Shamelessly Peddling Keynesian Economics, Again…

One of the most important things I learned as a military officer was to know my adversary. As such, I have always considered it essential to read and think about what the best of the political opposition has to say, give it credit where it is due, and criticize it when it seems irrational. It is only by this study of one’s opponents that one can truly defend one’s beliefs with well-considered and rational arguments.

What better way to do this than consider and critique the words of liberal Nobel laureate, Paul Krugman, who published an op-ed yesterday in the New York Times, entitled “Deep Hole Economics“? I sometimes find Krugman to make incredibly lucid economic points. Unfortunately, he also sometimes has a tendency to unnecessarily spew too much partisan bile, especially for someone so well-educated and distinguished.

In this op-ed, I think Krugman has it right regarding monetary policy and interest rates. Yet I think his comments on a 21st century Works Progress Administration (WPA) and supposedly “harmful” spending cuts miss the mark.

Krugman’s points on monetary policy and interest rates are valid concerns. I believe action on these two items to be a key litmus test of whether the new crop of Republicans are rationalists or reactionaries. Tea party furor would dictate that the Fed pullback on its quantitative easing policy, but sound economics (both right and left) dictates that the country ought to keep its monetary policy loose, at least for now.

On interest rates, I also fear that raising them in the near-term would be a disaster, which could likely lurch the country back into recession.

However, Krugman has it wrong on both his WPA recommendation and the danger of cutting spending. Historians are still debating whether FDR’s programs aided or worsened recovery from the Great Depression. Some believe that it was World War II, not FDR’s Keynesian fiscal policies, that got the country out of its rut. I tend to agree with this explanation and think yet another government-directed stimulus would likely fail. After all, the unemployment rate is two percentage points higher than it was when the nation implemented the last government-directed stimulus.

While I would partially agree with Krugman that cutting spending in the short term would generally be a bad idea given the U.S. economy’s current state, I think it should be a duty of Congressional Republicans to make deep intermediate and long-term spending cuts particularly in entitlement programs like Social Security and Medicare. Just yesterday, Senator Graham took the politically gutsy move of recommending that there be a means-test for Social Security and an adjustment in the retirement age on Meet the Press. After all, why should a younger, poorer generation transfer its wealth to an older, wealthier one? Does Warren Buffett really need the money?

One last point is worse mentioning about Krugman’s reference to a Sarah Palin presidency in 2012. I say this with all due respect. It is simply not going to happen. Contrary to popular belief, there are plenty of conservatives who do not support Mrs. Palin.

About Sean Patrick Hazlett

Finance executive, engineer, former military officer, and science fiction and horror writer. Editor of the Weird World War III anthology.
This entry was posted in Finance and Economics, Politics, Social Security and tagged , , , , . Bookmark the permalink.

6 Responses to Shamelessly Peddling Keynesian Economics, Again…

  1. jdc says:


    Three of your assertions strike me as flimsy or irrelevant to the larger issue of systemic risk and recovery from this Great Recession. I’ll refer not just to Krugman but Krugman, Robert Reich and Joseph Stiglitz whose arguments are similar in style and substance.

    1. Krugman is shamelessly peddling Keynesian Economics.

    When speaking on the economy, Krugman, Stiglitz and Reich are very disciplined and seldom outdebated (or just plain proven wrong).

    George Will, really a pretend economic expert, is always flumoxed by Krugman on This Week. The AEI experts aren’t even coherent on any of the forums when trying to address the economic crisis.

    If I were a monetarist or a neoclassicist, I would consider them an embarrassment. They all seem stuck in trying to blame the crisis on people living beyond their means and ignore the fact that bubbles like the one that burst was no accident and hardly can be attributed to Fed expansions or contraction of money supply. Extravangant System Risk was the immediate cause and it was direct result of deregulation and the dismantlement of government oversight in the same way that the Gulf Oil Deluge was logical outgrowth of Republican attitudes regarding environmental regulation. All of this is difficult to contest, beginning with the history of tranches, repeal of Glass-Steigel and the corruption of the SEC and the bond-raters by monied interests.

