The power of the polemical

by Russ Roberts on August 1, 2011

in Stimulus

Here is Krugman on what is wrong with the budget deal:

We currently have a deeply depressed economy. We will almost certainly continue to have a depressed economy all through next year. And we will probably have a depressed economy through 2013 as well, if not beyond.

The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further. Pay no attention to those who invoke the confidence fairy, claiming that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn’t work that way, a fact confirmed by many studies of the historical record.

Slash government spending? A bit strong don’t you think? Let’s call it an exaggeration. There is no evidence that the deal slashes spending. There isn’t any evidence that it cuts it. It might cut the rate of growth. We’ll see.

But my favorite bit of polemicism is Krugman’s attack on the “confidence fairy”:

…that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn’t work that way, a fact confirmed by many studies of the historical record.

Unfortunately, Krugman doesn’t provide a link to those “many studies” of the historical record. Maybe he was busy or simply didn’t have room to provide them. But I will just mention that in 1946, federal spending fell about 55% when the war ended. The Keynesians predicted a horrible depression. Yet despite the release of 10 million people into the labor market with demobilization private sector employment boomed and the economy thrived. That’s a great natural experiment. I am eager to read any of the alleged many studies of the historical record.

Alberto Alesina would also disagree. Here is a defense of his work and some other studies of the historical record that fail to find the effects Krugman claims.

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{ 61 comments }

Subhi Andrews August 1, 2011 at 3:27 pm

There hasn’t been a single instance of prolonged economic slump in a laissez-faire economy prior to the Keynesian “improvements”.

Christina Romer (1986, and a few in later years.)has done several works showing that length, depth and severerity of economic cycles since WWII has only slightly gotten worse compared to the business cycles of pre-WWI economy.

I am writing a paper on fiscal policy during the great depression. I find these things very interesting.

complexphenom August 1, 2011 at 3:28 pm

Krugman is either incompetent or willfully disingenuous. He definitely can’t be serious.

juan carlos vera August 2, 2011 at 12:08 am

Like has been said several times here, in cafe, Krugman is a propagandist… He is not an economist…

Subhi Andrews August 1, 2011 at 3:30 pm

BTW, I even found a youtube link of a Hoover Speech where he announces a new spending program. He even used the word stimulus there.

Sam Grove August 1, 2011 at 11:38 pm

Copy the link and paste it into your comment for us.

vikingvista August 1, 2011 at 11:59 pm

http://youtu.be/9Z44gRBwLm8

“Stimulate” at about 2:15.

Anyone who read this printed speech would assume it was FDR.

kyle8 August 2, 2011 at 3:28 pm

Yes of course, our history courses are all wrong in making the New Deal out to be some radical break with the past. It only was more “hair of the Hoover dog”.

David August 1, 2011 at 3:31 pm

One question that kept popping into my mind when reading the first Krugman quote was to ask how we define the economy as “depressed”. We are technically not in a recession anymore, but the economy is depressed according to Krugman. I’m not necessarily disputing that, but Krugman then claims that without stimulus, the economy will likely remain depressed indefinitely. That leads me to wonder what sort of criteria he’s using to define an economy as depressed.

Krugman seems to believe the economy is now broken and will remain broken until “stimulus” of undetermined size and scope is applied. If the stimulus doesn’t bring the economy out of depression, then in Krugman’s view the answer must be more stimulus. He doesn’t seem to be interested in looking at structural causes of the depression. What if it turns out that government intervention in the economy is causing the lingering depression? Krugman doesn’t even want to ask that question.

juan carlos vera August 2, 2011 at 3:45 am

In addition Krugman does not understand, or made the fool, that the logic of the stimulus leads men to seek stimuli rather than being productive…

To destroy the argument of Krugman [...stimulus is the solution...] one can reverse the burden of proof. If the stimulus is the solution, then there would be no economic problems at all because the government would always have a ready stimulus to prevent it. But this argument leads to a clear contradiction. It happens that the man is not a stupid bug. If every man knows that the government always rescues him, then what purpose he must be economically productive?. This leads to all people become economically unproductive, which is equivalent to say that the economic crisis is widespread and enduring. So we live in a supposed economic paradise and in a real economic hell, simultaneously. A clear contradiction… Thus, there are no libertarians who must prove that the stimulus doesn’t work, but the interventionists who must understand that the stimulus never work…

Les Cargill August 1, 2011 at 3:35 pm

The basic demand profile in 1946 is radically different from what it is now. Large swaths of people had gone without consumer goods for a very long time. America was (close to the) the only standing industrial power left.

