Friday, December 30, 2011

Feed a Cold, Starve a fever

 
Op-Ed Columnist

Keynes Was Right

By
Published: December 29, 2011
“The boom, not the slump, is the right time for austerity at the Treasury.” So declared John Maynard Keynes in 1937, even as F.D.R. was about to prove him right by trying to balance the budget too soon, sending the United States economy — which had been steadily recovering up to that point — into a severe recession. Slashing government spending in a depressed economy depresses the economy further; austerity should wait until a strong recovery is well under way.
Fred R. Conrad/The New York Times
Paul Krugman

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Unfortunately, in late 2010 and early 2011, politicians and policy makers in much of the Western world believed that they knew better, that we should focus on deficits, not jobs, even though our economies had barely begun to recover from the slump that followed the financial crisis. And by acting on that anti-Keynesian belief, they ended up proving Keynes right all over again.
In declaring Keynesian economics vindicated I am, of course, at odds with conventional wisdom. In Washington, in particular, the failure of the Obama stimulus package to produce an employment boom is generally seen as having proved that government spending can’t create jobs. But those of us who did the math realized, right from the beginning, that the Recovery and Reinvestment Act of 2009 (more than a third of which, by the way, took the relatively ineffective form of tax cuts) was much too small given the depth of the slump. And we also predicted the resulting political backlash.
So the real test of Keynesian economics hasn’t come from the half-hearted efforts of the U.S. federal government to boost the economy, which were largely offset by cuts at the state and local levels. It has, instead, come from European nations like Greece and Ireland that had to impose savage fiscal austerity as a condition for receiving emergency loans — and have suffered Depression-level economic slumps, with real G.D.P. in both countries down by double digits.
This wasn’t supposed to happen, according to the ideology that dominates much of our political discourse. In March 2011, the Republican staff of Congress’s Joint Economic Committee released a report titled “Spend Less, Owe Less, Grow the Economy.” It ridiculed concerns that cutting spending in a slump would worsen that slump, arguing that spending cuts would improve consumer and business confidence, and that this might well lead to faster, not slower, growth.
They should have known better even at the time: the alleged historical examples of “expansionary austerity” they used to make their case had already been thoroughly debunked. And there was also the embarrassing fact that many on the right had prematurely declared Ireland a success story, demonstrating the virtues of spending cuts, in mid-2010, only to see the Irish slump deepen and whatever confidence investors might have felt evaporate.
Amazingly, by the way, it happened all over again this year. There were widespread proclamations that Ireland had turned the corner, proving that austerity works — and then the numbers came in, and they were as dismal as before.
Yet the insistence on immediate spending cuts continued to dominate the political landscape, with malign effects on the U.S. economy. True, there weren’t major new austerity measures at the federal level, but there was a lot of “passive” austerity as the Obama stimulus faded out and cash-strapped state and local governments continued to cut.
Now, you could argue that Greece and Ireland had no choice about imposing austerity, or, at any rate, no choices other than defaulting on their debts and leaving the euro. But another lesson of 2011 was that America did and does have a choice; Washington may be obsessed with the deficit, but financial markets are, if anything, signaling that we should borrow more.
Again, this wasn’t supposed to happen. We entered 2011 amid dire warnings about a Greek-style debt crisis that would happen as soon as the Federal Reserve stopped buying bonds, or the rating agencies ended our triple-A status, or the superdupercommittee failed to reach a deal, or something. But the Fed ended its bond-purchase program in June; Standard & Poor’s downgraded America in August; the supercommittee deadlocked in November; and U.S. borrowing costs just kept falling. In fact, at this point, inflation-protected U.S. bonds pay negative interest: investors are willing to pay America to hold their money.
The bottom line is that 2011 was a year in which our political elite obsessed over short-term deficits that aren’t actually a problem and, in the process, made the real problem — a depressed economy and mass unemployment — worse.
The good news, such as it is, is that President Obama has finally gone back to fighting against premature austerity — and he seems to be winning the political battle. And one of these years we might actually end up taking Keynes’s advice, which is every bit as valid now as it was 75 years ago.
 
A version of this op-ed appeared in print on December 30, 2011, on page A23 of the New York edition with the headline: Keynes Was Right.

253 Comments

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  1. Feed a Cold, Starve a Fever

    Not Keynesian Mantra. Mr Nobel Laureate, Oops, Dr, Oops, Paul, my main man, you, Paul Newman, Oops, Krugman, ain't no doctor, doctor, feeding cold (recession) more jobs and starving the (general) fever in EEU for severe and mandatory cuts in spending.

    The hot and angry mob, in Athens and Rome are hissing and hissing, I can't say that second hissing with letter p, replacing letter h. NYT (moral) robots shall shred my comment and feed the hungry mice. I gotta be careful.