    Truthfully Krugman’s prescriptions are a mix of monetary and fiscal suggestions–a far cry from “shameless” dogma. I’m suprised you don’t appreciate this. A good deal of the time he even agrees with Bernanke who comes from a Monetarist frame. Is this also shameless?

    Krugman does offer barbed political commentary–particularly critical of both Obama and know-nothing right-wingers (Tea Party in particular)–but his arguments are always reasoned and based on facts in evidence. If this is “bile” we need more off it.

    Your remarks about decorum strike me as misplaced–a projection of preference for dispassionate dialogue that was lost long ago when Knut Gigrich begain spewing invective and hate and then the same techniques were institutionmalized at Fox. Perhaps it’s good that you see this as something undesirable, but to apply this standard to someone like Krugman comes off as silly and fatuous and truthfully hippocritical. Republicans destroyed thoughtful objective discussion in this country–they are the ones who poisoned the well. If you want to point fingers start with the people you support.

    Also be prepared for the fact that true Progressives are a different breed of cat than liberals. We’ll call you out every time you trot out this kind of silly projective argument.

    2. His remarks about a 21st century WPA are off the mark.
    Your statement could be interpreted as a suggestion that this is Krugman’s main Rx for recovery. I’m not sure if this is intended, but if so it’s a gross misreading. He does favor a stronger jobs program as opposed to ridiculous tax cuts for the rich, but there are two different rationales for this: a. to reduce suffering (an issue which you ignore entirely) and, b. stimulus effects (including the multiplier value of giving money to people who will spend it domestically and fast, as opposed to people whose MPC is less and will more likely use tax windfall for investments that are less beneficial domestically). Good luck trying to challenge this.

    I’m curious: how exactly would you have suggested that the US recover from a $1-2 Trillion drop in private demand ca 2008? A. Just “bear with the downturn the old fashioned Herbert Hoover way until the next swing in the business cycle? B. Even more tax cuts for the rich? (Gingrich, Boener, et al) C. More tax relief for businesses whose tax rates, especially for the off-seas-internationals is really trivial. D. Reliance on quantitative easing with minimal requirements on lending?

    Can you cite any reasonable quantitative model that any of these approaches would work? I’ll make it easy for you, just focus on D but convince me that QE has any chance of working without strictures Republicans are loathe to implement that would do much more than stimulate the markets, increment bonuses and increase takeovers.

    At what point do you begin to ask yourself whether neoclassical economics (with implied and untenable assumptions about true competition, perfect information, and no systemic risk) is so much unrealistic nonsense that should only be entertained as a cerebral parlor game? I refer you to Nobel Laureate Stiglitz here who says it far better than I.

    3. Krugman is off the mark on recovery from the Great Depression.

    You seem to imply this rather than say it outright. You might want to clarify. If you think that Krugman fails to understand the reasons that both GDP and employment improved in the late 30’s and 40’s, you need to go back and take another look. He has much to say about financial contraction and how it stanched private demand and investment. Moreover he states openly that loss of nerve by FDR had to be compensated by war demand for the economy to recovery. Ironically–and I hope you appreciate this–the notion that it took war spending to rescue us from the Depression is really tantamount to strong Keynesian intervention.

    So in effect, you are really attacking a straw man.

    (4.) And by inference from the above the Progressive counter-deflationary measure he suggests are ill-advised and we would be better off relying on a QE2 style approach (or perhaps even a Neo Hooverite approach). You do seem to endorse quantitative easing in the short run, so I gather you aren’t a Hooverite Republican.

    I do wonder about your long-run solutions and those within your party who mostly seem to be Hooverites and proponents of both minimal government and next-to-no regulation. I hope that in the future you will sketch out how any of this could possibly work in reversing current trends, since the same policies actually got us where we are now.

