Home > Uncategorized > Krugman a Keynesian? No way!

Krugman a Keynesian? No way!

from Lars Syll

In his critique of MMT the last couple of weeks, Krugman has claimed Stephanie Kelton and other MMTers have got things terribly wrong:

Anyway, what actually happens at least much of the time – although, crucially, not when we’re at the zero lower bound – is more or less the opposite: political tradeoffs determine taxes and spending, and monetary policy adjusts the interest rate to achieve full employment without inflation. Under those conditions budget deficits do crowd out private spending, because tax cuts or spending increases will lead to higher interest rates.

Paul Krugman

And this comes from someone who calls himself a Keynesian economist! The problem with his view is, of course, that it has nothing at all in common​ with Keynes — and that is utterly and completely wrong!

What Krugman is reiterating here is nothing but a version of Say’s law, basically saying that savings have to equal investments and that if the state increases investments, then private investments have to come down (‘crowding out’). As an accounting identity, there is, of course, nothing to say about the law, but as such, it is also totally uninteresting from an economic point of view. As some of my Swedish forerunners — Gunnar Myrdal and Erik Lindahl — stressed more than 80 years ago, it’s really a question of ex-ante and ex-post adjustments. And as further stressed by Keynes about the same time, what happens when ex-ante savings and investments differ, is that we basically get output adjustments. GDP changes and so makes saving and investments equal ex-post. And this, nota bene, says nothing at all about the success or failure of fiscal policies!

For the benefit of Krugman and other latter-day​ mainstream economists, let’s see what a real Keynesian economist has to say about crowding out and government deficits:

Fallacy 2
Urging or providing incentives for individuals to try to save more is said to stimulate investment and economic growth.

Again, actually the exact reverse is true. In a money economy, for most individuals a decision to try to save more means a decision to spend less; less spending by a saver means less income and less saving for the vendors and producers, and aggregate saving is not increased, but diminished as vendors in turn reduce their purchases, national income is reduced and with it national saving. A given individual may indeed succeed in increasing his own saving, but only at the expense of reducing the income and saving of others by even more …

Saving does not create “loanable funds” out of thin air. There is no presumption that the additional bank balance of the saver will increase the ability of his bank to extend credit by more than the credit supplying ability of the vendor’s bank will be reduced … Attempted saving, with corresponding reduction in spending, does nothing to enhance the willingness of banks and other lenders to finance adequately promising investment projects. With unemployed resources available, saving is neither a prerequisite nor a stimulus to, but a consequence of capital formation, as the income generated by capital formation provides a source of additional savings.

Fallacy 3
Government borrowing is supposed to “crowd out” private investment.

The current reality is that on the contrary, the expenditure of the borrowed funds (unlike the expenditure of tax revenues) will generate added disposable income, enhance the demand for the products of private industry, and make private investment more profitable. As long as there are plenty of idle resources lying around, and monetary authorities behave sensibly, (instead of trying to counter the supposedly inflationary effect of the deficit) those with a prospect for profitable investment can be enabled to obtain financing. Under these circumstances, each additional dollar of deficit will in the medium long run induce two or more additional dollars of private investment. The capital created is an increment to someone’s wealth and ipso facto someone’s saving. “Supply creates its own demand” fails as soon as some of the income generated by the supply is saved, but investment does create its own saving, and more. Any crowding out that may occur is the result, not of underlying economic reality, but of inappropriate restrictive reactions on the part of a monetary authority in response to the deficit.

William Vickrey Fifteen Fatal Fallacies of Financial Fundamentalism

  1. March 8, 2019 at 1:13 am

    This is among the most precise economic arguments pointing out national debt need not be an economic problem.

    National debt spending is a problematic from a more inclusive social perspective.

    Who controls the vector of subsidizing debt expenditure? One needs to ignore reality to see debt expenditure destroys democracy. How? Information flow is disrupted to support oligarchic self-enrichment plans. This is this portal where deficit budgets distort a free market based on best possible information.

  2. March 8, 2019 at 3:19 am

    I am a professor & You are also a Professor, but you are not in a position to break down the above points – saving dilemma, I call – If the whole thing is split into points – contradictions could be sorted out & removed to some extent – and the we would be in a position to put in a cognizable Mathematical Form – whose solution will give us results & some insights too…
    My intuition says that there is a “critical” value, one should look for…

  3. Nick Edmonds
    March 8, 2019 at 8:51 am

    Is the Vickrey quote really a counter to the Krugman quote? Vickrey says “As long as … monetary authorities behave sensibly, (instead of trying to counter the supposedly inflationary effect of the deficit)” But Krugman is specifically talking about what happens when the monetary authority takes counter action. Whether or not you agree with Krugman or with Vickrey, there doesn’t seem to be any inconsistency here.

