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Paul Krugman's Keynesian views: more snake oil
Gerard Jackson
According to Krugman saving is "a bad thing". In fact, the more Americans save the worse the economy will be. But if Krugman were right then those countries with very high savings ratios would be permanently depressed while countries with no savings would be booming. So why is it he never presents any data in support of his assertion? Is it because the statistics show that it was those countries with the highest savings rates that had the highest growth rates? Like every cultist, Krugman is extremely adverse to evidence that contradicts his beliefs.
Krugman is so bad he even makes the crude Keynesian mistake of confusing cash balances with savings. To save is, as the classical economists fully understood1, is to spend. It is, as the Austrian school explains, the process by which spending on present goods is directed to spending on future goods (capital goods) which in turn raise the future level of consumption. Without saving there can be no investment. Without investment there are no capital goods. Without capital goods there is only abject poverty. To argue that one can invest without saving is to argue that a farmer can grow crops without ever having to plant anything.
But surely an expansion of cash balances would reduce aggregate demand and therefore cause a recession? It is true that a sudden intensity in the demand to hold cash — if large enough — would induce an economic downturn. However, I have never known of a single instance where the demand to hold more money triggered a recession. In every instance of a recession that I know of a rapid increase in the demand for cash balances always followed the downturn2. The cash-balance approach also overlooks the fact that even if people did decide to hold more money in their balances the depressionary effect on output could be avoided by an adjustment in prices. But for the Keynesians price adjustments are indeed an abomination.
In addition, if increasing savings did trigger recessions then they would always start at the consumption stage of production. In fact, the termination of every boom always starts in the highest stages of production, after which the process works its way down the capital structure to the point of consumption, the exact reverse of what vulgar Keynesians argue.
Now just about everyone knows that Obama has spent huge amounts and intends to spend vastly more, far more than the US economy can stand. In the meantime Bernanke, the Fed's chief, is responsible for an unprecedented increase in the country's monetary base. So why hasn't the economy taken off instead of limping along while shedding jobs? Krugman's response is to reach for his Keynesian security blanket otherwise called the liquidity trap. According to this piece of Keynesian baloney the interest rate can fall so low that people prefer to hold on to cash.
So now we have a situation where the rate of interest is determining the demand for cash balances (once again Krugman provides no evidence to support this assertion) which is very peculiar considering that it was Keynes who argued in his General Theory that the rate of interest was determined by the supply and demand for money. Yet the liquidity trap concept reverses this relationship, which is false anyway. This is how the eminent economist Sir Dennis Robertson wittily characterised Keynes' theory of interest:
Thus the rate of interest is what it is because it is expected to become other than it is; if it is not expected to become other than it is, there is nothing left to tell us why it is what it is. The organ which secretes it has become amputated. And yet it somehow still exists — a grin without a cat. (Mr. Keynes and the Rate of Interest in Essays in Monetary Theory, London: P. S. King & Son, 1940).
This leads us to Krugman's view that government spending must compensate for any drop in private investment, overlooking the simple fact that to invest is to save. So on the one hand he attacks savings as depressing the economy while on the other hand demanding that the government take up any drop in saving. (Krugman's economics is like something from a Sprague de Camp story.)
Krugman evidently believes that if China sells its US treasuries this would promote economic growth and lower unemployment. This is ludicrous. The present economic situation is purely domestic in origin and has nothing to do with Chinese trade surpluses or purchases of treasury bills. At the root of Krugman's suggestion is the mercantilist fallacy — successfully resurrected by Keynes — that monetary expansion generates economic growth. That the Fed's criminally loose monetary policies, compounded by reckless spending, over the years is the root cause of the problem would never be considered by Krugman.
Firms will invest and hire when they see prospects of a profit. What that leftwing Obama is doing is destroying any prospects of profits by piling huge costs on to production, promising large increases in taxes and energy prices (he did say he will cause "electricity prices to skyrocket") while vastly increasing government spending and borrowing. In the meantime the Fed appears more than willing to flood the country with a tidal wave of dollars to help him out.
Reasonable people would be justified in asking whether the bullying Obama and his minions — including those in the so-called media — are trying to save the economy or whether they are waging war on it.
1Malthus' theory was more of a stagnation thesis rather than a pure underconsumption approach. This could be one of the reasons he made a point of keeping a distance between himself and the underconsumptionists of the time.
2Underconsumption due to an increase in the demand to hold money is not the same as a bank run. The former assumes that people have decided to hold a greater proportion of their income in the form of 'idle' balances while the latter is an attempt by depositors to rescue their savings from banks they think will go under.
Gerard Jackson is Brookes' economics editor
BrookesNews.Com
Monday 22 March 2010