Skip to main content

The revival of Keynesian economics with a special Krugman twist

Here's a glimpse at our future, via the economic thought of the man who will undoubtedly have a huge influence on American economic policy over the next four years: Paul Krugman [quotes from the New York Times via Independent Political Report].

Krugman notes that consumers have finally pulled back on spending:

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

It’s true that American consumers have long been living beyond their means. In the mid-1980s Americans saved about 10 percent of their income. Lately, however, the savings rate has generally been below 2 percent — sometimes it has even been negative — and consumer debt has risen to 98 percent of G.D.P., twice its level a quarter-century ago.

Some economists told us not to worry because Americans were offsetting their growing debt with the ever-rising values of their homes and stock portfolios. Somehow, though, we’re not hearing that argument much lately.

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.

Some background: one of the high points of the semester, if you’re a teacher of introductory macroeconomics, comes when you explain how individual virtue can be public vice, how attempts by consumers to do the right thing by saving more can leave everyone worse off. The point is that if consumers cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone’s income.

So, to get this straight, Krugman's argument is that we built the current American economy by going deeply into debt as individuals in order to drive consumer spending to drive up productivity, and now that we're so deeply in debt that many of us have cut spending to pay our debts and begin saving ... we're the ones who are about to ruin the economy.

Individual virtue can be public vice.

Great concept that, and an indication of the extent to which we've gone down the path toward placing the "needs" of the State ahead of what's good for the citizens of that State.

You can tell by what Krugman prescribes to keep us out of a long recession:

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.

Let’s hope, then, that Congress gets to work on a package to rescue the economy as soon as the election is behind us. And let’s also hope that the lame-duck Bush administration doesn’t get in the way.

Unpack this just a little. Krugman is saying that save ourselves from a recession or depression that might last 4-5 years, our government [which is already $11 trillion in debt and falling further behind every day] should borrow or print more money and try to spend our way to prosperity.

The question for the good Dr Krugman would then be: when do we ever actually reduce or pay that debt, while dealing with the eventual financial debacles of out-of-control Social Security or Medicare spending? Exactly how much additional debt do we pile up for our children and grandchildren to pay when the interest payments on the natio exceed 50% of our tax revenues.

This Keynesian approach of deficit spending to fund government stimulus is only (even barely) justifiable in economic terms when there is a reasonable expectation that later economic growth will allow the accumulated debt to be effectively reduced to a smaller segment of the economy.

Given the specter of global warming, or the end of cheap oil, or a variety of other factors, that isn't even a vaguely responsible projection.

Think about it this way: Dr Kurgman and his followers can be thought of as either (a) generals preparing the fight the last war [in this case, the Great Depression]; or (b) being in denial that their poor spending habits have gotten them into this situation and that it will require different behaviors to get them out.

The bubble created by the Federal Reserve, deficit spending, and just all-out greed on too many parts is going to collapse. It's going to hurt, and the longer we avoid dealing with it realistically in an attempt to postpone that pain, the worse it will be.

Robert Heinlein had a saying that covers this: Never put off a trip to the dentist.


Wow, there is really much useful info here!

Popular posts from this blog

Comment Rescue (?) and child-related gun violence in Delaware

In my post about the idiotic over-reaction to a New Jersey 10-year-old posing with his new squirrel rifle , Dana Garrett left me this response: One waits, apparently in vain, for you to post the annual rates of children who either shoot themselves or someone else with a gun. But then you Libertarians are notoriously ambivalent to and silent about data and facts and would rather talk abstract principles and fear monger (like the government will confiscate your guns). It doesn't require any degree of subtlety to see why you are data and fact adverse. The facts indicate we have a crisis with gun violence and accidents in the USA, and Libertarians offer nothing credible to address it. Lives, even the lives of children, get sacrificed to the fetishism of liberty. That's intellectual cowardice. OK, Dana, let's talk facts. According to the Children's Defense Fund , which is itself only querying the CDCP data base, fewer than 10 children/teens were killed per year in Delaw

With apologies to Hube: dopey WNJ comments of the week

(Well, Hube, at least I'm pulling out Facebook comments and not poaching on your preserve in the Letters.) You will all remember the case this week of the photo of the young man posing with the .22LR squirrel rifle that his Dad got him for his birthday with resulted in Family Services and the local police attempting to search his house.  The story itself is a travesty since neither the father nor the boy had done anything remotely illegal (and check out the picture for how careful the son is being not to have his finger inside the trigger guard when the photo was taken). But the incident is chiefly important for revealing in the Comments Section--within Delaware--the fact that many backers of "common sense gun laws" really do have the elimination of 2nd Amendment rights and eventual outright confiscation of all privately held firearms as their objective: Let's run that by again: Elliot Jacobson says, This instance is not a case of a father bonding with h

A reply to Salon's R. J. Eskrow, and his 11 stupid questions about Libertarians

Posts here have been in short supply as I have been living life and trying to get a campaign off the ground. But "11 questions to see if Libertarians are hypocrites" by R. J. Eskrow, picked up at Salon , was just so freaking lame that I spent half an hour answering them. In the end (but I'll leave it to your judgment), it is not that Libertarians or Libertarian theory looks hypocritical, but that the best that can be said for Mr. Eskrow is that he doesn't have the faintest clue what he's talking about. That's ok, because even ill-informed attacks by people like this make an important point:  Libertarian ideas (as opposed to Conservative ideas, which are completely different) are making a comeback as the dynamic counterpoint to "politics as usual," and so every hack you can imagine must be dragged out to refute them. Ergo:  Mr. Eskrow's 11 questions, with answers: 1.       Are unions, political parties, elections, and