Military Keynesians Are the Worst Keynesians of All

From the National Journal this week:

Two wars are not enough.

America's economic outlook is so grim, and political solutions are so utterly absent, that only another large-scale war might be enough to lift the nation out of chronic high unemployment and slow growth, two prominent economists, a conservative and a liberal, said today.

Nobelist Paul Krugman, a New York Times columnist, and Harvard's Martin Feldstein, the former chairman of President Reagan's Council of Economic Advisers, achieved an unnerving degree of consensus about the future during an economic forum in Washington. Their views were shared by a third economist, Jan Hatzius of Goldman Sachs, who said the only economic scenarios he could visualize were either "pretty bad" or "very bad." ...

Krugman and Feldstein, though often on opposite sides of the political fence on fiscal and tax policy, both appeared to share the view that political paralysis in Washington has rendered the necessary fiscal and monetary stimulus out of the question. Only a high-impact "exogenous" shock like a major war -- something similar to what Krugman called the "coordinated fiscal expansion known as World War II" -- would be enough to break the cycle. "I don't think we're about to launch a war against anybody," Feldstein said with tongue-in-cheek regret at the left-leaning forum, "America's Fiscal Choices," sponsored by four think tanks. "But Paul is right. That was the fiscal move that got us out" of the last downturn comparable to this one, the Great Depression.

Krugman is the leading Progressive Keynesian, Feldstein the leading conservative Keynesian. (That is not a contradiction in terms. See my article on the subject.) What unites them? Military Keynesianism.

Both mistakenly think World War II ended the Great Depression, a claim soundly debunked by Robert Higgs. (See Art Carden's discussion.) How could the war have ended the Depression? The economy was mostly devoted to making things that would blow up and destroy other things -- including life. Living standards certainly did not rise during the war: The purchase of consumer goods was restricted through an elaborate rationing system. Government directed production. It owned the economy.

Economists point to improved wartime aggregates, such as GNP, investment, or employment. But who cares about statistical aggregates? They only shroud what's going on at ground level. Government spending is a component of GNP; so increases bore no necessary relationship to individual well-being. Ten million men were drafted into the military, so what did the improved unemployment rate have to do with consumer welfare? Besides, Higgs shows the statistics are suspect for a variety of reasons.

Economists often give reckless advice to governments. But when they declare that only a major war will lift the economy out of recession, we really need to start worrying. Military Keynesianism kills.

(See Steve Horwitz's recent column on the subject.)

Silver Lining on the "Stimulus" Bill

Update: The Senate bill is now $827 billion, so the following item has been overtake by events. Hopefully the outcome alluded to below will still take place.

Breaking news from CNN:

Democratic and Republican Senate negotiators reached a tentative agreement for a $780 billion economic stimulus package, according to two Democratic sources and a GOP negotiator. Senate Majority Leader Harry Reid took the list of cuts to the nearly $900 billion Senate bill to fellow Democrats, and the Senate continued the debate into the evening.

Below $800 billion! Well, look at the bright side. Maybe it will drive Paul Krugman crazy.

Krugman Flunks Capital Theory

Paul Krugman is said to have beat up on George Will during this joint appearance on ABC's "This Week" back in November. But all Krugman really did was show that he, like Keynes, holds an unrealistic Play-Doh model of capital, as opposed to the heterogeneous, multistage, intertemporal structure-of-production model of the Austrian school. When Will notes that there was negative net investment during the 1930s, Krugman responds that, of course, there was negative net investment: "Because when . . . all the factories are standing idle, who wants to build a new one?"

Point for Krugman? Wrong.

If Krugman took the Mises-Hayek trade cycle theory seriously he'd realize that the idle factories in the 1930s represented malinvestment induced by Federal Reserve credit expansion in the 1920s. This policy, by lowering the interest rate and falsely signaling an increase in real saving (i.e., a preference for future over present goods), shifted resources from later stages of production (closer to the consumer) to earlier stages of production. Unfortunately, those who think of capital as a heap of homogeneous, monochrome Play-Doh aren't sensitive to this point. Capital is capital is capital. That's why Krugman can't understand why someone would want to invest when factories stand idle.

When the inflationary boom ended, as it had to because it was artificially induced and there weren't enough resources for both the early stages and the later stages (where consumers wanted them), the malinvestments had to be liquidated. But since capital consists not of Play-Doh but of discrete things -- buildings, machinery, tools materials -- with particular characteristics, those that were the products of malivestment were not necessarily suitable for other purposes. They couldn't simply, costlessly, and instantly be moved and employed in later stages of production. Hence, the idle factories. This was wasted capital brought about by the credit expansion. This was the depression.

If the economy was to recover, new investment consistent with consumers' actual preferences had to be undertaken. But that required time and saving, i.e., deferred consumption. It also required a stable political environment in which investors could be confident that their property was safe from the government. Unfortunately, thanks to tax increases, unending interventionist programs, and threatening antibusiness rhetoric, FDR's government failed to provide that environment.

Krugman's flip remark to Will is a perfect illustration of what is wrong with Keynesian economics.

Cross-posted at Anything Peaceful.

Shame on You, Paul Krugman

We are certainly used to the fallacious Keynesian "economics" that pours forth from most of Paul Krugman's New York Times columns. That's bad enough. But dishonesty too? What's the excuse for that? In a recent column called "Fifty Hebert Hoovers," Krugman expressed fear that the nation's governors would follow in the footsteps of Hoover, with devastating consequences for the economy. And what did Hoover do that has Krugman so concerned? He writes:

No modern American president would repeat the fiscal mistake of 1932, in which the federal government tried to balance its budget in the face of a severe recession....

But even as Washington tries to rescue the economy, the nation will be reeling from the actions of 50 Herbert Hoovers — state governors who are slashing spending in a time of recession.... [Emphasis added.]

Krugman here leads his readers to believe that Hoover tried to balance the budget by slashing spending. In fact, Hoover did not reduce spending. On the contrary, he increased it. If he aimed at balancing the budget, it was through tax increases not spending cuts. For example, the top marginal income-tax rate jumped from 24 to 63 percent. Anyway, he actually ran large budget deficits. In this, as in many other areas, Hoover anticipated Franklin Roosevelt. (See my article, "Bad Deal," in The American Conservative, Jan. 12.)

Does anyone believe that Krugman is unaware of that fact?

Cross-posted at Anything Peaceful.