    Among other things address the pathetic state of American infrastructure (power grid, intercity transportation, schools in decline) fossil fuel dependence. In your world our private sector will somehow power us through these deficits and enable us to compete with countries like China who are moving rapidly on intercity rail, expansion of secondary education, rare mineral development and high tech development with the benefit of government investment.

    Perhaps you would also like to address the current decline of the middle class in the US (versus the opposite trend in China ) and what this augurs for the future of this country. Try to imagine a future with little upward mobility, the demise of public education, both of which have dramatically fueled the American miracle. You can kiss that goodbye if people don’t start listening to the likes of Krugman, Stiglitz and Reich and realize that neoclassical solutions for America are about as likely to be as effective as they were for Chile.

  2. Sir,

    First, I appreciate your reading my blog and taking the time to debate these issues. It is too often the case in America today that both the right and left are continually shouting past each other. All of us have something to learn from one another, myself included, and I think you have made several strong points in your comment. I will now address each of your points in turn:

    Point #1. The contention that Krugman is shamelessly peddling Keynesian Economics is a flimsy one.

    My comments were focused primarily on Krugman’s advocacy of a WPA — i.e., his fiscal policy. Later in my post I deliberately separated Krugman’s specific fiscal recommendation of a 21st century WPA with his advocacy of QE2. I would agree with him on the latter. To be honest, I also do not read Krugman religiously, but when I do, he often recommends loose fiscal policy programs with which I disagree.

    To your point on conservative commentators getting things completely wrong, I share your concern that many of them are ill-qualified to comment on economic or fiscal policy. After all, weren’t some Republicans demanding a retrenchment of QE2? I myself have been extremely frustrated by the far right taking over my party, as the vast majority of them lack thoughtful prescriptions for our current economic situation. Hence this blog.

    I agree with you that one cause of the Great Recession had to do with the proliferation of exotic derivatives, but not because of any lack of government regulation. The fact of the matter is that government failed to adapt to rapid innovations in the financial markets and in fact colluded with Wall Street as a means of providing every American with the dream of home ownership (e.g. Barney Frank and others). By splicing and dicing MBS derivatives, Wall Street was able to spread the risk (albeit until someone noticed that the emperor had no clothes) and thereby extend home ownership to more people (whose risk profiles would have sent any traditional loan officer heading for the hills). There was blame to go all around, but government failed because it did not adapt. Its politicians had no incentive to adapt. They, too, had their hands in the till — both Republicans and Democrats.

    On your point about decorum. I completely agree. Republicans have poisoned the debate, but so also have Democrats. Nancy Pelosi in particular. The point of this blog is to attempt to move past this bile and focus on problem-solving. Ad hominem argumentation only serves to divide and alienate at a time when the country needs to come together and solve its problems.

    Point #2: The contention that Krugman’s remarks about a 21st century WPA are wildly off the mark

    Your remark that characterizing this recommendation as Krugman’s main recipe for a recovery is grossly misleading is a very valid one. I did not intend to suggest that, but if it came out that way, the fault is all mine.

    For my prescription I would implement a version of both C and D. The portion of C, however, would be tax cuts for everyone, not just the rich. I do agree with you that getting money back into people’s pocket is the fastest way to help generate a recovery. On your point about extending the Bush tax code for the rich, I can honestly say that I am torn on this issue. To be fair I haven’t studied the effect that putting more money in wealthier income earners’ pockets has on generating an economic recovery, but the basic logic that they are less likely to spend makes sense to me. My concern is that what is considered wealthy in one part of the country, is barely middle class in others. I could be comfortable with tax cuts for everyone making under $1 million, but $200-250k cuts it too close in some parts of the country.

    At the end of the day, I am a pragmatist, I am more influenced by what works than by partisan politics.

