Paul Krugman: Arithmetic Has A Well-Known Keynesian Bias


 

 

Arithmetic Has A Well-Known Keynesian Bias, by Paul Krugman, in NY Times: Martin Wolf is shrill:

[W]ithout economic growth, it is almost impossible to deleverage an economy. The prime minister revels in his pre-Keynesian views. When weak demand is the immediate constraint on output, that is simply terrifying.

He’s reacting to Cameron’s statement, semi-withdrawn but not really, that what Britain needs is for everyone to pay down debt, said in obvious obliviousness to the fact that if everyone cuts spending at the same time, income must fall.

But then, this kind of obliviousness is very widespread, and my experience is that if you try to point out the problem — if you try to explain that my spending is your income and vice versa — you get a belligerent response. Y=E is seen as a political statement, which in a way it is if one side of the political spectrum insists on believing things that can’t be true.

It is truly remarkable how, in a world that looks very Keynesian, anti-Keynesian views have taken over. I do sort of understand why. Part of the story is the perceived failure of the Obama stimulus, which is seen as a refutation of Keynesianism even though those of us who took our Keynes seriously predicted that this would happen. A reader reminds me of what I said on Jan. 6, 2009:

This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan’s perceived failure, if it’s spun that way, will be placed on Democrats.

I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”

The other part of the story is the troubles of the euro area debtors. Never mind that these have nothing to do with stimulus spending, and that Spain and Ireland were actually fiscal role models before the crisis; this too is spun as somehow anti-Keynesian, rather than a reflection of the disastrous effects of imposing a nouveau gold-standard regime.

And yes, it is terrifying.

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