Krugman: Hey, Small Spender (contrarian)

[Beet]

Here’s the narrative you hear everywhere: President Obama has presided over a huge expansion of government, but unemployment has remained high. And this proves that government spending can’t create jobs.

Here’s what you need to know: The whole story is a myth. There never was a big expansion of government spending. In fact, that has been the key problem with economic policy in the Obama years: we never had the kind of fiscal expansion that might have created the millions of jobs we need.

Ask yourself: What major new federal programs have started up since Mr. Obama took office? Health care reform, for the most part, hasn’t kicked in yet, so that can’t be it. So are there giant infrastructure projects under way? No. Are there huge new benefits for low-income workers or the poor? No. Where’s all that spending we keep hearing about? It never happened.
...
Consider, in particular, one fact that might surprise you: The total number of government workers in America has been falling, not rising, under Mr. Obama. A small increase in federal employment was swamped by sharp declines at the state and local level — most notably, by layoffs of schoolteachers. Total government payrolls have fallen by more than 350,000 since January 2009.

Now, direct employment isn’t a perfect measure of the government’s size, since the government also employs workers indirectly when it buys goods and services from the private sector. And government purchases of goods and services have gone up. But adjusted for inflation, they rose only 3 percent over the last two years — a pace slower than that of the previous two years, and slower than the economy’s normal rate of growth.

http://www.nytimes.com/2010/10/11/opinion/11krugman.html

[sparkey]

What a dumb argument: Obama increases federal spending across the board, but that doesn't count as a substantial increase in the federal government because, er, state and local governments aren't following suit? The truth: Obama has overseen increases in the federal budget across the board, and the debt has risen, and unemployment has remained high. I certainly find "the narrative" more accurate than Krugman does.

[Beet]

Well Krugman points out that even though Obama has overseen increases in the federal budget, those increases have actually been less than what they were during the previous two years when unemployment was low and the deficit was falling. A true Keynesian remedy would have seen increases in the federal budget sufficient to make up for the drop in private spending, over and beyond the rate it normally increases at. That leaves total Aggregate Demand (AD) growing at a constant pace. Otherwise AD stops growing or falls, and you get unemployment.

And of course state and local governments' actions matter. Money is money, no matter where it comes from. Their cuts have amounted to a Hooverite policy that has cancelled out the meager stimulus.

[sparkey]

Is the argument seriously that Obama isn't a "true Keynesian" then? What else would he be? It seems to me that he is following a Keynesian strategy, even if state and local governments are resisting, and he's having difficulty mustering enough political capital to increase budgets as much as he'd probably like to. Again, the facts: the federal budgets have increased, and unemployment has remained high despite that. It's not surprising that Krugman thinks that Obama hasn't been Keynesian enough, and that's the reason that unemployment has remained high. But plenty will reasonably disagree, because "the narrative" matches the numbers.

[tpfkaw]

I'm not sure what universe you're living in, but in my universe Hoover nearly doubled federal spending (more than doubled if inflation is taken into account).

[opebo]

Is the argument seriously that Obama isn't a "true Keynesian" then? What else would he be?

He may be a Keynesian in personal preference, but that isn't of much interest.  He has been unable to be Keynesian in practice and policy.

[Beet]

Of course the argument is that Obama isn't a true Keynesian. Krugman had been urging Obama a far larger stimulus since early 2009, and Obama didn't listen. What Obama is, is a President who looks at what he can get out of Congress, takes it, and then puts the best face on. He's limited by political constraints. But Krugman says he should have at least argued for a much larger stimulus.

To say "the federal budgets have increased, and unemployment has remained high" is a pretty absurd reductionism. I mean, if the federal budget increases by $1, and the unemployment rate stays at 9%, by that argument stimulus failed. Obviously the magnitude matters. And Krugman is saying that the magnitude isn't nearly as great as it's been made out to be. Government spending has actually stagnated or fallen.

Hoover didn't significantly increase federal spending. Spending rose from $11.68 to $12.62 billion from 1929 to 1933. By contrast, FDR increased spending to $20 billion in 1940-- and even then, unemployment remained high. But FDR was a lot more successful than Hoover. Finally by 1945 federal spending had risen from $20 billion to $118 billion-- and unemployment collapsed below 2 percent.

