The View from Abroad

Hard hitting commentary from an American living overseas

Kenn Jacobine

Kenn Jacobine
June 03
Kenn Jacobine is an international educator currently teaching History and Economics for the American School of Doha, Qatar. He has also taught at international schools in Ecuador, Mali, and Zambia. His political transformation took place over the course of many years. Starting out naively as a big state liberal, he became a Reagan Republican in 1982. Disillusionment set in with the realization that small government rhetoric rarely translated into limited government actions. On Christmas day 1992, he became a libertarian. In 1994, Kenn ran for the State Senate in Pennsylvania on the Libertarian Party ticket garnering 5 percent of the vote. He has been active in freedom causes ever since.

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MARCH 25, 2012 12:32PM

Keynesians are Clueless

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Paul Krugman, New York Times columnist, Nobel Prize winner, and Keynesian economist extraordinaire is about to have his new book released entitled, End this Depression Now.  In it, the Duke of Deficit Spending argues that a speedy, robust recovery from the Great Recession which started in 2008 is just a quick policy decision away.  If only our leaders can muster the “intellectual clarity and political will” needed to raise federal spending further, Americans will begin consuming again, businesses hiring, and the current depression will be over in a flash.  Once again Krugman is being true to his economic philosophy – namely that increasing aggregate demand through loose fiscal and monetary policy is a cure-all for what’s ailing the economy.  Let it be said that there is not a more consistent deflationist than Paul Krugman in all of the economic profession.

Now, why anybody would still listen to Krugman is a mystery to me.  After all, he entirely missed calling the financial crisis of 2008 while Austrian economists were spot on with their prognostications.  I suppose most laymen don’t know the difference and most economists and academics are as Milton Friedman proclaimed so long ago “All Keynesians now”.  Thus ignorance of and loyalty to a failed philosophy are powerful forces to make people do irrational things.

In the first place, Krugman shows his ignorance with the title of his book, End this Depression Now.  The statistics indicate that we are not currently in a depression.  Secondly, current numbers indicate that the deflationary spiral that Krugman has been predicting and fears the most is not happening.  On the contrary, while he continues to fret over falling prices leading to a double-dip recession, long-term trends point strongly toward oncoming double digit price inflation. 

What it all boils down to is that Krugman and other Keynesian economists are about to miss the next economic crisis.  Austrians have been arguing all along that we can’t solve our economic problems by doing the same things that got us into the mess in the first place.  Deficit spending and a ridiculously loose monetary policy will not cleanse the market of all the mal-investments made during the preceding artificial boom (housing bubble).  It will only put us deeper into trouble.  What was needed was a drastic cut in government spending, a cut in taxes, and the setting of interest rates by the market not the monetary oligarchs at the Federal Reserve.

So because policy makers in Washington listened to Krugman and his ilk over the voices of reason, we are about to enter the next cycle of boom and bust.  It will consist of phony growth, rising prices, and rising interest rates which will ultimately pop the bubble and send the economy into another tailspin.  The proof is in current trends.

In spite of Krugman’s ill-timed book, we are not in the middle of a depression.  Consumer spending is way up.  In the fourth quarter of last year balances on credit cards rose 9.27 percent.  In February, retail sales in the U.S. improved in 11 of 13 industry categories and marked the biggest gain in five months according to Commerce Department figures.

Then there is job growth.  400,000 private sector jobs have been created just in the first two months of this year.  More workers mean more spenders and more spenders mean more jobs, right?

Oh, and let’s not forget how well the financial markets are doing.  The Dow is up 7 percent YTD, the S&P 500 is up 11 percent YTD, the Homebuilders Index is up 23 percent YTD, and the S&P Financials are up 21 percent YTD.  These are not numbers indicative of a depression.

But, all of this good news is coming at a cost, literally.  We are approaching the place this commentator wrote about on October 16, 2009.  Bernanke and the Federal Open Market Committee are going to have a big decision to make in the near future – raise rates and burst the Fed induced bubble or leave rates low and watch prices skyrocket. 

Price inflation is already heating up.  It was only a matter of time before all the stimulus, low interest rates, and money printing kicked in to produce higher prices.  The money supply has increased by 14.6 percent year over year ending in February.  That makes 39 consecutive months of double digit year over year rates of monetary inflation.

The result has been higher gasoline and food prices.  College and healthcare costs continue to rise.  And the Manufacturing ISM Report On Business® for the 4th straight month shows the number of industries experiencing higher raw material costs on the rise and the number of industries experiencing  lower raw material costs on the decline.  It will be just a matter of time before those higher raw material costs find their way into higher prices on the merchant’s shelf.

