Saturday, December 31, 2011

Keynes, Krugman, and Common Sense

"Keynes Was Right" argues Paul Krugman in his NY Times Op-Ed column of Dec 30. "The boom, not the slump, is the right time for austerity at the Treasury" said Keynes in 1937. His pro-Keynes argument goes on for four half-page columns without once citing any historical or present-day evidence that this concept has ever actually been shown to work! He chides FDR for cutting spending too soon thereby prolonging the recession of the 1930s at a time when the economy was showing signs of improvement. Obama has made the same mistake, Krugman maintains. Now is the time to spend more, buy more debt, etc. to get the economy to improve even more quickly.

Let's assume Krugman and Keynes are correct. Does one just keep buying debt (printing money) as the economy continues to slump? Surely there must be a point at which economists would agree that it may be time to consider the alternative - namely a limit on spending. How does Krugman (or Keynes) know when that point has been reached? He does not inform us. How can one be certain that continued government spending in the 30s would have speeded a recovery? Where are the data that show continued spending is the answer to our current economic issues?

It's all theory. Common sense may teach otherwise. To paraphrase Ecclesiastes: "For everything there is a season - a time to be born and a time to die, a a time to sow and a time to reap, etc." Well perhaps during periods of recession there may be a time to spend and a time to stop spending. I think Moody's agrees.

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