[sparkey]

To say "the federal budgets have increased, and unemployment has remained high" is a pretty absurd reductionism. I mean, if the federal budget increases by $1, and the unemployment rate stays at 9%, by that argument stimulus failed. Obviously the magnitude matters.

That's a very good point. You're absolutely right about that. Of course, the converse similarly fails. We can't say, "Well, unemployment has remained high despite the increased spending, therefore we need even more spending," into infinity.

[Beet]

To say "the federal budgets have increased, and unemployment has remained high" is a pretty absurd reductionism. I mean, if the federal budget increases by $1, and the unemployment rate stays at 9%, by that argument stimulus failed. Obviously the magnitude matters.

That's a very good point. You're absolutely right about that. Of course, the converse similarly fails. We can't say, "Well, unemployment has remained high despite the increased spending, therefore we need even more spending," into infinity.

If you're trying to push a car out of a ditch, you would first try to push as hard as you could, right?

[cinyc]

If you're trying to push a car out of a ditch, you would first try to push as hard as you could, right?

Bad analogy - but apropos.  If you're trying to push a car out of a ditch, you're a moron.  Gravity dictates that the harder you push, the more the car is going to get stuck in the ditch.  You're making the problem worse, not better.  There's a reason why you pull a car up from higher ground, not push it from behind.

It's just like Keynesian economics, though.  Contrary to popular economic myth, Keynesian economics did not get this country out of the Great Depression.  And it won't be what gets us out of the current economic rut.  Propping up politically popular businesses because they are supposedly too big to fail creates perverse incentives by ignoring risk and rewarding failure.  It ensures that economic resources become misallocated for political instead of economic reasons, increases uncertainty and creates a bad business climate for those who have to compete against the government.  Throwing good money after bad down a hole to prop up zombie businesses and zombie government doesn't make sense.

[Beet]

You're not making any new, or supported points, cinyc.

Everyone is aware of moral hazard, which is the official term for "creates perverse incentives by ignoring risk and rewarding failure", and I agree that it's a serious problem. But it has little to do with Keynesian economics. Keynesian Aggregate Demand theory says that government should spend to increase total Demand in the economy. It doesn't say you have to spend it on propping up failing companies. The money might be better spent building infrastructure, investing in education, or transfer payments to the poor to increase consumer spending, for example.

It's true that bailouts have taken place. We've been through this ground countless times. The financial bailouts were necessary to prevent a total meltdown. The bailouts of GM and Chrysler didn't eliminate risk -- the CEO was canned, the shareholders got wiped out, and the bondholders had to take a haircut, and the unions had to make huge concessions. And rather than making it harder for their private sector competitors, like Ford and Toyota-- Ford and Toyota actually supported the bailouts, because their own suppliers were dependent on GM to stay in business. For example, Alan Mullaly "supports the bailout because he thinks that if one company goes down, it will take several major parts-suppliers with it and that will adversely affect Ford's business." Both Honda and Toyota also supported the Big 3 bailout. And remember, they were initiated by the Bush administration, hardly an administration dependent on union backers. And it's not hard to see why: an IHS Global Insight projection in November 2008 predicted that a liquidation of GM would have cost taxpayers $200 billion and 2.5 million jobs.

And GM is hardly a zombie business anymore. Their sales in China, the world's largest and fastest growing market, is up 37% this year on top of a 67% surge last year. Their US sales are up double digits too, and after several years of losing billions, they are now profitable and about to go public again.

[cinyc]

The problem with Keynesian aggregate demand theory is that it assumes money grows on trees or can just be created without any ill effects.  Every dollar spent by government has to come from somewhere, whether it is borrowed (oftentimes, from countries that don't much like us or share our values and crowding out private sector borrowing), confiscated from others through taxation or printed.   And since government does not always know best, the proceeds are often times misallocated away from productive uses to non-productive uses.

Is there any particular reason why the government should be picking and choosing who should be immune from the effects of a recession by spending other peoples' money?  "Investing in education" is a euphemism for bailing out the teachers' union by making sure extravagant (by private sector standards) pay and benefit packages remain in place while others suffer to pay tribute to the union.  Investing in wasteful infrastructure projects like bike paths, bridges for horses, and intermodal facilities out in the middle of nowhere do little to immediately stimulate the economy and may or may not be of long-term benefit.  And those transfer payments to the poor must come from somewhere - and what's to stop the poor from prudently paying down debt instead of spending, anyway?

