Paul Krugman: Fighting off depression
iht.com
iht.com
To wit: take a look at "Baby-Sitting the Economy" (http://www.slate.com/id/1937/), an article Paul Krugman wrote in 1998. It describes a simple example: a co-op with a coupon or "scrip" currency redeemable for baby-sitting. By Krugman's own admission, this example inspired his understanding of monetary policy, recessions, and Keynesian economics. In the story, a "recession" occurs when co-op members start hoarding scrip in anticipation of future outings; the result is that the whole system freezes up; and the solution was an injection of liquidity through scrip inflation.
Exercise: discover the flaw in Krugman's analysis. Hint: consider what would happen in a real economy with hard currency by allowing the price of baby-sitting to fluctuate and by replacing "scrip" with gold. Contrast this situation with the long-run effects of the inflationary "solution" on savings and business investment incentives.
I have two predictions: the economy will continue to tank despite (or because of) attempts to "stimulate" it, and Krugman will blame the resulting depression on the stimulus being insufficiently bold---i.e., on not being Keynesian enough.
Perhaps you should make up your mind about basic economic causality before hectoring Krugman for having actually read the original texts. The General Theory is a difficult and dense book and Krugman offers a decent summary of Keynes' paradox of thrift.
If you are interested in economics, the problem with your suggestion is that by the time he gets around to discussing the paradox of thrift, Keynes has already broken claims that Say's Law forces supply and demand into equilibrium through changes to the wage level. If I remember correctly, he did this with the empirical observation that while additional wages may induce labor to enter the workforce, declines in real wages don't generally cause a decline in demand for employment.
My analysis could be mistaken, though, and I'll definitely take a look at Keynes's argument more carefully some time.
You are confusing two different types of analysis. If you had taken a (more rigorous) macroeconomics course you would have learned that there are two types of analysis: long-run and short-run. In the short-run prices are inflexible due to unions, preexisting contracts, menu costs, etc. In the long-run prices can fluctuate and recessions are impossible (we don't worry about some recession that happened in 120 A.D. for example). Keynesian economics only deals with the short run, and only in the short run can the economy be trapped in a temporary disequilibrium. Even though the economy should eventually recover on its own in the long run it can cause a lot of pain in the process, which is why Keynesian economics advocates government intervention.
"I've long had a hobby interest in economics... The inmates are running the asylum."
Maybe a hobbyist shouldn't be suggesting that Nobel prize winners be put in an asylum ;).
I have little confidence in the putative experts because of a long list of seemingly elementary fallacies promulgated by many mainstream economists. Notable among these are the idea that spending causes prosperity, the notion that economic "stimulus" is beneficial, and a persistent conflation of trade deficits with indebtedness. Perhaps most damning is the simple observation that, though people have long been spending beyond their means, and saving more is the obvious antidote, this solution is vehemently opposed by the conventional wisdom. They seem immune to the argument that, while increased savings will result in a contraction of consumer product companies, this is not a bug, but a feature---a painful one, to be sure, but ultimately unavoidable. Seen from this perspective, the present attempts to limit the severity of the recession are not only misguided, they are probably counterproductive.
I do expect to take a course in this at some point, by the way, just for fun (and it really will be only for fun; I'm a 35-year-old physics Ph.D. with little to gain from further formal schooling). Unfortunately, my intuition is that "rigorous macroeconomics" is an oxymoron, and that much of the subject as presently taught is a hopeless lost cause. I hope I am wrong...
Maybe a hobbyist shouldn't be suggesting that Nobel prize winners be put in an asylum ;).
Oh, I've read too many of Krugman's essays to heed that warning. :-)
I'll take the time to explain some of your complaints:
"spending causes prosperity": well, obviously if you don't spend any of your money obviously you don't have prosperity. If you borrow money to spend economics assume that you are rational and that it is because you prefer having a good time now to later. This seems more like a value judgment though, which most economics tend to avoid.
"conflation of trade deficits with indebtedness": well, if country A wants to consume something produced by country B, it can only do so in three ways: 1) give B something A produced, 2) give B a chunk of A (e.g., real estate) or 3) borrow from B. Since most countries don't like 2), trade deficits are settled using 3)
Most economics will say that a higher savings rate will be beneficial in the long run but if people suddenly saved more because of government policy there will a aggregate demand shock and the economy will go into a recession since the price level cannot easily adjust in the short run. (When people save more they have less money to spend and thus all prices become "too high" for them.)
Check out the book for more information. You will find that while economics may have flaws, it is internally self-consistent. It just doesn't take into account that most people are not rational :(.
Macroeconomics by N. Gregory Mankiw (Hardcover - April 28, 2006)
Buy new: $117.47
There's a rough correlation between trade deficits and debt, just as there's a correlation between the number of movies people see and debt: there's a correlation between spending and debt. Focusing on foreign trade---and using the loaded and misleading word deficit---simply feeds people's xenophobia and distracts from the underlying issues.
"In the long run we are all dead"
My concern with Keynes is that eventually, the long run must come about. ie, the long run has to happen sometime, right?
All kidding aside Krugman accurately points out that the Republicans are simply posturing themselves as "champions of careful Congressional deliberation." The big problem I find with his line of thinking, however, is that he assumes Obama is not posturing himself as the "champion of quick and decisive action." Krugman further magnifies his blind-spot in the following excerpt:
"The biggest problem facing the Obama plan, however, is likely to be the demand of many politicians for proof that the benefits of the proposed public spending justify its costs — a burden of proof never imposed on proposals for tax cuts."
That is, we are likely going to be unable to spend our way out of this mess because people are unsure about this whole magical plan that spending and printing money will actually be a viable plan toward recovery. Secondly he firmly plants his flag in statist territory by insisting that tax cuts are never held to this same standard. By this he seems to be suggesting that when government spends money what rulers need is nearly carte-blanche ability to spend as they see fit; but when we want to steal less from citizens then we had better have some careful deliberation that this tax cut is going to positively effect them!
"The Fed," she argues, "has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible."
Reading NY Times for their business/economics opinion is like reading Playboy for the articles -- curiously unsatisfying.
Just because Keynes wasn't proven wrong doesn't mean he is right. I don't think he has put enough thought into this. The fact of the matter is our financial system pretended there was whole lot more wealth than there really was and not mention the fact they continued to trade based on that.
Niether trickling down money top down nor spending can solve this core issue in my opinion.