Who Says Keynesianism is Dead?

by Don Boudreaux on September 28, 2004

in Myths and Fallacies

My colleague (and preeminent blogger) Tyler Cowen, at Marginal Revolution, found this example of the usual nonsense that follows natural disasters: according to a reporter for USA Today, the recent hurricanes that hit Florida might provide so much economic stimulus that they will prove to be a net benefit to the economy.

From USA Today such dreadfully bad “economics” is to be expected (if not condoned). But reading this “report” reminded me of a column that Paul Krugman published in the New York Times on September 14, 2001. It’s entitled “After the Horror.” After rightly pointing out that the full economic effects of the September 11th attacks depend very much upon the expectations that investors have about the future – a future now suddenly more uncertain because of these horrific events – Krugman says that

there will, potentially, be two favorable effects.

First, the driving force behind the economic slowdown has been a plunge in business investment. Now, all of a sudden, we need some new office buildings. As I’ve already indicated, the destruction isn’t big compared with the economy, but rebuilding will generate at least some increase in business spending.

Second, the attack opens the door to some sensible recession-fighting measures. For the last few weeks there has been a heated debate among liberals over whether to advocate the classic Keynesian response to economic slowdown, a temporary burst of public spending. There were plausible economic arguments in favor of such a move, but it was questionable whether Congress could agree on how to spend the money in time to be of any use – and there was also the certainty that conservatives would refuse to accept any such move unless it were tied to another round of irresponsible long- term tax cuts. Now it seems that we will indeed get a quick burst of public spending, however tragic the reasons.

Given Tyler’s recent link to the betting market that showed Krugman to be among the favorites to win the Nobel Prize in Economic Science, I’m much distressed.

Does Krugman really believe what he wrote? Does the reporter for USA Today really believe what she wrote? If so, do these people ever stop to wonder why Boston and Baltimore are more prosperous than Beirut and Belfast?

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