You don't solve a problem caused by excess borrowing by borrowing more and spending like a drunken sailor to benefit your political allies.  Contrary to conventional economic wisdom, it didn't work in the 1930s.  It will not work today.

[Dgov]

If you're trying to push a car out of a ditch, you would first try to push as hard as you could, right?

No, you first make sure you're pushing it in the right direction and not in the same direction that drove you off the road to begin with

[WillK]

 Propping up politically popular businesses because they are supposedly too big to fail creates perverse incentives by ignoring risk and rewarding failure.  

You must be logged in to read this quote.

Neither of these policies are really Keynesian.

[WillK]

Is there any particular reason why the government should be picking and choosing who should be immune from the effects of a recession by spending other peoples' money? 

The reason for the spending is to to boost aggregate demand in order to generate additional economic activity.  Some forms of spending are definitely better than others and the government often screws this up, but mistakes in implementation don't discredit a theory. 

You must be logged in to read this quote.

It did work then, but I understand that this must be denied at all costs.

[Beet]

Sure, whenever government spends money, it picks and choose which sector of the economy for it to go in. So if you're categorically opposed to that, you can't support any government spending at all. That's pretty silly. In general, the government is called to step in during depressions because the private sector isn't spending any money at all, due to the perfectly rational decisions of individual firms not to invest or expand production in a depressed environment. The Keynesian insight is that this is not necessarily something temporary but can get into a sort of permanently depressed equilibrium that does not 'return to normal'. It is not just the existence of unemployment that provides empirical support for Keynesianism, it is the persistence of unemployment.

I think looking into specifics as to where fiscal stimulus goes can be a valid criticism. The evidence that smaller classes sizes leads to improved student performance is mixed, and Japan threw a lot of money at bridges to nowhere. It's in the details that I'm weaker, I'll admit. I don't know enough about every sector and every policy to determine what the best investments are in that area. Presumably only experts would know best. Still I suspect there are a lot of good investment opportunities out there in this great country that aren't being exploited. For any specific project the aim would be the same for the government as for a private company: to get a return from the investment enough to justify the cost. But unlike a private company, external benefits, public benefits, and long term benefits would be taken into account.

As to your assertions to the 1930s... look this has been debated ad nauseum. I'm not sure if you're trying to restart it. I'll just say here that the empirical evidence is more than overwhelming, and the experts generally agree that fiscal and monetary policy was quite effective. None were more convinced than the contemporaries who actually lived it. The bleatings today smell of rank, failed historical revisionism.

[Marokai Backbeat]

 Propping up politically popular businesses because they are supposedly too big to fail creates perverse incentives by ignoring risk and rewarding failure.  

You must be logged in to read this quote.

Neither of these policies are really Keynesian.

I think it's abundantly clear by now that only a few people on this site, and certainly not people like Cinyc, Vepres, or Libertas, as three examples, actually know what Keynesian economics is.

[Vepres]

 Propping up politically popular businesses because they are supposedly too big to fail creates perverse incentives by ignoring risk and rewarding failure.  

You must be logged in to read this quote.

Neither of these policies are really Keynesian.

I think it's abundantly clear by now that only a few people on this site, and certainly not people like Cinyc, Vepres, or Libertas, as three examples, actually know what Keynesian economics is.

You should get your head checked for short-term memory loss.

Keynsian economics, in a nutshell, is running large deficits in recessions, and raising taxes and such to create a surplus in economic expansions.

[Marokai Backbeat]

Yet you called Bush and Keynesian.

[Vepres]

Yet you called Bush and Keynesian.

Yeah, apparently I can't realize I had prior misconceptions

Admit it, you just hate me for some irrational reason.

[Obnoxiously Slutty Girly Girl]

 Propping up politically popular businesses because they are supposedly too big to fail creates perverse incentives by ignoring risk and rewarding failure.  

You must be logged in to read this quote.

Neither of these policies are really Keynesian.

I think it's abundantly clear by now that only a few people on this site, and certainly not people like Cinyc, Vepres, or Libertas, as three examples, actually know what Keynesian economics is.

