Keynesian Economics and the Ash-heap of History

KrugmanHunter KeynesThis is the first time in my review series on the financial crisis of 2008 that I am doubling up by covering two books in one review.  On the other hand, neither of these books are specifically about the 2008 crisis either, though neither of them would have come out if it were not for the crisis.  On one hand, we have a re-tread from Paul Krugman of his 1999 bomb, The Return of Depression Economics.  Originally written to evaluate Japan’s disastrous decade, Krugman re-worked the book in 2008 to lay out his prescription for what plagues the U.S economy (and when I say he re-worked the book, what I mean is that he added about 10 pages through one additional chapter).  It should be no surprise that in both cases (Japan then, and the U.S. now), Krugman says that the entire issue comes down to “aggregate demand”.  And for a committed Keynesian like Krugman, this demand can only be created by the federal government during tough economic times.  The private sector goes into retreat, foolishly trying to protect their own interests.  But with the right amount of deficit spending and government stimulus, demand can be re-ignited, and the overall economy can be saved from the pains of recession.  We can drink all night, and not even need Aspirin in the morning.  What a deal …

And what a farce.

I am not going to let the fact that Paul Krugman is one of the most belligerent, lazy, disproven, toxic “economists” in the world today get in the way of this brief review.  The reason I am including Hunter Lewis’s book in the review is that this is not really a critique of Krugman at all, but really a broader critique of the true source of his line of thinking: the deceased British economist, John Maynard Keynes.

In 2002, Paul Krugman wrote, “Alan Greenspan needs to create a housing bubble to replace the NASDAQ bubble”.  This comes close to reflecting the honesty and self-awareness of Keynes himself who once wrote that the economy could be served by “paying workers to dig ditches and then fill them up again.”  Hearing Krugman advocate the purposeful creation of one bubble as a means of handling the pain of another is music to my ears.  I think it is important to use the words of actual Keynesians like Krugman and Keynes himself to indict them.  Rductio ad absurdums are fun, but they are not fun when they are really lame straw men.  However, accusations of straw man fallacy do not come easily when one is using someone’s own words (in context) against them.

Hunter Lewis does a fine job of this in his Where Keynes went Wrong.  It is not the best critique of Keynes I have ever read, but it does include more anecdotal proof of what Keynes said and believed than anything I have seen.  Keynes was a radical statist, probably guilty of more eccentric and inconsistent economic posturing than anything else.  Lewis feels no need to let Keynes off the hook for his remarkable hypocrisy, and he doesn’t.  My complaint is that the book is quite hard to read from a formatting standpoint.  Though Lewis was trying to make it easier for readers, it didn’t work.  But complaints about layout notwithstanding, the book is a valuable reference for those who want to see in Keynes own words what he really believed.  If two generations of Presidents are going to buy into his premises and conclusions about economic theory, the least we can do is better understand the man and the economic philosophy guiding American leadership.  Suffice it to say, you will exit your study of the subject rather convinced that our own leaders have not themselves studied it.

To throw in my own contribution to the subject, Krugman and Keynes are wrong in premise #1, which is that a third-party entity, namely, the federal government, is more qualified to determine what to spend and when to spend it, than the actual market participants themselves who may be increasing or decreasing their own activity.  Any drunk who tries to solve a hangover with more booze leaves himself with a bigger problem: an even worse hangover.  Krugman and Keynes, however, end up in such a ridiculous economic place because their very first premise is so tragically flawed: faith in the wisdom of the almighty state to make these decisions for us all.

Of course there is another tragic flaw in the most fundamental of Keynesian beliefs, and it might even be worse than the fact that the state is not qualified to do what they have ordained them to do.  This flaw is: the government can not do what they have asked them to do, because they do not have any money.  The only way for the government to try and make up for what the private sector is doing (or not doing) is to take from or borrow from that very private sector.  This is fine (even if I do not like it) as a collectivist political philosophy, but it does not help those looking for genuine economic recovery solutions.  Krugman now states that the $800 billion stimulus President Obama signed into law has been such a huge failure because it was not big enough.  This is “convenience” economics, which rhymes a bit with Keynesian economics.  Spend and borrow.  If that does not work, spend and borrow some more.  Repeat ad infinitum.  Die before your children come seeking your head.

Those last few sentences truly do summarize the economic philosophy of nobel-winning Paul Krugman and his mentor, John Maynard Keynes.  In reality, the solution for falling prices is, and always has been , falling prices.  For when prices fall, they end up finding buyers.  Producers and consumers do business on their own terms.  When the government decides that they will “help them along”, they need neither “help” them, or move anything “along”.  Anything, that is, besides the national debt.

I believe that one of the great aftermaths of the 2008 financial crisis will be the final nail in the coffin for Keynesian economics.  We are coming out of that recession with far, far more debt than we had going in (debt that has to be paid back, and probably in a much higher interest rate environment than we are in now), and yet there is not an iota of evidence that the government-sponsored spending played any role in the economic recovery.  This has been a recovery driven by globalization, by corporate earnings, and by economic decision-making.  The government’s own actions have done nothing but impede that very recovery, not advance it.  The 1970’s were supposed to be the end of the Keynesian experiment.  The 1980’s and 90’s should have been.  I suspect that as long as we have big-government-collectivism we will always have the convenience of Keynesianism to fall back on (“Dear Americans, times are so tough, and we are so determined to do something, and not be like Japan, that we are going to go back to the old Keynesian formula of inane government spending again”).  I wish these people would stop.  We would not need to try and ease the pain of a bubble burst if these people would quit creating bubbles (and now I am talking both to the Keynesians and politicians in D.C. as well as the Greenspans of the central banking world who all seem to bathe in the land of unintended consequences).  We are in need of some real grown-ups in Washington D.C. to make some very tough political decisions.  And beyond moral fortitiude and mental maturity, we are doing to need them to have been educated at the feet of some other economist than John Maynard Keynes.