagued other European nations.
Now Estonia, Lithuania, and Latvia are enjoying impressive growth while the nations that raised taxes seem stuck in perpetual recession.**
So let’s recap. When nations try Keynesianism, they get bad result because more government spending isn’t conducive to growth.
When nations raise taxes, they get bad results because you don’t get more growth by penalizing work, saving, investment, and entrepreneurship.
But when nations reduce the burden of government spending and leave more resources in the productive sector, the economy recovers.
Seems like one side can declare victory and spike the football, but it’s not Paul Krugman and the Keynesians.
*I’m guessing one would be hard pressed to find any examples of modern-day Keynesians ever supporting fiscal restraint.
**Krugman tried to undermine the Baltic model of fiscal restraint by attacking Estonia, but wound up with egg on his face.
[…] sur la soi-disant austérité, mais tout ce qu'il a vraiment accompli est la démonstration que les dépenses publiques financées par l'impôt sont destructrices de richesses. Plus spécifiquement, il a présenté un bon dossier contre la version européenne/FMI de […]
[…] Paul Krugman recently tried to declare victory for Keynesian economics over so-called austerity, but all he really accomplished was to show that tax-financed government spending is bad for prosperity. […]
crisbd, they got us into this mess by following up with their very best of intentions. That the collective wisdom knew this was the path to hell was over-ridden by their desire to “help” their fellow man by pulling the levers of power in that direction. That they enriched themselves in the process was a side benefit. 😉
The problem is lack of clarity – or do I mean mendacity – about the meaning of austerity. To most governments, austerity means taxpayer austerity – higher taxes. And they don’t mean any austerity by the government itself – lower spending. see: http://www.lifestrategies.net/austerity
Yet as Dan Hannan, Conservative MEP for South East England incisively notes:
“The Keynesian thinking that dominates our governments, central banks and universities flies in the face of common sense. Most of us can see that, when you’re in debt, the answer is to spend less, not more. Most of us understand that you can’t carry on consuming without producing anything, at least not in the long term. Most of us grasp that, when inflation devalues the coin in which we’re paid, we’ve been ripped off. You need to be an economist or a politician not to see these things … You don’t see how governments can borrow their way out of debt? You’re just revealing your ignorance! You’ve had to cut back on your own spending, and you think the public sector ought to do the same? You know nothing about economics! … Still, I can’t help asking: if they’re so bloody clever, how did they get us into this mess?“
Change the “m” to a “t” and the “a” to an “o” add an “o” and an “l” = tool.
In layman’s terms,
You cannot expect better economic performance by flattening the effort reward curve. And Keynesianism does exactly that. By taking from future producers and giving to current consumers. The incentive of current consumers to produce may be stimulated by increased demand (diluted by the fact that a non-trivial proportion of stimulus helicopter money goes to buy foreign goods) but is also dampened by the consumer’s ability to buy with borrowed, i.e. unearned, money. The incentive of future producers is dampened period, because of the increased taxes needed to pay for the past unearned consumption. So you have one positive and two negatives, of sorts, leading to a net negative. A net flattening of the effort reward curve.
Also Krugman is dishonest. He is not simply advocating Keynesianism, ie. a temporary intervention in free markets. Keynesianism is just his proxy. His central goal is the *permanent* expansion of government, permanent subjugation of economic activity to collective management, permanent subjugation of economic activity to a centralized plan driven by directly or indirectly elected elites (or one hopes that they are elected at least). There are a lot of tangible and intangible benefits to being “the people’s economist” a member of that elected elite that will drive the homogenized economic plan of delusion into a new era of prosperity. The comforting dream of prosperity through mandatory collectivism always returns, albeit dressed in slightly different clothes every time. So Krugman is simply using Keynesianism as a first step to that end, hoping that the temporary intervention advocated by Keynesianism will irreversibly morph into permanent collective centralized economic management. And he is going to be one of the central managers. He is leading American prosperity to self-destruction but he right in his strategy as empirical evidence overwhelmingly suggests that voter-lemmings will fall for the comfort of his effort-reward flattening tricks and gimmicks. Voter–lemmings have been falling for these gimmicks over and over again in Europe. And sure enough, the more western world decline takes hold, the more desperate voter-lemmings will become, and the more comfort they will seek in the redistributive effects of ever flatter effort-reward curves. The decline is already on an irreversible trajectory. The early twenty first century will go down in history as the time when the prosperity of once privileged western world voter-lemmings got quickly absorbed into the world average. It is a fate of their own making, a normal human reaction towards self destruction: Stressed by competition from three billion liberating souls? Flatten your own effort-reward curves!
