Monday, August 15, 2011

Krugman Takes Keynesianism into Twighlight Zone

It seems Krugman so believes in the Keynesian multiplier, that he really doesn't think it matter what the money is spent on:
"If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months," he said. "And then if we discovered, oops, we made a mistake, there aren't any aliens, we'd be better--"
"There was a 'Twilight Zone' episode like this in which scientists fake an alien threat in order to achieve world peace,"

It turns out this was actually an Outer Limits episode, but no matter. If they really don't care what the money is spent on, why not just reduce taxes across the board? It would be far simpler and faster. I suspect because the real objective is redistribution, and lower tax rates across the board is regressive on a dollar basis even if proportionately the same. Too bad, but it highlights that old maxim I learned in my litigation--a dispute is never about what its most zealous disputant says it's about. In this case, the real wish of Keynesians is to redistribute wealth via the government, giving bureaucrats more power over the bourgeois. If it were otherwise it would be too easy to stimulate the economy in short order via their model of the economy.

Consider that the 2001 Bush tax cuts were a Keynesian idea to stimulate the economy. These are largely seen as a give-away to the rich, but here's the cuts:
  • a new 10% bracket was created for single filers with taxable income up to $6,000, joint filers up to $12,000, and heads of households up to $10,000.
  • the 15% bracket's lower threshold was indexed to the new 10% bracket
  • the 28% bracket would be lowered to 25% by 2006.
  • the 31% bracket would be lowered to 28% by 2006
  • the 36% bracket would be lowered to 33% by 2006
  • the 39.6% bracket would be lowered to 35% by 2006

Of course, the economy never reached full employment, which is always the case in real time, as full employment is something people apply to the past; the present is always below its potential, seemingly. This is why spending more is so problematic, because it is very improbable that such spending will be temporary as opposed to part of the new baseline, all to work on fighting aliens, or whatever they do in the Department of Education.


Dave Pinsen said...

In fairness, Krugman and the Keynesians have another reason besides redistribution to advocate spending (including spending in the guise of "refundable" tax credits, aka grants) over tax cuts: propensity to spend. Which would result in more consumption, a $5 million tax cut for Bill Gates or a $5k refundable tax credit/grant for a thousand median-income Americans? You can debate the merits of giving a thousand Americans $5k checks, but the answer seems obvious, no?

If you limit the definition of tax cuts to actual tax cuts, where the tax payer gets back less than he pays in income taxes, since our tax system is so progressive (thanks in part to those Bush tax cuts), only a wealthy minority of Americans will end up with a material number of extra dollars to spend in that case, and the wealthier they are, the less likely they'll spend those additional dollars in the real economy.

As for the war spending, it seems that most commenters on the right take the tack that FDR's economic stimulus failed to get us out of the Depression, and it took WWII's military spending to do that. But wasn't that military spending a massive form of government stimulus?

The two big differences between the WWII stimulus and what today's Keynesians have in mind seem to be that WWII armaments spending stimulated domestic manufacturing, whereas today's transfer payments spending stimulates a lot of Chinese manufacturing, due to our trade deficit; and that WWII's draft tightened the civilian labor market, whereas mainstream Democrats and Republicans advocate expanding the labor market via more immigration today.

Anonymous said...

Perhaps the WWII destruction of the vast majority of productive capacity in Europe and Asia had more to do with WWII leading us out of the depression than the suppposedly stimulative effects of WWII spending. The US was left to become manufacturer to the world, and accordingly boomed.

Michael Meyers said...

Hi Eric,

I would have worded the sentence about Krugman, et. al. real motivation as...

"the real wish of Keynesians is giving bureaucrats more power over the bourgeois via wealth distribution."

The question is do they primarily care about poor people or power. I vote for power. They really don't give a s**t about poor people I think.

As always, thanks for your great blog.


Anonymous said...

If they cared about poor people they'd advocate free markets. They are power mad liars, or fools.

Dave Pinsen said...

"Perhaps the WWII destruction of the vast majority of productive capacity in Europe and Asia had more to do with WWII leading us out of the depression than the suppposedly stimulative effects of WWII spending. The US was left to become manufacturer to the world, and accordingly boomed."

That's true to an extent of the post war boom, but not so much during WWII itself. We obviously weren't selling many manufactured goods to Japan, Germany, or the numerous countries they occupied at the height of WWII. We donated some equipment to our allies, but their economies, like ours, and those of our enemies, were geared toward total war and armaments production.

Interestingly, too, the productive capacity with respect to armaments held up fairly late into the war on the losing side. On p. 9 of Antony Beevor's "The Fall of Berlin: 1945", he quotes Albert Speer from a presentation Speer made to German army corps commanders on January 13th, 1945:

"The Allied bombing campaign was not the problem, he argued. German industry had produced 218,000 rifles in December alone. This was nearly double the average monthly output achieved in 1941..."

Anonymous said...


Yes, certainly I agree that the destruction of productive capacity was related to the post war boom (which of course had multiple causes) rather than to economic performance during WWII itself.

Appreciate your introducing some interesting facts about WWII into the discussion.


Anonymous said...

if they cared about the poor, they'd reform education.

research shows that the biggest factor in educational attainment is teacher quality. the current system does not reward good teachers nor does it punish bad teachers. but changing that would mean taking on a significant donor to the democratic party, i.e. teachers unions. so it will never happen.