    Humor aside, what's with your Keynesian "bing-bang-boom-boom" comical, Oops, economical Voodoo medicine? Are you a (real time) Voodoo medicine man or something?

    What the world needs now, as in this very day, is deliverance "May Allah be praised, (PBUH)" not severance (From) "Tax and Spend" Holistic, Oops, Holy Hindu Cow! What Now? heavy dose of “Age of Jacksonian Democracy?”

    Another Avatar of FDR?

    ...and I am Sid Harth@sidileaks.net
  1.  
    Dr. Krugman still neglects to account for the Keynsian influences that created the social democratic mess that is now Europe.

    Also, his view that one should sop up the Keynsian excesses in times of plenty, while correct, has rarely, if ever, been followed. Once government moneys enter the pipeline, the more necessary it becomes for the government to continue the flow since the economy will not fund the paper-shuffling jobs that the government has created and the government cannot politically survive if it does the right thing by withdrawing the dollars.
    • Peter wayne
    • New York
     
    The real problem with the global economy is the global GDP in 2007 was leveraged by Derivates to 300% of it value. At a little less than 600 trillion dollars floating around in Derivates there is not place to hide. The inventor of this financial instrument should be in jail like Bernie Maddoff.
    • Fiscal Sanity
    • Colorado
     
    We're running a $1.5T annual deficit. How much more government deficit spending do you propose as stimulus? And the notion that we're 'cutting' anything is a joke. Only in Washington, DC can you claim a cut when in fact spending more this year than last. Indeed, the Times even had an article this week outlining how futile the House republicans efforts to cut spending had been.
    • matt
    • va
     
    Does the European and Euro crisis masks a bigger one to come?
    Is the Euro as sick as the Dollar?
    It seems not. The USA have an abysmal double deficit (exterior and interior), when Europe only has an internal one.
    We have 12 bankrupt states including CA (9th economy in the world).
    We cannot rely indefinitely on foreign creditors to finance this situation.
    The day the Chinese think they have sufficiently diversified their investments to let the dollar disintegrate, Keynesian theory will just have to be shelved because there will be no money left to spend...but we will still be able to play monopoly with it!
    • Ralph
    • Chicago, Illinois
     
    If an economics major wrote a paper like this column, he would get an F.
    Dr. Krugman needs to learn a bit of humility. To draw such sweeping conclusions after only a couple of years, while ignoring everything else going on in the economy, is ludicrous.
    A few things Dr. Krugman misses:
    1. US government borrowing costs are very low right now because of the "flight to safety" and fear factor of another major economic blow up. To assume that these low rates mean that the US government can keep adding on debt, with no consequence, is foolish. Two years ago, Greece could borrow in the financial markets at almost the rate of Germany, look at them today. And in 2006, anyone with a pulse could get a mortgage, by 2008 the whole world had changed.
    2. We keep hearing from Dr. K. that "the stimulus was too small", referring to the $800 billion "stimulus" bill. But this is playing with the numbers. The government has racked up around $4 trillion in new debt over the past three years, doesn't that count as stimulus? and the Federal Reserve has expanded its balance sheet by over $2 trillion? Doesn't that count as stimulus? So if $6 trillion in "stimulus" is too small, how much is enough?
    3. And why don't Keynesians like Dr. K. ever talk about other ways to stimulate growth, aside from government borrowing/taxing/spending? what about restructuring and reforming our tax code to promote more investment? what about simplifying the ever increasing government regulations and mandates?
    • RGM
    • VA
     
    I do not disagree with the assertion that the Recovery and Reinvestment Act of 2009 was too small nor that Keynesian economics has been vindicated by our current economy - but what are the recent examples of positive outcome when a government has been able to muster the courage to abide by the Keynesian prescription for such a massive recession? Would also be interested in having the counterfactual presented. What might our economy look like now if Krugman's interpretation of Keynes' prescription had been adopted in 2008-9?
  7.  
    As always, an usual suspect, Paul Krugman, your problem is that you make too much sense.
    Keynes has not invented his approach, he only formulated an old common-sense idea,
    "Saving for rainy days...".
    Bohemian and German king, Charles the IV, in XI century, got the wall around Prague built during the depression, to put people to work. It is still called "The Hunger Wall".
    Pharaohs built their pyramids when the Nile flooded their fields, and fellahs were stucked in their huts for six months of the year.
    And other numerous historical examples of this common-sense economic behavior.

