Brittan on Krugman on Keynesianism

by Don Boudreaux on June 9, 2012

in Complexity & Emergence, Myths and Fallacies, Seen and Unseen, State of Macro, Stimulus

Here’s a letter to the Financial Times:

Favorably reviewing Paul Krugman’s case for Keynesian stimulus spending, Samuel Brittan writes that “Consumers will not spend because of a backlog of indebtedness and businesses will not invest because of pessimism about market prospects” (“You don’t need to be a lefty to support Krugman,” June 7).

I don’t know about the UK, but here in the US it’s untrue that “consumers will not spend.”  Inflation-adjusted personal consumption expenditures in America are now slightly higher than they were at their bubble-buoyed pre-slump peak in the third quarter of 2008, and 4 percent higher than they were at their post-bubble-burst nadir in the second quarter of 2009.  (Note that such consumption expenditures were, at their low during the recession, only 3 percent below their pre-recession high.)

So while Mr Brittan is correct that investors are pessimistic, this pessimism is not plausibly caused by American households’ refusal to spend.  Instead, this pessimism is far more likely caused by factors to which Keynesians are blind, namely, government-created impediments and uncertainties that distort the all-important microeconomic details – what the economist Arnold Kling calls “patterns of sustainable specialization and trade” – on which thriving markets depend.  Increased government spending of the sort that Messrs Brittan and Krugman advocate will do nothing to remedy these problems.

Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA  22030

* Data are from Section 2, table 2.1, line 29 of this BEA site, and are adjusted for inflation using the Minneapolis Fed’s inflation converter found here.

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