Everything Wrong With Krugman and Keynesian Economic Thinking

The excerpt is originally written by David Stockman and can be at David Stockman's Contra Corner » Stockman’s Corner. 

It is fortunate that Paul Krugman writes a column for New York Times readers who want the party line sans all the economist jargon and regression equations. So her

It is fortunate that Paul Krugman writes a column for New York Times readers who want the party line sans all the economist jargon and regression equations. So here is the plain English gospel straight from the Keynesian oracle: The US economy is actually a giant bathtub which is constantly springing leaks. Accordingly, the route to prosperity everywhere and always is for agencies of the state—especially its central banking branch—to pump “demand” back into the bathtub until its full to the brim. Simple.

You often find people talking about our economic difficulties as if they were complicated and mysterious, with no obvious solution. As the economist Dean Baker recently pointed out, nothing could be further from the truth. The basic story of what went wrong is, in fact, almost absurdly simple: We had an immense housing bubble, and, when the bubble burst, it left a huge hole in spending. Everything else is footnotes.

And the appropriate policy response was simple, too: Fill that hole in demand.

True enough, the housing and credit bubbles did burst. But that’s exactly where the rubber meets the road in the debate between Keynesians and Austrians. The latter see bubbles as an artificial expansion of economic activity owing to cheap credit and the malinvestments which flow from it.

When bubbles inevitably burst, therefore, the artificial bloat in investment, output, jobs and incomes is eliminated—or in the old fashioned phrase, liquidated.  Moreover, liquidation is the equivalent of purging a cancer; it removes a malignant growth, but does not reduce the true wealth of society or the sustainable living standard of the people.

The reason for this proposition is Say’s Law. That is, sustainable demand must originate in production; valid “spending” must be derived from the income earned in the process of supplying real goods and services. That includes spending that is financed by savers out of their own current incomes, and spending by transfer payment recipients that is financed by taxes on producers.

The full article can be found after the jump here, click here.