    Paul, why you don't call spade a spade, that this is a world-wide assault on what's left of social-democratic institucions, a final assault in the class war. In Warren Buffet's words, "Class war, of the rich agaist the poor....and we, rich, are winning!"
    • skeptic
    • CT
     
    Some Republicans cynically capitalize on catastrophic events by asking not what they can do for their country, but what their country can do for them and their corporate masters. The economic meltdown is seen as an opportunity to attack social programs under the guise of austerity etc. Just as they used 9/11 as a pretext for the Iraq War and for an ongoing attack on civil liberties. And now we hear right-wing war drums in search of an excuse to escalate hostilities with Iran.
  9.  
    "...the policy elite — central bankers, finance ministers, politicians who pose as defenders of fiscal virtue — are acting like the priests of some ancient cult, demanding that we engage in human sacrifices to appease the anger of invisible gods." -- Paul Krugman

    This is because the high priests consult with economists. The answer is to stimulate now with worthwhile, non-earmark projects, and simultaneously create a plan implemented later that will reduce and gain control of our deficit. The high priests are not alone in their deficit concerns; so is the average citizen. Us "average Joe's" must be convinced that we can control the deficit and that we have a will to do so. More: http://bit.ly/sSr6bO
    • Michael
    • Oregon
     
    Deficits are not as serious a concern as a high and sustained unemployment rate. If America sustains and learns to accept a 9-11% unemployment rate the ramifications will be much more severe than a sustained deficit. That said, the choice can't be as simple as either one or the other. But, focusing on deficits INSTEAD of unemployment seems pretty foolish to me.
    While the Tea Party appears obsessed with the deficit and insists on not only no new taxes, but no adult discussion of new taxes, they have earned the right to that position because they elected people to congress. The Occupy movement must do the same if they wish a national voice.
    If that movement, or any other voting block, is able to equal the Tea Party's congressional power, I hope they are not as lock-step organized and hypnotized against cross-isle discussion. Specifically, the Krugman/Keynes recommendation that deficits be addressed when economies are healthy seems wise.
    And, I'd like to add my own recommendation for long term financial solvency. Avoid foreign wars.
    • Ken Winkes
    • Conway, WA
     
    Nor surprise here. I believe you've often accounted for the Right's apparent thickheadedness. They are the rentier class and the rentiers like to be owed money. That way they don't have to work. They like austerity in others because it means 1) that they aren't the one who will have to pay the bills and 2) they will be paid back un-debased currency.

    In short, the rentiers lend their excess money to the government that did not have the wit or courage to collect it in taxes; then they earn risk-free interest on that money, which is in turn collected from wage earners. It's not a mystery; it's, as they say on the Right, simple economics: that is, running the government like a private company to benefit only the few.
    • Bill Ireland
    • California
     
    As usual, Mr. Krugman sets up straw men and then knocks them down. No one within 100 miles of Washington is advocating "savage austerity" in the federal government. But the failure of the "superdupercommittee" proved for all time that even modest cuts are impossible with the current crop of lawmakers.

    By the way, Keynes never advocated the structural deficits that are now a chronic condition of government--state and federal.

    But Krugman has been a lone voice insisting that the problems of Europe are not a result of fiscal incontinence. Sorry, but it's clear by now that he emperor has no clothes. The century-long European experiment with social democracy is dead. The carcass will linger and rot in the streets while people walk over it pretending it's not there. But Americans will do well to note the horror that awaits if we continue on Krugman's recommended path.
    • Adam Smith
    • St. Louis, MO
     
    Krugman leaves out an important point. Even Keynes stated that governments should use surpluses generated in good times to pay off the debts incurred during downturns. Unfortunately, the U.S. government for the most part has always used surpluses to engage in even more reckless spending, primarily to buy off the middle class. This has been true under both Democrats and Republicans. The most recent stimulus has been a disaster. We are now approaching $15 trillion in debt. Even the Congressional Budget Office stated recently that this administration's recent stimulus will be harmful to the future economy.

    Keynesians need to step back from their political bias long enough to really understand that a nation cannot spend its way to prosperity. Budgets eventually have to be balanced. The nations of Europe are just now facing that painful reality.

    As far as the Occupy movement is concerned, it is losing steam and none too soon. Disrupting the Iowa caucuses shows how out of touch the movement really is. Occupiers think they advance their cause by disrupting the right of caucus goers to exercise their democratic rights. Interfering with the rights of Iowans to peaceably assemble and participate in democratic process should not be tolerated.
    • Mbakerz
    • Dallas, TX
     
    It is ironic to me that the Right likes to talk about running the government like a business or a household but completely ignores the fact that Keynesian economics does just that. In bad times, companies may run deficits (red ink) and households may borrow more to make ends meet (e.g., borrow to pay the mortgage so you don't lose your house or to put food on your table). When times are good, companies and families pay down their debt and get their economic house in order. While simplistic, this is exactly what Keynes and Krugman propose.

    The Right also doesn't seem to know (or care) that cutting government jobs adds to unemployment. Those jobs are real jobs that pay real money so people can pay real mortgages. I'm not advocating that the government "create" jobs just for the sake of jobs themselves (which I admit would border on Socialism), but people need to recognize the impact of cutting those jobs in tought times. Until the private sector can absorb the slack, you are only making the problem worse. Again, in good times, when unemployment is relatively low, you can then talk about "downsizing" government. GDP and economic multipliers don't really care whether a job is private or public sector.

