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Steve Landsburg (channeling Murray Rothbard) points out [2] that the simple Econ 101 Keynesian multiplier is a fraud because it assumes that an increase in G is not offset by any other behavioral changes.
Paul Krugman [3] and Daniel Kuehn [4] accuse Landsburg of caricaturing Keynesianism–of course there can be crowding out, the multiplier doesn’t hold at all times, it’s not a constant, and so on.
Here is Krugman:
Anyone who’s followed the various attacks on yours truly knows what I mean: Keynesians believe that budget deficits never matter, that increasing demand can solve all economic problems, that there’s no such thing as a supply side to the economy, that more spending is always good. You can see it even in the comments to Kuehn’s post, with people expressing doubt about whether there’s crowding out in my textbook. Let me suggest a very difficult research project: how about actually looking at the book?
Now, to some extent Karicature Keynesianism involves extrapolating what people like me say about policy in a depressed economy with interest rates up against the zero lower bound and pretending that this is what we say in all situations. But where’s this urge to caricature coming from?
I’m sure that Krugman understands that budget deficits can matter, that increasing demand doesn’t solve all economic problems, that the supply side is relevant, that government spending can be too large, and that there is a potential for crowding out.
So when he relentlessly champions increasing government spending, he evidently only means now, under these circumstances, which would include a debt to GDP ratio of 75%, a level of government spending of $3.5 trillion, and that crowding out under the current situation is small. He’s not stupid. He understands that the world is more complex. He isn’t always in favor of more government spending.
I have three questions for Professor Krugman and those such as Daniel Kuehn who think Landsburg has caricatured their position:
What empirical evidence can you provide that suggests that these factors (debt to GDP ratio, supply side factors, crowding out) are not relevant right now?
Second, given that you have relentlessly advocated greater spending, can you explain when you would not favor an increase in spending and the evidence for those conditions? A related question–are the benefits of greater spending always positive as long as unemployment is above 4%?
Third, does the failure of the Keynesian models using multipliers from past economic experience to accurately predict the effect of the 2009 stimulus package give you any uncertainty about your claims?