Steve C. August 1, 2011 at 4:34 pm

That’s half of the explanation. The other half is savings. Ask anyone who lived through those times as an adult. Consumer goods were severely restricted and in some cases non-existent. Auto production was converted 100% to defense. You could not buy a new car because such a thing did not exist. Couple that with the introduction of federal withholding, rationing and the constant pleas by the government to buy war bonds and stamps.
Pent up demand meet an excess of forced savings!

Sam Grove August 1, 2011 at 11:40 pm

Both of which fail to address the failure of Keynesian economists to predict the boom, in fact, predicting the opposite.

Don Boudreaux August 1, 2011 at 3:37 pm

Another scholarly source to consult for evidence contrary to Krugman’s claim is Bob Higgs’s 2006 book Depression, War, and Cold War (Oxford University Press). (I’d supply a link but, were I to do so, my comment would not successfully post. :-( )

Subhi Andrews August 1, 2011 at 3:49 pm

you can use http://bit.ly to shorten the link, and then post it.

I recently bought the book. Unfortunately there is no kindle/epub version of the book. That would have been really helpful for searching and finding pieces of relevant text.

liberalcynic August 1, 2011 at 4:39 pm

There is a kindle version. http://amzn.to/pTplDf

Subhi Andrews August 1, 2011 at 5:51 pm

Thanks. I couldn’t find it when I was searching on Amazon. Unlike other books, Kindle edition for this one seems to be a lot more expensive than the paper edition.

John Papola August 2, 2011 at 1:11 am

wow. bought.

Slappy McFee August 1, 2011 at 3:53 pm

Not to pick nits Russ — but you didn’t include a link to Krugman’s article.

BTW — More Mike Munger on EconTalk!!!

Slappy McFee August 1, 2011 at 4:14 pm

Nevermind — Link is there now

Hal_10000 August 1, 2011 at 4:30 pm

I argued this morning that Krugman’s rhetoric is centered on what he really wants — tax hikes (which apparently do less harm to the economy than only getting 95% of planned spending hikes). His rhetoric has suddenly gone from “we must raise the debt ceiling” to “no, not that way!”

With these guys, the answer to everything is more spending and more tax hikes. Keynsian economics, debt ceilings, healthcare — these are a means to that end, not vice versa.

muirgeo August 1, 2011 at 5:24 pm

No Hale the answer is to grow the economy by restoring the middle class jobs and wages. Until that happens things will not improve and may get worse.

I love to ask you guys what are the most expensive programs Obama passed to increase the deficit…. you can’t point to ANYTHING because there are none.

The deficit is a result of the past administration not covering its expenses and of the long term drop in receipts form the broken economy they left us.

The deficit is a symptom NOT a cause. You guys have NO solutions that will improve the lot of most Americans.

Krishnan August 1, 2011 at 5:34 pm

Ah yes, the almost TRILLION dollars in stimulus that Obama passed (his own slush money) did nothing to the deficit … And it is all the fault of George W. Bush. Got it.

Sam Grove August 1, 2011 at 11:41 pm

YASAFI!

muirgeo August 2, 2011 at 12:18 am

Nope I didn’t think you could point to a program Obama’s that significantly adds to the current deficit. THERE IS NONE… but again.. I am speaking about the REAL world and I know that doesn’t always count for you guys.

Sam please put on your blinders before you open this link…

http://cdn.crooksandliars.com/files/uploads/2009/12/CBPP_deficit_factors_2019_a8d9a.jpg

Emil August 2, 2011 at 3:11 am

Now I’m confused. So Obama is your hero because he is doing stimulus spending but he is also your hero because he is not doing any stimulus spending?

muirgeo August 2, 2011 at 2:50 pm

No Emil the stimulus spending is mostly done…gone… and now the GDP and jobs are falling off.

