Smart. Sharp. Funny. Fearless.
Thursday, September 29, 2016

Defending Krugman: The Importance Of Keynesian Economics

Keynes was right: increased government spending in the U.S. is necessary to decrease unemployment and raise demand in the near-term.

Paul Krugman hardly needs defending, but his views about the need for Keynesian stimulus in the U.S. right now are coming under considerable fire from centrist and left-of-center economists. I find this disturbing because Krugman’s view abides by basic Keynesian principles that seem to have been discarded by many who profess themselves Keynesians. Is there a wide misunderstanding of Keynes?

What seems to upset people is that Krugman argues the government must spend more money now, almost regardless of what it spends it on. The Keynesian thesis is that economies can settle at a high level of unemployment rather than re-adjust to the optimum unemployment level—or level of economic activity—on their own. This was a response to the classical, pre-Depression view that the beauty of free markets was a self-adjustment process based on falling prices in downturns. But ultimately the problem is a lack of demand, and Keynes advocated budget deficits to support an increase in demand.

The lack of demand in the economy now is palpable. Krugman’s contention is that in the near-term, we can solve this problem if we have the will to do so. The economy can reduce its rate of unemployment fairly rapidly with adequate Keynesian stimulus. It is clear that monetary stimulus at this point is not enough.

This view is not incompatible with longer-term concerns about the economy — inadequate education for too many, infrastructure decay, old energy technologies, and so on. Many seem to criticize Krugman for not acknowledging “structural” changes in the economy, and they implicitly agree with classical conservative observers that the unemployment rate really can’t fall much below 7 percent. I can’t speak for Krugman, but he seems to be saying that we should not mix up longer-term structural issues with near-term demand inadequacy. It’s very likely the unemployment rate can fall much farther without igniting inflation.

  • dtgraham

    The irony of Republicans becoming defense Keynesians, as sequestration approaches, is delicious isn’t it? They’re now actually beginning to argue that government military spending is stimulative to the economy and any reduction will trigger overall job losses.

    Big balls and no shame. That’s today’s GOP.

    • The longer you are wrapped up in Republican vs. Democrat arguments, the longer it will take you to gain a true understanding of economics.

  • rustacus21

    This is about as scientific as we need to be in comparing ‘real’ economics w/hypothetical, laboratory (supply-side), mad science. This stuffs “WORKS” on paper, in the real world, but most especially, on fed, state, local & household budgets… Can I get a witness… @1600 Pennsylvania?…

  • Ignoring republican rants, there is no doubting the result of Keynesian stimulus as pitched by Paul Krugman. It is his clearly stated fundamental assumption behind application which I believe is the source of error; to wit, that there has been no structural economic changes to render a Keynesian stimulus either relatively impotent or resulting in unexpected and unwanted outcomes.

    Leave aside Krugman’s argument that a new Keynesian stimulus should be accompanied by 3 – 4 % inflation so as to reduce the value of the debt significantly, then continuous rollover could eventually render the debt so valueless and inconsequential it may never need to be repaid.

    Concentrate instead on the environment that sought after economic growth is contained in. This is a well explored viewpoint that Paul Krugman has so far refused to consider; growth acceleration in an environment viewed by Keynes himself as infinite relative to the economic growth is entirely different than growth which induces increased environmental friction rather than receiving additional free lunches from the planet.

    There has been a qualitative change in the reception of human economy growth as a subset of the planetary environment and the solar budget. The structural shift to increased environmental friction from induced Keynesian stimulus results in required recognition that growth of prosperity in the modern information-age economy has changed from quantitative to qualitative growth. This structural change is not trivial, the economy as a subset of the environment is also included in the mathematics of quantum mechanics and information-age democracy.

    • I’m estimating the bong hit count for this post at 4.

  • Where has Keynesian economics EVER worked? It is robbing Peter to employ Paul. No jobs outside the private sector are self sustaining and Keynes attacks those first.