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What happened to all of the doom and gloom economic threads?

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mercury14 said:
I'm not advocating for the Clinton era tax rates. I'm advocating to keep the Bush cuts for almost everyone. There's a huge difference there which you choose to ignore for some reason.
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That's a political, not an economic stand.

Targeting groups produces antipathy and division.

Economics, like Justice should wear a blindfold. The only ignorance is this.
 
4est_4est_Gump said:
Falling gas prices would have spurred sales in a healthy economy.

This is an example of liberal writers trying to put a good face on their chosen economic polity.

If you have more money because less of it goes in the tank, then by all standard, confidence should go up and when confidence goes up, then spending goes up. Perhaps its the drop in gas prices that is the insignificant element in our current calculus...
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They surely did spur sales but apparently not enough. The drop in gas spending was $1 billion dollars.

Also, lower spending on gas doesn't translate directly into more spending. The savings are also used on savings, debt repayment, etc.
 
Still, the point remains that the economy is going in the wrong direction and gas prices are but one signal of this as are declining sales.



A tax hike on anyone is not going to change this unhappy fact.
 
Why does Krugman favor increased government spending? After the collapse of the housing market and the bank and investment house failures that accompanied this collapse, consumers' spending fell. Faced with the prospect of diminished spending by consumers, investors were reluctant to invest. Unless the government acted, the economy threatened to spiral downward. Government aid programs and actions by the Fed prevented total collapse, but spending has not been sufficient. The government needs to do more. "Why is unemployment so high, and economic output so low? Because we — where by 'we' I mean consumers, businesses, and governments combined — aren't spending enough" (p. 24).

One might at first object to Krugman's argument in this way. If the government spends more but does not increase the supply of money, must it not be the case that someone else has spent less money? In this view, there cannot be an overall failure of demand. More of particular goods can be produced than people want at the price they are offered for sale, but there cannot be general overproduction.

Krugman rejects this counterposition. "This is the fallacy Keynes called 'Say's Law'" (p. 25).

What is wrong with Say's law, in brief, is that money need not be either spent or invested. People can hoard money; and, if they do so, a failure in total demand can indeed result. Surprisingly, he does not offer a detailed account of how hoarding produces this failure in total demand. "You can write down a little mathematical model to illustrate the issues, but this works only with economists, not with normal human beings (and it doesn't even work with some economists)" (p. 26). Instead, he supports his criticism of Say's law with a story that he has already used in his The Return of Depression Economics. The story is about a babysitting cooperative, the members of which find themselves at cross-purposes.

I do not propose to rehearse here the details of Krugman's babysitting example and its relevance to the case of economic depression.[1] Let us instead look at the Keynesian analysis directly. Does it rest on plausible assumptions? What evidence supports it?

It will come as no surprise to readers that the Keynesian account strikes me as unpersuasive. For one thing, as Krugman himself acknowledges, the depression starts with the collapse of particular markets such as housing. If this is so, why are investors supposed to fear a general fall in future consumer demand? Is not the problem rather that there has been malinvestment in specific areas? The solution would then be to shift resources away from these areas into others. So long as this is done, why would businessmen refuse to invest?

Krugman is aware of this response, but he believes it is just what we need to avoid. He cites Joseph Schumpeter, who warned against policies of government stimulus to end depressions. Instead, bad investments should be left to fail:

For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested remnant of maladjustment, new maladjustment of its own which has to be liquidated in turn, thus threatening business with another crisis ahead. (p. 204, quoting Schumpeter)
Krugman does not tell us what is wrong with Schumpeter's reasoning. Instead, he takes for granted that investors in a depression expect a general collapse in consumers' demand.

But suppose, contrary to fact, that investors did expect a general fall in consumer demand. Would it follow that investment would stop, miring the economy in continuing depression? By no means. As Friedrich Hayek noted long ago, investment in a business can be profitable even if demand for the product of the industry has fallen. What concerns the businessman is not the quantity of his product that buyers demand at a given price, considered in isolation, but rather that amount compared with his costs. If his costs have also fallen, why cannot investment continue?

As Hayek says,

As it is not the absolute level of the prices of the product, but only their relative level in comparison with factor prices which determines the remunerativeness of production, it is, therefore, never the absolute size of the demand for consumption goods, but the relative size of the demands for the means of production to be used for the various methods of producing consumption goods that determines this relative profitableness.[2]
Krugman might respond to our objections in this way: "You may cavil at various details of Keynes, but the evidence demonstrates that he is right. Government spending does indeed revive prosperity and create jobs."

Does not this response ignore the obvious? The government under Bush and Obama has spent a great deal of money; but, on Krugman's own showing, the economy has failed fully to recover. Does this not give us some reason to think that the Keynesian prescription is inadequate? Krugman does not think so. He says the problem with current American policy is that the government has not spent enough. Further, he says, he does not here speak with the wisdom of hindsight. He warned long ago that the amount of money the government proposed to spend would not suffice to bring about recovery.

I personally was more or less tearing my hair out in public as the shape of the [Obama] administration's plan began to come clear.… I feared that an inadequate stimulus would both fail to produce adequate recovery and undermine the political case for further action. (p. 119)
In cases where a correlation exists between government spending and increases in employment, he awards full marks to Keynes:

As military spending [in 1940] created jobs and family incomes rose, consumer spending also picked up (it would eventually be restrained by rationing, but that came later). As businesses saw their sales growing, they also responded by ramping up spending. And just like that, the Depression was over. (p. 39)[3]
Krugman does not so much as mention the pioneering work of Robert Higgs, Depression, War, and Cold War, which decisively challenges the contention that World War II ended the Great Depression. Higgs convincingly shows that prosperity returned only after the war ended. But let us, very much contrary to fact, suppose that Krugman is correct about the effects of government spending in the years after 1940. His defense of Keynes would still be grossly deficient.