Yffudcm August 3, 2011 at 1:42 am

Ok, so let’s just have another New Deal in which the government passes a legislative package that provides for higher minimum wages throughout the economy, and forces employers to hire more workers.

Perhaps they could use Mad Magazine’s rendition of Billy Carter’s job creation plan from the 1970s, that required the water coolers in offices across the country to be filled with beer. If everyone is drunk, the argument went, it would take more workers to do the same amount of work, thereby driving down unemployment.

Problem solved!

liberalcynic August 1, 2011 at 4:40 pm

I don’t get Krugman. Perhaps it is impossible to have a dialogue with him. He seems to have made up his mind that government intervention is the only way. He is not even cherry-picking his data anymore. He’s just stating that facts exist and we should take them on faith.

Krishnan August 1, 2011 at 5:12 pm

He is always ticked off … He is ticked off that the stimulus was not 10 trillion dollars, that the economy is not responding to his great wisdom, that people are not paying him homage and worshipping him, that people have the temerity to question his infinite wisdom and so on …

I am waiting for him and Thomas Friedman of the NYTimes to move to China … I’d donate some money to help purchase one way tickets … After a few months, I imagine the Chinese Government thugs will get sick of Krugman and Thomas Friedman and throw them down some deep, dark place …

txslr August 1, 2011 at 5:20 pm

Reminds me of another joke. “Did you hear about the Jerry Lewis Telethon? We’re trying to get enough money to send him to France.”

Josh S August 2, 2011 at 8:08 am

Krugman is a lot like an orthodox theologian of a religious denomination, except his holy text is even harder to understand, and he has even less reason and evidence backing him up.

steve August 1, 2011 at 4:40 pm

actually after the war, as the full mobilization wound down, and no it didn’t start with v-j day, the unemployment rate rose from around 3.5% to near 8%. and you can imagine, or perhaps you can’t, the feeling at the time with war ended and the depression in everyone’s mind. and as for this keynesian stuff, more spending or less taxes matters little in terms of invoking the power of deficit spending to boost the economy. they are both keynesian, one presumes the government can spend better the other the private sector. get your history right and stop calling tax cutters anti-keynes. they are pro spending of a different sort. and to say we are in the same situation as in 1946-47-48 is just playing to your audience and not the truth.

kyle8 August 2, 2011 at 3:34 pm

That is absolutely idiotic. So now, people keeping their own hard earned money is fiscal stimulus? If so, then why is it that is never the type of stimulus that the Keynesians prefer?

liberalcynic August 1, 2011 at 4:43 pm

I have a question though. I understand very little of economics, so bear with me if I sound like a neophyte. If there is a huge debt, will mere cutting of spending take care of it? Shouldn’t there be some way of increasing federal revenue? Why not tax defense contractors and others who’ve benefitted from the wars that have crippled the economy?

Krishnan August 1, 2011 at 5:24 pm

Government spending crowds out spending by the private sector – where the real economic activity is … Government cannot and does not create anything – except consume resources created by others in the private sector. When the economy grows, tax revenues grow – without any change in the tax rates … When tax rates are increased, the revenues do not increase proportionally – In many cases, revenues FALL (Read about the Laffer Curve) … Yes, in the short term we can increase revenue by increasing tax rates … but it does not lead to sustainable growth …

We already tax defense contractors and others – those that work for such companies pay their taxes – like anyone else …

txslr August 1, 2011 at 5:40 pm

I have a different concern, though. We speak of government’s share of GDP as if the only damage the government does to the economy is through taxing and spending. In fact, the government has become quite adept at ‘off-balance-sheet’ spending by forcing costs onto the rest of the economy in ways that don’t show up in spending and taxation. Tax-breaks that funnel investment dollars into useless windmill farms and ethanol plants and plug-in hybrid cars, CAFE standards, costs of meeting FDA approval processes, EPA mandates aimed at killing coal, slowdowns in permitting offshore oil and gas exploration, Dodd-Frank, requirements on employers to carry certain levels of health insurance, state insurance commissions defining what health insurance must include, minimum wage laws, etc., etc., etc. These things don’t show up on the accounts in any direct way, but cost the economy enormously.