But redistribution, whether current or intergenerational, almost always wins at the polls and will win ever more as western world decline takes hold and voter-lemmings become ever more desperate for more redistribution. Everything will be sacrificed to the temple of denial as the western world voter-lemmings react to the rising of the emerging world by clobbering their own economic liberty. Soon all rationality will disappear, as indicated by Krugman and his increasing appeal amongst ever more desperate and declining voter-lemmings.
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One clarification: When I say redistribution from today’s consumers to tomorrows producers, there is a surprise! Unbeknownst to declining western world voter-lemmings the world is now moving at such a fast pace, that todays consumers and tomorrow’s producers are more or less the same people, the same voter-lemmings, because the bill of this distortion in incentives will come due way before most people think and before most government economists hope for. Of course, future producers will refuse to produce at the tax rates required to pay back the stimulus. Or, to be more precise, they will lack the enthusiasm to produce at the level needed to outcompete the rest of the world – and the western world will fold.
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In the end,
The central theme remains the same: Our western world prosperity and privilege is facing the existential threat and competition juggernaut of three billion emerging people who are in the process of economically liberating themselves and moving to the more natural, steeper effort-reward curves. Our voter-lemming plan to address this issue is to (guess what? ) flatten our effort-reward curves! Politicians will be more than happy to sell us our own self destruction if that means that we are willing to delegate them more power, fame and economic benefit.
re: “Sadly, we only have a few examples of this smaller-government approach. But we get very positive results.”
Though we can at least compare the rate of growth of government spending to the rate of growth of an economy (in general, not just during slow economies). It turns out that in the US and around the world, usually the faster government spending grows the slower the private economy grows, and vice versa (based on over 7 hundred data points from one data set, and using an approach that might raise some questions to deal with a larger data set, over 3 thousand points), here:
http://www.politicsdebunked.com/article-list/spendingpattern
It doesn’t address the question of cause and effect, which is a much harder issue (which it points out, and to illustrate the difficulty points out the problems evaluating claims of “stimulus” spending evidence).
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In Krugman’s April 27th blog article, “The Ignoramus Strategy,” Krugman makes five claims. There are two in particular I think that aren’t agreed upon, or at least don’t tell the full story.
They are:
“1. The economy isn’t like an individual family that earns a certain amount and spends some other amount, with no relationship between the two. My spending is your income and your spending is my income. If we both slash spending, both of our incomes fall.”
“3. Things aren’t always this way, but when they are, the government is not in competition with the private sector. Government purchases don’t use resources that would otherwise be producing private goods, they put unemployed resources to work. Government borrowing doesn’t crowd out private borrowing, it puts idle funds to work. As a result, now is a time when the government should be spending more, not less. If we ignore this insight and cut government spending instead, the economy will shrink and unemployment will rise. In fact, even private spending will shrink, because of falling incomes.”
I have trouble accepting 1 because it seems like too much of an oversimplification or at least ignores savings (I could be wrong here). I have trouble accepting almost all of 3.
Could you address these two points or point me in the direction of someone who has?
Reblogged this on That Mr. G Guy's Blog and commented:
Can we just say that Krugman is an idiot and leave it at that?