What he is in effect saying is this: "Instances that appear to confirm the claim that government spending ends depressions count in favor of Keynes. But cases that go against Keynes do not count, because we cannot rule out the possibility that greater spending would have worked."

What Keynes's friend Piero Sraffa, who cannot be suspected of bias in favor of the Austrian School, wrote in his copy of Keynes's General Theory applies to Krugman as well: "as usual, heads I win, tails you lose."[4]

One passage in the book is unintentionally revealing. Given Krugman's stress on the importance of propping up investment through government stimulus, one might have expected him to favor measures to boost business confidence. Instead, he cites with approval the Polish Marxist Michal Kalecki, who warned that appeals to business confidence were an instrument by which the capitalist class endeavored to control policy. Government should not placate business but instead control the economy directly:

Every widening of state activity is looked upon by business with suspicion, but the creation of employment by government spending has a special aspect which makes the opposition particularly intense. Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence.… This gives the capitalists a powerful indirect control over government policy; everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. (pp. 94–5, quoting Kalecki)

Krugman remarks, "This sounded a bit extreme to me the first time I read it, but it now seems all too plausible" (p. 95).

Krugman yearns for the glory that was Roosevelt and the grandeur that was Truman, but he evidently thinks that their revolution against capitalism needs to proceed further.

Krugman has nothing to say about the Austrian theory of the business cycle. Hayek is mentioned once (p. 205) in connection with the passage from Schumpeter previously quoted, but his name does not appear in the book's index. Mises and Rothbard are not mentioned at all. Given his manifest lack of understanding of the Austrian theory in earlier work, this is just as well.[5]
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http://mises.org/daily/6080/End-This-Nonsense-Now
 
Why did Krugman choose England as his example of negative austerity?

This summer will bring more to Greece than just fiscal chaos. The Mediterranean summer will also bring tourists, many of whom will come from Europe’s colder north. While this year’s tourists will provide some of the usual economic benefits, there is one country whose citizens will also be able to bring lessons on economic growth and recovery. Sweden, often dismissed by free marketers and embraced by the left, provides some of the best examples of how privatization and sensible banking policy can lift a country out of an economic slump. The Greeks would do well to learn from the Swedish experience.

Up until the 1970s Sweden had strong market-oriented policies in place that increased wealth and standards of living thanks to reforms introduced at the end of the 19th century. These Swedish market reforms were wide ranging, impacting both business and law. Property rights were enforced, the government was limited, regulation was light, and a private banking sector flourished. Sweden managed to avoid direct involvement in the Second World War and so was able to avoid the economic hardship endured by the rest of Europe that helped introduce centralized governments and public service institutions.

In the 1970s the Swedish government implemented policies that were anti-market and pro-government. Taxes went up and many industries were subsidized. The currency was devalued and burdensome additions to employment law were introduced. The result was the economic crisis of the early 1990s.

In response the Swedish government reverted to free-market polices. In the years following the 1990s crisis, Sweden has deregulated whole industries and encouraged the privatization of public services. One Swedish hospital is listed on the stock exchange while the country's education system is the most market-friendly in the word, with a popular voucher program and for-profit schools. Sweden has also managed something almost unheard of in Europe: budget surpluses.
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http://reason.com/archives/2012/06/13/nordic-lessons-for-the-mediterranean
 
Echoes of A_J:

Today's European debate isn't about governmental austerity, it's about governmental reality. Ultimately, the argument is not whether governments can keep trying to stimulate their economies, but when their creditors will quit financing it. Somehow, Europe's governments, teetering on tilting economies, have missed this point; we can only hope that Washington hasn't.

We are witnessing a prolonged domino-effect among the world's economically intrusive states. It began over two decades ago with the fall of the USSR and communism across Eastern Europe. Now the dominoes are falling into Western Europe -- Greece, Portugal, Spain, and Italy, all are threatened with economic collapse.

By now, the obvious should be axiom: A state cannot run an economy and a state-run economy cannot sustain its state. The more of its economy a government consumes, the less productive its economy becomes. And the more dependent its subpar economy then becomes on its government.

This vicious cycle creates a widening gap between what the government promises and what its economy can deliver. The government resorts to spending more, while its economy responds by producing increasingly less of the revenue needed to finance the government's increasing spending.

The only reconciliation possible between the over-demanding government and its under-producing economy is borrowing. Once this pattern becomes firmly and deeply established, the conclusion becomes inevitable. Political oppression -- as in both former and current communist countries -- can temporarily extend the contradiction, but it cannot extinguish it.

Of course, there are liberals who dispute this scenario -- just as they dispute anything that questions the state's efficacy. They claim that governments can and should do more -- that government spending actually stimulates the economy.

There is no more than a limited truth to this: Simply because of the way that GDP is calculated, government spending can make the official numbers look better… temporarily.

However, over a sustained period, this amounts to merely cooking the books. The problem remains that nagging gap between governmental demand and economic production: someone has to finance what the economy cannot.

Nor are the government's demands static either. Once political promises of increased economic benefits are made, voters demand that they not only be met, but expanded.
Equally important, as crisis looms, the economically interventionist government finds itself less able to address it -- precisely because of its now routine expanded intervention.
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J. T. Young
http://spectator.org/archives/2012/06/14/its-about-reality-not-austerit
 
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