Some people seem to think that huge government would be fine if we could figure out a way to pay for it that taxpayers wouldn’t notice(e.g. state lotteries and corporate income taxes). The real solution is not in how the government finances what it does, it’s what it does.

When viewed this way nearly the entire debt-ceiling debate has been off-point and addressing the shortfalls by raising taxes heads in entirely the wrong direction.

Krishnan August 1, 2011 at 5:50 pm

There are some who believe that if only the right people were in Government – everything would be just fine – and we would achieve nirvana … The problem, they say, is that we just do not have the right people today and so they need four more years to get the right people … Yes – and I have a bridge to sell.

You are right in that Government inhibits economic activity – so simply looking at Government’s share of GDP is insufficient – the damage it inflicts is HUGE.

yet another Dave August 1, 2011 at 6:06 pm

If there is a huge debt, will mere cutting of spending take care of it?

IF spending was actually cut, yes. But there is no cut, it’s a lie – the politricksters play the game of baseline budgeting where changing the increase from 10% per year to 8% per year is called a cut. Then the rent-seeking parasites scream, using words like “slashing spending” and accusing the evil slashers of throwing grandma out on the street.

It’s even worse than that because the ass-clowns delay all the “cuts” for a future congress to implement, so even the slight reduction in rate of growth won’t happen.

Why not tax defense contractors…

Since defense contractors are paid by the government with funds from taxes how will taxing them more help?

Josh S August 2, 2011 at 8:10 am

Brief version: No matter what you do with tax rates, actual tax revenues top out at ~19% of GDP, because people change their behavior in response to the changing tax structure. The only way to actually get more revenue is for the economy to grow. Raising rates only works very briefly, because actors in the economy quickly adapt to the changing tax code to minimize their liability.

Steve Sutton August 1, 2011 at 4:44 pm

Are the “confidence fairies” related to the “animal spirits”?

muirgeo August 1, 2011 at 5:19 pm

Krugman will be proved right. We have already seen the results of 1/2 a million government jobs being cut since the stimulus. GDP and hiring have since predictably fallen off. Cutting more government jobs will make things worse. The only good thing about the republicans locking up our policy making apparatus, cutting spending, not promoting jobs or trade in any meaningfully is that I will be able to show the libertarians just how wrong they are with each quarters indicators showing continued stagnation.

It’s a shame as we should have learned from the last classical liberal failure that was the Great Depression that it is a dead ideology that has no purpose but propagandizing to hold the rich their places in the autocracy.
I only hope we all live long enough to see the bottom followed by social revolt and serious structural changes that actually increase the purchasing power of the middle class. Because until that happens we will be in the dull drums for a long time. If republican/libertarians polices predominate it’s easy to predict the economy will worsen as “the low hanging fruit” and the prosperous post FDR regime can no longer be pilfered with their 2 Santa Claus approach to make the economy bubble and burst again.. There is no more wiggle room for inept neoliberal policies. Any more pushes in that direction will clearly result in worsening quality of life for more and more Americans. And it will be easy to point out to even the most ideologically blinded.

txslr August 1, 2011 at 5:24 pm

Which Krugman? He just posted on his blog that not raising the debt ceiling probably won’t cause a catastrophe after all.

Darrel August 1, 2011 at 5:21 pm

Hahah, the best Krugman article I’ve read in a while. Not that he is saying anything more than propoganda aimed at mobilizing democratic voters to stand up to the Right-wing extremeist tea party and their loyal vote-monkees in the congress. But I have to say, I love his tone. I detect fear and uncertainty. He’s surprsied that the usual dirty tricks and lowest common denominator politics that has become mainstay in Washington D.C. has NOT worked. The Democrats went to their bread and butter – trying to flip the script on the GOP and demegoug austerity as republicans “throwing grandma off a cliff”. Obviously, Krugman and his other mainstream media comrades have worked hard on producing that narrative – but the American people aren’t buying it.