    Point #3: The contention that Krugman is off the mark on recovery from the Great Depression

    To be fair, Krugman’s op-ed makes no explicit mention of what he thought helped the U.S. economy recovery from the Great Depression. I was merely suggesting that my personal opinion is that the country got out of the Depression because of World War II, not the discrete set of policies FDR orchestrated. In fact, the country is still suffering from many of them — Social Security being top of mind. I do not doubt the good intentions of these policies — the country certainly needs a safety net. I just don’t think people like Warren Buffett need the government to provide him with one. Social Security needs to be reformed and I think it can be done in a reasonable way with a means-test and age adjustment. The problem is that it would be political suicide for any politician to recommend this course.

    Your point that World War II was some sort of a Keynesian intervention is a valid one. The difference in that intervention is that every American agreed (or at least most of them) on how the government should spend the money — tanks, trucks, rifles, etc. One scary statistic is worth noting however. In 2009, government expenditures were 24.5% of GDP a full percentage point higher than the average during World War II. We are already there. Without a clear agreement on what America’s next challenge is (i.e., I say it is energy independence, President Obama decided, in my opinion, instead to waste political capital on healthcare), a consensus on how to spend that money is impossible. Today, in many cases it is wasted.

    Here is an example. The current Federal Loan Guarantee Program has an advanced vehicle technology program. In some case it does some good by supporting innovative start-ups like Tesla Motors that are really shaking up the automobile industry. However, over 80% of these dollars go to Ford or Nissan — traditional, hidebound organizations that have failed to innovate over the last twenty-five years. Why are they getting more money than everyone else? Political patronage. The supposed jobs created or saved by this program cost an average of over $400,000 per person. Is this a good use of our tax dollars?

    The fundamental difference today between conservatives and liberals is that liberals trust government. Conservatives, on the other hand, see that large organizations are rarely able to carry out complex policies because of the natural friction and chaos inherent in human organizations. As a former military officer this always translated into the maxim: a plan seldom survives after contact with the enemy. There is nothing wrong with trusting government, people just have a variety of different experiences that shape their views.

    I wish that both the President and the Congress took some of the recommendations of the debt commission more seriously. Both sides of the aisle need to come together more. Neither side has the right answer and a better answer can only come from them working together.

    The reason the Chinese have been so successful is that they are effectively a dictatorship and can channel their dollars far more efficiently than a republic can with all its chaos. Furthermore, the Chinese also had far less infrastructure than the United States currently does (i.e., they started from a much smaller base). That said, like you, I do believe that American needs long-term infrastructure development, we just need some focus — like achieving energy independence. Neither political party is providing that now.

    The decline of the middle class is definitely a concern. Recently, I learned than the gap in wealth distribution is higher in the U.S. than in Russia. Seriously. How to solve this problem is something that I do not as yet have a response for, but I don’t think greater government expansion is the answer. I think it is the problem.

    Thank you again for providing your perspective. Anytime someone provides a thought-provoking comment, it always elevates the level of discussion.

  3. JDC says:


    Now for the most outrageous unsupported assertion in your commentary:

    “…I think it should be a duty of Congressional Republicans to make deep intermediate and long-term spending cuts particularly in entitlement programs like Social Security and Medicare. It’s why Americans elected them.”

    There is absolutely no support for the assertion that the gains in the House represented a mandate for cuts in Medicare and Social Security. In fact, the exit polls and other survey results leading up to the election Support Just the Opposite and actually undermine the more general assertion that the election represents an endorsement of Republican policy ideas.

    I really think you ought to correct your mistake here: your assertion regarding entitlements defies all empirically-based political science, statistical analysis and common sense and comes off as Fox-based propaganda.

    The best that you could say is that in some districts, some Republicans were elected despite their enthusiasm for cuts in Medicare and Social Security only because the rode the wave of dissatisfaction over the economy. Just to help set the record straight on this I’ll give a few references here:

    Click to access 6153_dcor112010%20CAFpostelection.FINAL.pdf

    Greenberg Quinlan Rosner exit polling
    Mid-term election results not a mandate for GOP, poll shows
    By Daniel Tencer
    Friday, November 5th, 2010 — 7:33 pm

    ‘Voters are looking for change — but not what the Republicans are offering’
    It’s the economy, stupid.

