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Krugman and Expectations

Posted By Don Boudreaux On April 3, 2011 @ 5:26 pm In Complexity & Emergence,Curious Task,Current Affairs,State of Macro,The Economy,The Future,Video | Comments Disabled

Here’s a short clip of Paul Krugman [1] asserting that the only reason businesses today aren’t investing more than they are is because businesses have “tons and tons of excess capacity.”  (HT W.E. Heasley)

Krugman’s assertion is not implausible.  But nor is the assertion to which Krugman replies – and pooh-poohs – an implausible one.  The previous speaker, without mentioning the term, suggested that what Robert Higgs calls “regime uncertainty [2]” is a chief reason why business investment today is so lame.  Krugman dismisses that possibility summarily and with disdain.

Why?

Why are expectations and uncertainties about future consumer demand so obviously relevant while expectations and uncertainties about future government policies so obviously irrelevant?  I know of no reason – not even one in Keynesian economics – for Krugman’s apparent conclusion along these lines.

More generally, why are “animal spirits” so cockeyed?  If animal spirits can cause sudden, economy-screeching-to-a-halt pessimism among investors – pessimism explainable by no phenomena more observable than animal spirits – why cannot the spirits of animals (1) be spooked by what these spirits, correctly or not, predict to be unpredictable or enterprise-quenching government policies; and (2) just as mysteriously as they become pessimistic about the future for no apparent reason, also become optimistic about the future in the absence of any observable reason for optimism?

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[1] Here’s a short clip of Paul Krugman: http://thelastembassy.blogspot.com/2011/04/expectations-major-variable-in.html

[2] what Robert Higgs calls “regime uncertainty: http://www.independent.org/publications/tir/article.asp?a=430

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