Saturday, December 31, 2011

Really? Keynes Was Right?

Nobel Prize Laureate and NY Times OP-Ed Columnist Paul Krugman in his last Thursday's piece Keynes Was Right wrote;

"In declaring Keynesian economics vindicated I am, of course, at odds with conventional wisdom. In Washington, in particular, the failure of the Obama stimulus package to produce an employment boom is generally seen as having proved that government spending can't create jobs. But those of us who did the math realized, right from the beginning, that the Recovery and Reinvestment Act of 2009 (more than a third of which, by the way, took the relatively ineffective form of tax cuts) was much too small given the depth of the slump. And we also predicted the resulting political backlash.

So the real test of Keynesian economics hasn't come from the half-hearted efforts of the U.S. federal government to boost the economy, which were largely offset by cuts at the state and local levels. It has, instead, come from European nations like Greece and Ireland that had to impose savage fiscal austerity as a condition for receiving emergency loans - and have suffered Depression-level economic slumps, with real G.D.P in both countries down by double digits."

He essentially makes the (intuitively plausible)case that spending cuts during a downturn can only exacerbate a nation's woes... And cites Greece and Ireland as proof...

Now, in my simplistic view of the world, I struggle with Mr. Krugman's assertions... For one, Greece and Ireland need "emergency loans". Greece and Ireland apparently subscribed fully to the Keynesian notion that when a government borrows from its own people and/or others, the deployment of the borrowed capital will provide offsetting stimulus and the wherewithal to later pay back the debt with interest... But, again, Greece and Ireland need "emergency loans"... And what's this about "savage fiscal austerity"? Yes, those who would offer aid to Greece demand that they show real fiscal restraint going forward (how dare they), that if they continue in their profligate ways, bailed-out they ain't... But "savage" is an awfully strong word, and wasn't Greece's austerity budget just passed the other day? Has there indeed been ample time for this "savagery" to cause a "Depression-level economic slump"? Or could it be that Greece is what becomes of a country when [virtually] its entire economy is at the mercy of bureaucrats spending other people's money on other people?

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