It would be hard to imagine Paul Krugman ever advocating tighter money, or more fiscal discipline. He is a screeching Keynesian broken record, but that plays only one theoretical side of Keynes–the side formulated in the midst of the Great Depression.
It would take a book to explain the number of differences between the economic problems of the Great Depression and those faced now, but just a few are: 1) no unemployment insurance and social safety net during the Great Depression; 2) no massive federal codification of the labor/employment relation during the Great Depression; 3) no accumulated wealth of a half century of world-wide American hegemony during the Great Depression; 4) no stagnant population growth or rapidly aging population during the Great Depression; 5) no massive fiscal stimulus (i.e., deficit spending) during the Great Depression; 6) very little economic integration internationally during the Great Depression; 7) no freely floating exchange rates during the Great Depression (until the abandonment of the gold standard), and, 8) no reserve currency status behind which the failures of monetary policy might hide. There are more, but the point is that Keynesian economics are the product of a world that no longer exists.
Keynes was a great and brilliant material philosopher, for his time. But his time is past. And his imagination never leapt the temporal constraints in which it found itself, to reason out timeless economic principles. Keynes proposed a solution, lowered interest rates and fiscal deficits, that held the chance of saving capitalism from its self-destructive tendencies. His was a workman-like solution, something to pull from the economic tool-kit when demand collapsed due to capitalism’s inherent instability. Long dead, it is by now time that Keynes were buried.
But everything that Keynes proposed is what the US (and Japan, et al) has done in trying to revivify the economy, all to no avail. Massive fiscal stimulus has been applied (over $5 trillion in deficit spending since 2008). Interest rates have been nominally zero, effectively negative, for roughly four years. Yet the unemployment rate remains stubbornly stuck above 8%.
Ben Bernanke finally jumped the shark and, channelling his inner Keynesian, last week announced a truly massive, and open-ended, mortgage bond buying program. The US Federal Reserve is getting into the residential real estate business in a big, big way. And of course, Paul Krugman is gratified to see more “stimulus” money flowing into the economy, taking time out to defend Bernanke’s actions against Republican caterwauling:
This is very much the kind of action Fed critics have advocated — and that Mr. Bernanke himself used to advocate before he became Fed chairman. True, it’s a lot less explicit than the critics would have liked. But it’s still a welcome move, although far from being a panacea for the economy’s troubles (a point Mr. Bernanke himself emphasized).
And Republicans, as I said, have gone wild, with Mr. Romney joining in the craziness. His campaign issued a news release denouncing the Fed’s move as giving the economy an “artificial” boost — he later described it as a “sugar high” — and declaring that “we should be creating wealth, not printing dollars.”
Mr. Romney’s language echoed that of the “liquidationists” of the 1930s, who argued against doing anything to mitigate the Great Depression. Until recently, the verdict on liquidationism seemed clear: it has been rejected and ridiculed not just by liberals and Keynesians but by conservatives too, including none other than Milton Friedman. “Aggressive monetary policy can reduce the depth of a recession,” declared the George W. Bush administration in its 2004 Economic Report of the President. And the author of that report, Harvard’s N. Gregory Mankiw, has actually advocated a much more aggressive Fed policy than the one announced last week.
A group of Krugman’s politico-economist colleagues (in profession, not ideology) from the Hoover Institution (George P. Shultz, Michael J. Boskin, John F. Cogan, Allan H. Meltzer and John B. Taylor) got together over at the Wall Street Journal (The Magnitude of the Mess We’re In) to clearly explain the economic challenges facing the US, here’s some highlights of what they said:
Did you know that annual spending by the federal government now exceeds the 2007 level by about $1 trillion? With a slow economy, revenues are little changed. The result is an unprecedented string of federal budget deficits, $1.4 trillion in 2009, $1.3 trillion in 2010, $1.3 trillion in 2011, and another $1.2 trillion on the way this year. The four-year increase in borrowing amounts to $55,000 per U.S. household…
Did you know that the Federal Reserve is now giving money to banks, effectively circumventing the appropriations process? To pay for quantitative easing—the purchase of government debt, mortgage-backed securities, etc.—the Fed credits banks with electronic deposits that are reserve balances at the Federal Reserve. These reserve balances have exploded to $1.5 trillion from $8 billion in September 2008…
The Fed now pays 0.25% interest on reserves it holds. So the Fed is paying the banks almost $4 billion a year. If interest rates rise to 2%, and the Federal Reserve raises the rate it pays on reserves correspondingly, the payment rises to $30 billion a year. Would Congress appropriate that kind of money to give—not lend—to banks?
The issue is not merely how much we spend, but how wisely, how effectively. Did you know that the federal government had 46 separate job-training programs? Yet a 47th for green jobs was added, and the success rate was so poor that the Department of Labor inspector general said it should be shut down. We need to get much better results from current programs, serving a more carefully targeted set of people with more effective programs that increase their opportunities.
Did you know that funding for federal regulatory agencies and their employment levels are at all-time highs? In 2010, the number of Federal Register pages devoted to proposed new rules broke its previous all-time record for the second consecutive year. It’s up by 25% compared to 2008. These regulations alone will impose large costs and create heightened uncertainty for business and especially small business…
We cannot count on problems elsewhere in the world to make Treasury securities a safe haven forever. We risk eventually losing the privilege and great benefit of lower interest rates from the dollar’s role as the global reserve currency. In short, we risk passing an economic, fiscal and financial point of no return.
I quoted so much because the article is so straightforward, important and true. I would encourage everyone to read it.
Even Robert J Samuelson of the Washington Post is skeptical of QE3:
We are reaching — or may already have passed — the practical limits of “economic stimulus.” Last week, the Federal Reserve adopted an open-ended bond-buying program of $40 billion a month to goad the economy into faster growth. But even before the announcement, there was skepticism that it would do much to lower the unemployment rate, which has exceeded 8 percent for 43 months. The average response of 47 economists surveyed by The Wall Street Journal was that a similar program might cut the jobless rate 0.1 percentage point over a year.
If we all remain Keynesians, the long run for the economy will soon arrive. It will be dead, lying in a gutter jacked up by its latest over the top Keynesian dosage of what George Will called monetary morphine.