This article is Krugman trying to use scare tactics [read: another classic from the liberal play book] against his own base to step up the fight against the GOP in this economic debate. Usually – Krugman is able to control himself in order to sound half-way objectionable. This article reeks of bias and reminds me of a boxer on the ropes, trying to swing back with wild, desperate haymakers. It’s will only be a breif matter of time before a few more well placed jabs from the opposition, take him down altogether.

RGDP August 1, 2011 at 5:35 pm

Real GDP declined in 1945, 1946, 1947 and 1949. The 1946 decline meets the technical definition of a depression (>10%).

The <A HREF="http://www.bea.gov/national/xls/gdpchg.xls"data.

steve August 1, 2011 at 5:48 pm

thank you for pulling up the actual data. there is enough in an austrian viewpoint to make for credible arguments in regard to what is best to do today without resorting to creating mythologies about the past.

yet another Dave August 1, 2011 at 6:21 pm

I wonder what might have happened in 1946, when the US gov’t sharply decreased war spending, that would cause the GDP calculation to give a lower number…..

txslr August 1, 2011 at 7:43 pm

National income accounting during the war was a joke. GDP measures the VALUE of goods and services, but how do you figure the value of a Sherman tank? Of course, you can’t, so they just made it up. The closest you could get would be to compare 1941 to 1946. From 1945 to 1946 tells you nothing.

Russ Roberts August 2, 2011 at 1:01 am

The GDP numbers were also distorted bythe end of price controls. There was a mild recession in 1945 before the war ended. 1946 was a very good yeAr for the economy.

steve August 2, 2011 at 9:31 am

so why did unemployment rate go up to 8% by 1948? hold to your mythology if you wish, if garners support from those that already agree with you but does nothing to bolster your view among those outside your circle. your choice, mislead by myth or lead by example. and by the way, you know what helped to turn unemployment down — yup the korean war. and when that was over, unemployment went back up again. there never was your garden of eden, get over it, you are a grown up.

Methinks1776 August 1, 2011 at 6:24 pm

Ummm…..government is spending plenty now. Tons. All on increasing the number of regulations to stop businesses from being able to do anything. Raising costs, pouring sand in the gears. That’s our government spending away.

And if the government isn’t spending enough on an agency (as determined by said agency), the agency just ups the fees it charges the companies its regulating and then passes all kinds of rules to regulate new areas of commerce that are not within its charter.

Krugman is as clueless as they come. Yeah yeah. Most generous interpretation and all that. We’ve all been far too generous to that asshat.

rbd August 1, 2011 at 7:27 pm

Methinks couldn’t be more correct. We’re living in the Regulation Administration. The worst offenders are EPA and SEC. These out-of-control job killers suck the life blood out of the economy under the guise of “protecting the consumer”.

Tell me what’s worse: no job or less CO2 in the air?

Krishnan August 1, 2011 at 7:38 pm

Be careful – there are many out there who would rather that we do whatever we can to reduce/eliminate CO2 – to them, paradise is the earth without humans – except a few of their own, of course … so, in summary, they do not give a d*&n about anyone who wants a job in a functioning economy – they have concluded that humans are all evil (except their own beings …)

Henri Hein August 1, 2011 at 7:08 pm

The stimulus package has been an abject failure, and the people responsible for it ought to be on their knees and apologizing to the rest of us. That includes its cheerleaders in acedemia and the media.

Seth August 1, 2011 at 8:51 pm

It seems to me that the liberal desire to raise taxes now is an unintentional admission by them that the stimulus did not work, since the stimulus was supposed pay for itself by improving the economy and increasing tax revenue.

Krishnan August 1, 2011 at 7:19 pm

I am beginning to doubt that there was a Dr. Krugman who was a serious economist and wrote logically without being a partisan hack. (Yea, I know he got a Nobel Prize, but that was to spite George W. Bush I concluded).

Was there a sane Dr. Krugman? I mean, can anyone point out precisely what is it that Krugman did/wrote that indicated that he did indeed make some sense at some time?