    As the previous poster, Janet, said, it is like religion to them and discussing the facts about Keynesian economics does as much good as discussing Heaven or the existence of God.
    • Galt Gone
    • Atlanta, GA
     
    The 30's level of federal spending was very small compared to today and so to say that austerity was the only reason for the slump is too simplistic. Of course pumping more money into an economy produces a sugar high of consumption, but the capital is wasted on consumption and not investment or seeking better productivity. Sucking capital out of an enemic economy to go to wasteful pork barrel spending is the most short sighted of policies.

    Our financial system is based on bringing all of our future capital forward therefore endagering our future to economic morass for the time to come. Things have to readjust, prices will find equilibrium no matter how much the government tries to prop it up with our future's capital.
    • Canis Scot
    • Lost Angeles, Peoples Republic of California
     
    Kenseyian economics is nothing more than smoke and mirrors wrapped around a failed concept.

    Like the Wizard, if you take the time to look behind the curtain, you discover a failed magician frantically spinning wheels and throwing switches trying to keep the rubes from discovering that his powers are just an illusion.

    Like most of the intelligent people in the United States all I can say is go sell your trash some where else. We are done with your clap trap.
    • Mike Walsh
    • Chaska, Minnesota
     
    Dr. Krugman:

    Could it not be that some, just some, of those who are opposed to Kenseyian economics really do not have the ability to grasp the concepts involved? In other words a lack of the ability to reason on economic matters due to deliberate and cultivated ignorance or simply a lack of grey matter?
    • MJR
    • Stony Brook, NY
     
    "It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" Both parties feed at the corrupting corporate trough - and you don't need to examine the thugs and clowns of the republican party - look at Ben Nelson, Mary Landrieu, Max Baucus and so called independents like Joe Lieberman. If any fail to pull their weight for corporate interests they are smashed in the next election. Any wonder why improving conditions for the average citizen - through Keynesian economic or any type of progressive policy has been thwarted. We are at the same decision point that most Americans faced in the early 20th century -change this corrupted system or dismantle it and start again. Either choice will require a great struggle and the Occupy movement is a beginning.
    • ihelfman
    • Canton, MI
     
    Keynes was right, Mr. Krugman, but don't pick and choose his economic recommendations. For creating jobs during the last depression, Keynes also advocated tariffs and economic nationalism: "... let goods be homespun whenever it is reasonably and conveniently possible; and, above all, let finance be primarily national." Your stimulus recommendations will only float a bubble economy to create more risk-free profits for the financiers, outsourcers, military and home security folks unless the money creates productive living wage jobs in the United States.
    • Poet
    • NYC
     
    Paul -

    In our open borders global economy, U.S. Kenyesian stimulus is mainly producing jobs for low cost developing countries.

    They need jobs/economic development too,

    but how does that provide good jobs for Americans

    and reduce our government debt ??
  21.  
    Another hilarious Krugman mantra. If any of Krugman's claims were were, true the US would not have recently suffered a rating downgrade and be on warning for more.
    • Ted
    • Syracuse, New York
     
    It is really quite shocking that as we borrow 1.5 TRILLION dollars this year that you do not think that is excessive fiscal policy seeking to sustain the economy. Keynes wrote in a World where the federal government made up 2% (two percent) of the economy...now it makes up an unsustainable 22%.

    The Fed has borrowed and increased the money supply in excess of another ten TRILLION since the beginning of the recession.

    Deficit spending did not work for Japan and it will not work for us. It only prolongs the ultimate pain of the collapse of the financial system, which we are currently enduring. Can you site examples of keynesian policies leading to sustainable economic growth? No. You can only throw up your hands and state that we did nt spend enough. When is enough enough? When the economy turns around. How convenient.
    • Mike in AZ
    • Az
     
    Hey Krugman,

    Read it and explain it away. http://news.investors.com/Article/596263/201112291827/tax-cuts-give-cana...

    Keynes is only correct in the eyes of someone that has never created anything but opinions based on models. Step away from the computer and try to make a living doing honest work. Maybe you'll realize government is not the answer.
    • dickrich2
    • New York City
     
    Simple arithmetic test. Calculate interest on our current debt of $16 trillion and projected $20 trillion

    a. at 3% interest
    b. at 4% interest
    c at 5% interest

    Now. Don't we have a 'fierce urgency of now"?
    • E.L. Williams
    • Grand junction,Co
     
    Oh and by the by, when it comes to Bill Clinton and everyones high opinion of him and his wife.
    Alls I have to say is I dont trust anyone who looks me dead in the eye and flat out lies and gets caught doin it!!

...and I am Sid Harth@sidileaks.com
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