  4. March 8, 2019 at 2:49 pm

    Krugman has no uncertainty among his main principles of economics.

  5. Mike Ryan
    March 8, 2019 at 4:25 pm

    Watch out… more nonsensical smoke screens for the 1 %. Krugman and every other economist at the university level should purge their beliefs. There are so many falsehoods in a Krugman Econ book he should be sued for fraud.


  6. Mike Ryan
    March 8, 2019 at 4:29 pm

  7. Helen Sakho
    March 11, 2019 at 12:53 am

    Neither! The “Keynes out – Hayek in” happened decades ago. Indeed, these people should be sued. But, we too, really must start addressing the more pertinent issues, which one should never tire of repeating. To start with, for example, the economics of the arms race and its domination by a handful of haggling “Sultans” and their clans that have already killed numerous people and flattened whole countries and are still doing so. Or, the pollution issues relating to this, and the private ownership of ultraLux travel jets (please consult the Economist this week), etc…

  8. Ken Zimmerman
    March 23, 2019 at 10:19 am

    Discussions of theory are interesting and can be fun. But what does research say about such theories? I’ve done a literature review of the two theories that compete most often in Congress and the media. 1) The effects of tax cuts on economic well-being of all Americans, not just the 1%; 2) The effects of government deficits on the economic well-being of all Americans, not just the 1%. The results can be summarized by conclusions in two of the research publications. “Hence, the overall relationship between budget deficits and economic growth is ambiguous.” (Budget Deficits and U.S. Economic Growth, Hendrik van den Berg; A. Ghoshroy, 2009). “Claims that the cost of tax reductions is significantly reduced through feedback effects, because of increases in economic growth (and that gains from tax increases are significantly reduced) have been made. As indicated in the previous analysis, however, these effects are limited. Although various dynamic models can potentially produce larger results, the models with responses most consistent with empirical evidence suggest a revenue feedback effect of about 1% for the 2001-2004 Bush tax cuts. (Tax Rates and Economic Growth, Jane G. Gravelle, Donald J. Marples CRS, 2014) Theoretical arguments are often clear cut and simple. Empirical results are almost never clear cut or simple. Arguing from theory to policy is, in my view putting the cart before the horse, in both senses of the expression.

    • Robert Locke
      March 23, 2019 at 4:24 pm

      Ken, it seems to be impossible, witness this discussion, to base the discipline of economics on anything but the words-writings of economists. And yet, Ken, you say that we need to put policy before theory. Then upon what is policy to be based?

      I know as an historian the answer to that, on a thorough examination of what the people who adopt policy, based on specificities, of the discussions that go into policy formulation.

      Often this doesn’t involve economists at all, thank God, as for example, when the policies to advanced the formation of mental capital are being discussed, economists haven’t until quite recently, included the significance of mental capital in their repertoire, in Anglo-saxonia that is, elsewhere the necessity to tend to the development of a nation’s mental capital became de rigeur when discussing policies favoring economic development. Historical sources are filled with such discussions, by parlmentarians, entrepreneurs, professors, scientists, soldiers, etc.and by economists outside Anglo-saxonians, e.g. the Listians.

      If blog participation is to be focused on the words-writings of economists, then its readers will never know anything about the origins of most-many policy formulations

      • Ken Zimmerman
        March 24, 2019 at 10:19 am

        Robert, the approach you describe can be applied in just about every kind of study, economic or otherwise. The work begins with observing the people who do the things you’re trying to understand. Then questions can be asked, and answers checked and verified. Then the research expands to other folks doing something else in the areas you’re studying. Robert, your instincts are correct. Economists mostly do a rubbish job in this kind of research. You’re also correct that historians have created dozens of detailed studies of economic events and actors. There is absolutely no comparison between the work of historians and economists. That’s a shame. Economists could learn a lot from reading historians’ work. Economists could also learn a great deal from reading the work of anthropologists (particularly urban and rural anthropologists), sociologists (particularly economic sociologists), and even psychologists who study markets and transactions. To be so isolated is a disadvantage for economists and anyone who depends on their work.

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