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October 28, 2011


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It doesn't seem to me that he's defending Keynesianism here so much as attacking policies that advantage "job creators" as an economic cure. The whole thrust of his argument is that the financial sector got help and the proletariat or whatever didn't.

It's a stupid article. Iceland isn't at all comparable, because they essentially defaulted. Heck I sort of think Greece should have defaulted and fallen out of the Euro - at least, the Economist has made some pretty good arguments in that direction. The US can't default; the closest we can get is rounds of QE. Further, it seems pretty clear to me that we didn't really lose any money on TARP, and indeed I think it's relatively uncontroversial that "the 99%" benefited from it far from they lost. Krugman brings it up purely as a class warfare trope, slyly suggesting it was a handout to bankers without specifically saying that it was a bad idea or that it was costly.

Krugman can hardly be unaware of this, and so this is actually not a stupid article, it's an unusually intellectually-dishonest one. This is the kind of thing that makes it so hard for me to read the man on a consistent basis.

But neither is it appropriate to take this as "the best available arguments in favor of "the path not taken.""

In any case, I'm not at all convinced we really saw any stimulus in the aggregate: "With deficit spending at 10% of GDP for three years, this is as Keynesian a fiscal policy as we've had in decades" is potentially mistaken. At the same time the federal government was spending more, the state and local governments were spending much less. There are important differences between the two, but it seems very arguable that the "stimulus" really amounted to a mere aversion of sudden *contraction* in government spending.

Really, the only thing I think was plainly shown by recent economic results (since ~1980) is that lower taxes do not *by themselves* create a tremendous amount of growth or jobs unless you're coming down from a very high level. This doesn't refute any economic theory that's still well respected in 2011*, so I would regard economic history as less than dispositive on the major controversies in macro.

*It does refute a sort of supply-side economics popular amongst politicians, but I don't think that any serious economists have taken the position since Robert Mundell in the early 1980s, so I'm not sure that counts.

Nathan Smith

You're more positive about the benefits of TARP than I am, though I'm still retrospectively in favor of it, on balance. The problem is that TARP, and in general Bernanke's determination to save the banks, created tremendous moral hazard. And the result seems almost to have changed the banks so much that they're no longer doing their job. They hoard vast amounts of cash at the Fed rather than lending to business. Businesses, meanwhile, have hoarded enough of their own cash that a lot of them can invest without the banks' help. The cost of bailing out the banks almost seems-- this is tentative-- to have altered the nature of (and the incentives of) the banks so much as to make them much less valuable to the economy. If the banks had been allowed to go bust, one presumes that finance wouldn't have disappeared; savers and borrowers would have found some way to get in touch. In the internet age it might have been easier. And the Fed can take over the money-creation role of the banks pretty easily. I'm still with the consensus view, but on this point, I think Krugman's unorthodox view deserves respect.


"I think Krugman's unorthodox view deserves respect"

It would, perhaps, if it was really a view, rather than an veiled aspersion.

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Second, the results are certainly not in-- yet.

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