Typical Keynesian

Paul Krugman offers a very strange complaint about two critics of the Obama spending plan:

First Eugene Fama, now John Cochrane, have made the claim that debt-financed government spending necessarily crowds out an equal amount of private spending, even if the economy is depressed — and they claim this not as an empirical result, not as the prediction of some model, but as the ineluctable implication of an accounting identity.

There has been a tendency, on the part of other economists, to try to provide cover — to claim that Fama and Cochrane said something more sophisticated than they did. But if you read the original essays, there’s no ambiguity — it’s pure Say’s Law, pure “Treasury view”, in each case. Here’s Fama:

The problem is simple: bailouts and stimulus plans are funded by issuing more government debt. (The money must come from somewhere!) The added debt absorbs savings that would otherwise go to private investment. In the end, despite the existence of idle resources, bailouts and stimulus plans do not add to current resources in use. They just move resources from one use to another.

And here’s Cochrane:

First, if money is not going to be printed, it has to come from somewhere. If the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment. Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both.1 This is just accounting, and does not need a complex argument about “crowding out.” Second, investment is “spending” every bit as much as consumption. Fiscal stimulus advocates want money spent on consumption, not saved. They evaluate past stimulus programs by whether people who got stimulus money spent it on consumption goods rather save it. But the economy overall does not care if you buy a car, or if you lend money to a company that buys a forklift.

There’s no ambiguity in either case: both Fama and Cochrane are asserting that desired savings are automatically converted into investment spending, and that any government borrowing must come at the expense of investment — period.

Note that Krugman doesn’t bother attempting to set the two economists straight by showing where the money is going to come from, instead he turns to a simple Econ 101 diagram of the so-called “multiplier effect” and complains about accounting. If this is a Dark Age of macroeconomics, it’s because the biggest names in the field are a bunch of third-rate Keynesians who cling to their outmoded and ineffective models as the economy melts down around them. They have no ideas except to spend more and print more, as if the problem was somehow brought about by too little government spending and too little inflation. And they completely fail to account for the actual consequences of debt and unproductive employment, or the important distinction between private consumption and government spending.

As one astute commenter pointed out: “Increase in G does decrease I – right now. It can theoretically result in increased GDP over time. This can happen though only if G creates greater velocity than I.”