You should get your head checked for short-term memory loss.

Keynsian economics, in a nutshell, is running large deficits in recessions, and raising taxes and such to create a surplus in economic expansions.

Vepres, you were right the first time. Minor policy deviations are irrelevant. No president since FDR has ever even attempted to reject the Keynesian worldview in his economic policies.

Krugman is an idiot and Keynesianism is a synonym for economic ignorance, but that's of course common knowledge already.

[Marokai Backbeat]

You count half of Keynesian economic doctrine missing as "minor policy deviations"?

[cinyc]

Propping up politically popular businesses because they are supposedly too big to fail creates perverse incentives by ignoring risk and rewarding failure.  

You must be logged in to read this quote.

Neither of these policies are really Keynesian.

I think it's abundantly clear by now that only a few people on this site, and certainly not people like Cinyc, Vepres, or Libertas, as three examples, actually know what Keynesian economics is.

Really?  It's demand-side economics that claims when GDP is falling (that is, C+I+G, usually +X for net exports), because of falling Consumption and/or Investment,  Government spending, should be increased to make up for the shortfall.  It doesn't take into account that there is no such thing as a free lunch - and in order to increase G, the government has to beg the Fed to print money, borrow from overseas (these days) or steal from the so-called rich through higher taxes, crowding out the private sector, ultimately decreasing C and I in the long-term.  And the government being the government, most of the G is wasted on useless programs and projects that provide net benefits to the political allies of the government in question.

Don't tell me I know nothing about economics because I don't agree with conventional conclusions that Keynesian economics works.

[Southern Senator North Carolina Yankee]

Sure, whenever government spends money, it picks and choose which sector of the economy for it to go in. So if you're categorically opposed to that, you can't support any government spending at all. That's pretty silly. In general, the government is called to step in during depressions because the private sector isn't spending any money at all, due to the perfectly rational decisions of individual firms not to invest or expand production in a depressed environment. The Keynesian insight is that this is not necessarily something temporary but can get into a sort of permanently depressed equilibrium that does not 'return to normal'. It is not just the existence of unemployment that provides empirical support for Keynesianism, it is the persistence of unemployment.

I think looking into specifics as to where fiscal stimulus goes can be a valid criticism. The evidence that smaller classes sizes leads to improved student performance is mixed, and Japan threw a lot of money at bridges to nowhere. It's in the details that I'm weaker, I'll admit. I don't know enough about every sector and every policy to determine what the best investments are in that area. Presumably only experts would know best. Still I suspect there are a lot of good investment opportunities out there in this great country that aren't being exploited. For any specific project the aim would be the same for the government as for a private company: to get a return from the investment enough to justify the cost. But unlike a private company, external benefits, public benefits, and long term benefits would be taken into account.
As to your assertions to the 1930s... look this has been debated ad nauseum. I'm not sure if you're trying to restart it. I'll just say here that the empirical evidence is more than overwhelming, and the experts generally agree that fiscal and monetary policy was quite effective. None were more convinced than the contemporaries who actually lived it. The bleatings today smell of rank, failed historical revisionism.

The problem is that with 1) special interests and 2) Pandering Politicians picking where to spend the money it is almost guarrenteed that a lot of Stimulus money that could go to a bridge somewhere's else that would be used more, or an existing bridge that is used heavily, gets sent to a bridge that happens to be in Jim Oberstar's or Don Young's district but is practically useless.

[opebo]

The problem with Keynesian aggregate demand theory is that it assumes money grows on trees or can just be created without any ill effects.  Every dollar spent by government has to come from somewhere, whether it is borrowed (oftentimes, from countries that don't much like us or share our values and crowding out private sector borrowing), confiscated from others through taxation or printed.   And since government does not always know best, the proceeds are often times misallocated away from productive uses to non-productive uses.

You are as usual missing the point - during deflationary depressions the money is not allocated to any uses, productive or otherwise - it sits inactive in the hands of the elite.  Seizing it from them or 'borrowing' it from them is good policy, and all the effects of same are beneficial.  Another way of putting this is government does in fact always know best - the fact that you prefer to be controlled by set of haphazard aristocrats is pretty pathetic.

And of course this is precisely what got the US out of the depression (WWII).