    That catchphrase from the 1992 election — which saw Bill Clinton propelled to the Oval Office on a wave of discontent over unemployment — applies just as strongly in 2010, a new poll indicates.

    The exit poll (PDF) from Greenberg Quinlan Rosner Research suggests that while voters gave control of the House to the Republicans, it was not out of a desire to return to Republican policies, but rather out of a lack of other options.

    The poll shows voters largely rejected the narrative put forward by Republicans: That the American public rebelled against the liberal-minded over-reaching of the Obama administration.

    Roughly even numbers of Democratic, Republican and independent voters — about three-quarters in each case — said the economy was a factor in their vote. No other issue polled nearly as high.

    Dissatisfaction with the available political options was also high, with 26 percent of voters saying their vote was a “message to both parties” that they are unsatisfied with the state of US politics. By contrast, 20 percent said the vote was a message specifically targeted at President Obama.

    That appears to mesh with a recent poll showing 54 percent of voters would like to see a viable third party rise in the US.
    “The results show that voters weren’t necessarily allying themselves with the GOP, but rather were voicing their disapproval with Washington as a whole,” writes Andy Kroll at Mother Jones.

    Nor did voters generally align themselves with Republican talking points. Even a majority of self-identified Republicans — 62 percent — said they wanted lawmakers to “keep their hands off” Social Security when addressing the budget deficit. Among all voters, 68 percent opposed cuts to Social Security…

    (please look at individual questions and tabulations if you have any doubts about this.).

    The survey likely comes as no surprise to voters but it’s “a welcome corrective here in Washington, where the conventional wisdom suggests a GOP revival supposedly spurred by voters’ newfound embrace of the Republican Party’s ideas, however scarce they may be,” Mother Jones’ Kroll writes.

    “This was a protest election — with voters angry about the president and Congress’ performance on the economy and absence of economic direction and vision, the bailouts and spending, inattention to the economy as reflected in the long-battle over health care and the poisonous partisan politics that carried on right through the crisis,” the study’s authors write.

    “Voters are looking for change — but not what the Republicans are offering. The Republicans’ image stands no higher than in 2008 and 2006 elections. A large majority of voters remain hopeful for the president and clearly want him to succeed. … Republicans should not misread the mandate and the changes that came out of this big election.”
    The poll surveyed 897 voters and has a margin of error of 3.3 percentage points among likely voters. It was carried out for Democracy Corps, a progressive strategy group, and the Campaign for America’s Future, a political group tied to the Democratic Party.

    other support for this inference:

    October 28, 2010 • 7:44 am
    Voters favor candidates who support preserving Social Security benefits
    The Institute for Women’s Policy Research has collected new data finding widespread support for Social Security programs, especially among women and younger voters. A few of the highlights:
    The large majority of those polled back Social Security programs in order to ensure economic security for themselves in retirement. Seventy percent report that they do not mind paying Social Security taxes because they are sure they will receive benefits when they retire…
    An even larger majority value Social Security for the benefits provided to current beneficiaries. Six out of seven (86 percent) of registered voters do not mind paying Social Security taxes to provide security and stability to millions of retired Americans, the disabled, and the children and widowed spouses of deceased workers…
    Well over half of registered voters (58 percent) believe that Social Security benefits should be increased- not cut- to shore up the economic security of retired Americans who lost savings and pensions in the financial crisis. Over 60 percent of young people support increasing benefits for today’s retirees in the wake of the recession.

    • Sir,

      Your point is valid and duly noted. I added that line as an afterthought and have subsequently removed it after I viewed your data as well as several other mainstream polls (e.g., Bloomberg, etc.), which universally show that the vote was one of dissatisfaction with all of Congress rather than a resounding mandate for Republican policies.

  4. Thanks for this post. I indeed agree with what you are saying. I have been talking about this subject a lot lately with my father so most probably this will get him to see my point of view. Fingers crossed!

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