Keynesian Economics Looks Pretty Good If You Ignore Its Disastrous Consequences

Paul Krugman professes on his blog that the experience of the Great Recession has shown that “Keynes is looking pretty good.” Never mind that it was Krugman’s Keynesian economic theories that led him to advocate a Fed policy of printing money to push interest rates down in order to create a boom in housing following the collapse of the dot-com bubble.

In another post, he writes, “We now know that the economic expansion of 2003-2007 was driven by a bubble.” We now know? It isn’t just hindsight that allows us to know this. Students of the Austrian school of economics like Ron Paul and Peter Schiff were pointing out that housing was in a bubble due to the Fed’s inflationary monetary policy years before it burst. Ron Paul warned of the housing bubble and the financial crisis it would precipitate as far back as 2001.

“You can say the same about the latter part of the 90s expansion,” Krugman adds. Of course, Krugman was completely blind to the dot-com bubble, assuring readers at the time that all the economic indicators were good and that the economy had nowhere to go but up.

“So you might be tempted to say that monetary policy has consistently been too loose,” he continues. “After all, haven’t low interest rates been encouraging repeated bubbles?”

Um… yes?

Hilariously, Krugman answers his own question: “But … there’s a big problem with the claim that monetary policy has been too loose: where’s the inflation? Where has the overheated economy been visible?”

Um… the inflation and overheated economy has been visible as the bubble?!

Here’s what another economist had this to say: “A snarky but accurate description of monetary policy over the past five years is that the Federal Reserve successfully replaced the technology bubble with a housing bubble.”

Just kidding. That wasn’t another economist. That was Paul Krugman acknowledging in 2006 how the Fed’s low-interest-rate policy created the housing bubble.

Krugman is utterly ridiculous. It astonishes me that anyone still takes him seriously. Apart from having advocated the very policy that caused the mess he now claims vindicates his Keynesian religion, he is an extraordinary hypocrite who really should not be so arrogantly trying to point to the specks in others’ eyes constantly, considering the enormous planks in his own.

Yesterday, for example, he wrote a post titled “What To Do When You’re Wrong” in which he writes, “I’ve been wrong many times over the years, usually on minor things but sometimes on big ones.” He names three examples:

Before 1998 I didn’t think the liquidity trap was a serious concern; the example of Japan suggested that I was wrong, and I eventually concluded that it was a big concern indeed. In 2003 I thought the US was potentially vulnerable to an Asian-crisis-style loss of confidence; when it didn’t happen I rethought my models, realized that foreign-currency debt was crucial, and changed my view.

The case of the euro is a bit different: I was very pessimistic about the strategy of austerity and internal devaluation, which I thought would have a terrible cost — and I was completely right about that. I also guessed that this cost would prove politically unsustainable, leading to a crisis for the euro itself; so far, at least, I have been wrong.

But unlike him, other people don’t admit when they are wrong, which is “more than an intellectual issue” and is a “test of character”. So how does Krugman stand up to his own test? Well, considering how he overlooks how he advocated that the Fed “create a housing bubble to replace the NASDAQ bubble”, and how he refuses to admit that he was wrong to do so, despite this policy’s terrible cost, he stands up pretty miserably according to his own standard.

Back to that post in which he asserts that “Keynes is looking pretty good”, Krugman humorously writes that

there has been a divergence between what gets published in the journals and what people in policy-related positions believe. Keynesian models — even New Keynesian models — remain hard to get past referees. Meanwhile, places like the Federal Reserve and the International Monetary Fund continue to do economic analysis with a strong Keynesian flavor. (There was plenty of Keynesian storytelling at last week’s big IMF event, and I did not exactly get laughed out of the room …)

That policymakers attempting to centrally plan the economy follow economic “models” and “analysis” that seems to have a hard time finding its way into the peer-reviewed literature doesn’t exactly favor the assertion that “Keynes is looking pretty good”, considering their actual track record. Could it be the reason such “analysis” doesn’t get published in the journals is it’s a bunch of nonsense, like the fantastical belief that economic growth can come from running the printing presses?

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