I am curious about the timeline – as to when Krugman went off his mind and became insane as he is today – what if any precipitated his descent into insanity. (Yea, to me he sounds insane and out of control …) (Yes, I know he is at Princeton and a colleague of Uncle Ben Bernanke)

Josh S August 2, 2011 at 8:16 am

“Pop Internationalism” by Dr. Paul Krugman is an excellent book explaining and defending free trade. I think his descent to insanity happened when Bush was “selected, not elected” in 2000.

Jim August 2, 2011 at 1:55 am

Let’s take the opposite tack. Name one legal activity a poor, jobless person can undertake to earn a living without government barrier.

The poor can not open their own taxi service, or style hair, or provide patrons the benefits of their extra rooms or cooking skills. They can’t even sell their own vegetables! Governments have effectively cut off all available entrepreneurial activity for the poor. They are not allowed to take care of themselves without heavy investment in ‘schooling’ and payments to government constructed entities which will regulate their ‘quality’ and suitability, not to mention legal and tax advice. God forbid someone received a bad haircut.

But it gets worse. Structurally, the working poor are precluded from earning a return on investment; the foundational vehicle for the rich to become richer. They are precluded by law from leaving a nest egg for their children or providing an ongoing annuity for their loved ones. For the first 12% of their earnings are consumed by the Ponzi scheme of SS. It does not invest. It does not save. It does not provide a return on investment. To invest, the poor must do so in addition to the precious amounts of income governments take from them by way of social security. That is a bar too high for most folks.

We could talk further how denigration of the dollar and subsidizing the rich adversely affects the poor, how zoning increases the cost of living, and social nets actually dissuade entrepreneurial activity instead of nurturing it.

We need to do more than cut spending. We need to roll back regulation that prevents low income mobility. Laws should nurture a spirit freed to choose their own destiny. Life may be tough. The least governments can do is avoid making it tougher when you’re down.

Governments have tried Keynes way. I suggest trying mine.

Which one do you think will spur the economy more?

Jonas E August 2, 2011 at 2:05 am

Russ,

In your Keynes vs reality post the signature “greg” asked how the structure of the labour force was affected when the soldiers returned. Since he never got an answer to his question I’ll repost it here.

“How many of those 10m new workers took over existing jobs from women who left the labor force?

In other words: were 10m new jobs created or did 10m women quit their jobs just as 10m men arrived to fill the vacancies?”

If 10m new jobs where created then your argument would be even harder to tear apart. If vice versa, then employment rate fell (ratio working pop. / tot. pop.) leaving the unemployment rate (unemp. / labour force) pretty much intact, which is still an effect of free market interaction (think Becker).

I hope the post made sense. Early morning in Europe…

SaulOhio August 2, 2011 at 6:03 am

Isn’t this “confidence fairy” the usual strawman argument? The idea behind slashing government spending is to allow consumers to take back control of the economy. It will not stimulate more spending in terms of more dollars. Just allow consumers to better express their preferences, allowing the economy to return to something more resembling a coordinated system.

Confidence is one of those things that econometricians and Keynesians try to measure. Its HIS kind of concept.

Don Boudreaux August 2, 2011 at 7:35 am

“Regime uncertainty” – as identified by Bob Higgs – seems to me to be slightly yet importantly different than generic confidence; the latter seems more akin to Keynes’s animal spirits – a fact that makes it rather galling for an unreconstructed Keynesian such as Krugman to poke fun at what he calls the “confidence fairy.” How, really, does a “confidence fairy” differ from an “animal spirit”?

Lint August 2, 2011 at 2:02 pm

Not to pick nits, but wouldn’t a natural experiment have been if we cut our spending while other nations that were in a similar scenario didn’t cut theirs? I completely agree that the freeing up of labor and the un-rationing of the economy brought the prosperity after WWII. But I’m not sure this qualifies as a “natural experiment.” Admittedly I don’t have the greatest amount of faith in natural experiments. See Card and Krueger’s famous 1995 paper for why I find the methodology flawed.

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