Paul Krugman is not a Keynesian
This is my quarterly rant on Paul Krugman and his beloved “New Keynesian” economics, a mainstream system of belief that’s neither new nor Keynesian. It’s not new because it’s little more than an extension of old style neo-classical economics and, that being so, isn’t remotely Keynesian.
If there’s one overriding bedrock principle in Keynes’s “General Theory of Employment, Interest, and Money”, it’s that there’s no natural force driving the economy to full employment and that the orthodox economic theory of full employment equilibrium is wrong. Per Keynes, “There is only one level of employment consistent with the propensity to consume and the rate of investment and it is not necessarily full employment”.
Utterly contra to this bedrock Keynesian principle, Krugman today laments the state of economic education and then proceeds to explain why the neo-classical idea of full employment equilibrium is correct. He even has the temerity to refer to the early Keynes.
I really wonder about the state of economics education.
Look, standard Keynesian models, open-economy version, tell a very clear story about what happens when a country pegs its exchange rate at a level that leaves its industry uncompetitive. The country doesn’t stay depressed forever: high unemployment leads to actual or at least relative deflation, which gradually improves cost-competitiveness, which leads to rising net exports and gradual expansion. In the long run, full employment is restored; it’s just that in the long run we’re all, well, you get the picture.
That was Keynes’s whole point in The Economic Consequences of Mr. Churchill — not that the return to gold at too high a parity would mean depression forever, but that it would subject Britain to years of unnecessary suffering.
Keynes’s whole point though, influenced tremendously by the Marxian tradition, was that a steady state of depression could in fact last forever since the only way out is continuous and expanding investment for which no equilibrium force within the market provides. His solution was for a far more active and ongoing government role to assure investment levels were sufficient for full employment coupled with redistribution to reduce the overall importance of investment. Krugman is either completely disingenuous in quoting Keynes in his post or desperately needs a refresher reading of his claimed intellectual forefather.
Krugman should be seen as little more than a neo-classical economist who expresses a few liberal ideas. Many progressives look to him as an intellectual leader but their faith is completely misplaced. He sees capitalism as a system that naturally gravitates to full employment and is inherently good. His key difference with his brothers further to the right is only in the speed at which the system moves to full employment.
His solution for today is centered around provoking some inflation, an absurdly narrow view of our situation as simplistic in its own way as those of the austerity and tax cut crowd on the far right. As noted in a past post, he’s against fiscal policy unless interest rates are at the zero bound, he favors a 5% regressive consumption tax, and worries about inflation should unemployment fall below 7%. He supports the obscene concept of NAIRU, the non accelerating inflation rate of unemployment, which is nothing more than a restatement of Marx’s reserve army of the unemployed. Here’s a quote from a highlight section of his lucrative macroeconomics textbook:
Policies that keep the unemployment rate below the NAIRU will lead to accelerating inflation as inflationary expectations adjust to higher levels of actual inflation. The NAIRU is equal to the natural rate of unemployment. …. (A)n unemployment rate below the NAIRU cannot be maintained in the long run. As a result, there are limits to expansionary policies. (page 462)
In his “The Return of Depression Economics”, Krugman praises multinational corporations and capitalism for reducing global poverty and is critical of globalization opponents to such a degree that he pulls out the standard right wing blurb that “bad jobs at bad wages are better than no jobs at all”. To elaborate on this point, he even wrote an article entitled “In Praise of Cheap Labor”. At no point does he engage with the fundamental question of why anyone should be forced into bad jobs and live poorly when we have the technology to assure otherwise.
And finally, Krugman’s view on the deficit is completely orthodox and he consistently fails to engage with Functional Finance / Modern Monetary Theory.
Krugman and the whole cadre of faux left economists do great damage to our public debate in that they effectively set the limits of the respectable left at a point on the spectrum that poses little threat to power. Intentionally or not, they play an important propaganda role in the system. It’s certainly institutional in that if Krugman expressed more radical ideas he wouldn’t be the Paul Krugman of today and somebody else would. Only an extraordinary personality could rise to prominence professing the actual views of John M. Keynes. Keynes, a supporter of capitalism, gave us a reasonably realistic critique of some of its key problems. We mustn’t be fooled that Krugman is doing the same.