So while Krugman and other Keynesians clamor for more federal spending and easy money to produce a speedy, robust recovery from the Great Recession, they are missing that the next boom and bust cycle has already begun.  But, that’s okay because Austrians have been predicting it for some time.  In the words of Yogi Berra, “It’s déjà vu all over again”. 

Article first published as Keynesians Are Clueless on Blogcritics.

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A very detailed explanation of why you got 5% of the total vote in your state senate race. You are courageous for putting yourself out here like this for all to read. I respect many libertarian views about our civil rights but your economics are bafflingly unrealistic, regressive and exploitative for an equitable representative democracy which the US tries to work toward.

As for your opinion of Paul Krugman. I don't think he's losing any sleep over it. Like birthers and flat-earthers, the Ron Pauler's and Michele Bachmann's speaking out is our best defense against them. For me, I'll take seriously a Nobel prize winning economist most any day. Well, at least, you recognized Reaganomics for the failure that it was.

PS It's hard to argue we're not in a depression when you are among the long term unemployed through no fault of your own. Thank you.

Thanks for reading and your comments. I think only time will tell how wrong Krugman is and how correct Austrians are. You can't say you haven't been forewarned. Best, Kenn
Krugman may have missed the boat in not being able to see the crisis of 2008 coming. The Hayek economists did not have a monopoly on prescience. Anyone who is a cyclical theorist in economics was someone who saw problems brewing. And there were plenty of people on Wall Street who foresaw problems, Jim Cramer was possibly only the most public figure.

There is one economic statistic that you don't quote, and that is the level of long term, structural unemployment. Between that and the ongoing housing crisis, it should be obvious that this is no typical economic downturn.

And I would not trumpet credit card usage as a sign of robust economic health when you couple that usage with the level of structural unemployment. As to inflation, the driver is of course, the price of gasoline. And gasoline's price rise is being driven by a combination of war-mongering and Wall Street speculation.
Sigh. . . . .

By Keynesian defintion, deficit spending is stimulative. This administration has indulged in over $5 trillion worth of such spending, which both Oscar and ONL admit has failed.

This fact alone justifies your title.
Let me revise and extend my comment.

" . . . . which Oscar, ONL, and Paul Krugman all admit has failed."
Krugman was talking about the housing bubble and coming collapse in 2006. I read plenty of non-Austrian economists that were predicting it earlier than that, but don't know if Krugman did.

If we want to consider all deficit spending Keynesian, then the champions of Keynesianism are the Conservative Republicans who are responsible for the vast bulk of our debt. The Reagan and Bush Junior "economic booms?" Foolish credit expansion and massive unpaid spending.

Krugman has recommended investment in public works, not foolish conservative supply-side, debt-exploding tax cuts or jacking up military spending without paying for it. That's Republican. The laissez faire deregulation that enabled the housing and derivatives bubble? Libertarianism.

Between the conservatives and libertarian's stupid ideas, it's amazing we aren't already owned outright by China.

We should shoot any conservative or libertarian who gets within 100 miles of Washington DC.

But of course if we followed libertarian ideology to the letter, all sorts of magical fairies will descend from the heavens and cure all ills.

Ideologues. Oy !
actually I think krugman did indeed mention a housing bubble prior to 2008 in his writing.
one of the most accurate economists was John Hudson who pointed to the FIRE sector (finance insurance real estate) long before anyone else did.
in your analysis I find no mention of corporate wrongdoing that led to the crisis.
in my opinion both keynesians and austrians are mistaken right now. it appears to me we have a finance cartel for one of the rare times in US history (maybe the 1st time ever at least of this size). maybe the largest cartel ever. neither of their approaches will address this core problem. the boat was missed when the US failed to put failed banks & other corporate entities into receivership in the 2008 crisis and prosecute the skullduggery. (read finance expert bill black on that sub)
UncleChri and others cherry pick individual facts, ignoring other inconvenient data points. For example, I saw no GOP phobias over the deficit spending of Reagan, Bush I, and Bush II. And yet, these three presidents accounted for more than half of all the deficit spending in the history of the United States.

On top of this, worrying about the federal deficit at this point ignores the fact that there have been many other times in American history when the comparative level of government debt was much, much higher than it is right now. In the 20th Century, 1920 and 1946 had much higher levels of debt overhang than what we are experiencing right now. And how did the US move into the fantastic prosperity of the 1950s and 1960s? By deficit spending!
Kenn has been silent ever since he has been smacked down by people commenting here. No surprises here.