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  • Memo to Krugman: Please Keep Reading

    Paul Krugman

    In the latest issue of Rolling Stone, New York Times columnist Paul Krugman targets Heritage’s Brian Riedl. In defending the $1.1 trillion “stimulus,” Krugman writes:

    One last line of attack was the claim that fiscal stimulus, in principle, simply can’t work. You hear this from conservative ‘experts’ like Brian Riedl of the Heritage Foundation, who declares, ‘Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. You’re not creating new demand, you’re just transferring it from one group of people to another.’ Borrowing from domestic lenders, the argument goes, cuts into the money available for investments; borrowing from foreigners curbs exports.

    What’s wrong with this claim? The answer lies in the very nature of our economic crisis. When the economy is at or near full employment, government spending does indeed come at the expense of private spending. But right now, we’re suffering from a problem known as the ‘paradox of thrift’ — everyone is trying to save more at the same time, even as investment demand is falling. Those vast quantities of potential savings — from consumers, corporations and institutional investors — have nowhere to go. By borrowing that excess money and using it to finance temporary budget deficits, the government can put it to good use, helping to sustain the economy. In a crisis like this, government spending is actually a way of getting unemployed resources working again.

    We are certainly flattered that Mr. Krugman is reading Heritage’s work. But perhaps he should have read it more closely, because the very next paragraph of Riedl’s op-ed addressed the “paradox of thrift” counter-argument by stating:

    Of course, advocates of stimulus respond that redistributing money from “savers” to “spenders” will lead to additional spending. That assumes that savers store spare cash in their mattresses, thereby removing it from the economy. In reality, nearly all Americans either invest their savings (where it finances business investment) or deposit it in banks (which quickly lend it to others to spend). The money gets spent whether it is initially consumed or saved.

    Mr. Krugman omits this portion of Brian’s argument and thus gives the misleading impression that Brian never addressed the spending/savings issue. In doing so, he fails to respond substantively to Brian’s argument while clarifying the source of his own error.

    Krugman’s mistake is in believing that private savings “have nowhere to go” when the economy is underperforming. On the contrary, private saving in good times and bad is channeled through the financial system into their next most productive use. Individuals are still depositing funds in banks and money funds and pension funds and the like, and these funds are still winding their way to private investment often substituting for the foreign capital we would otherwise import. Even in its creaky state, the financial system today still accomplishes this basic function.

    This is not the first time Mr. Krugman has gone after Brian. In 2006, he wrote that the common belief that President Bush was a big spender was really one large myth invented and circulated by Brian. While Brian must appreciate the mystical powers attributed to him, he responded in the New York Times that President Bush’s spending record speaks for itself.

    We look forward to Mr. Krugman continuing to follow Heritage’s research.

    Posted in Ongoing Priorities [slideshow_deploy]

    6 Responses to Memo to Krugman: Please Keep Reading

    1. Christian, New York says:

      Heritage, please keep thinking . . .

      When a) banks are not making loans or b)the demand for loans is declining as firms want to retire debt or do not see good investment prospects, this is the same as the paradox of thrift, and Reidl's explanation would not escape this point.

      Krugman is not unaware of the existence of a banking system, but when money is entering the system and not exiting, it is the same as stuffing in your mattress because it is not being spent. Savings only becomes Investment if banks can transfrom deposits into loans, which they seem incapable of doing at present.

      What "private savings" seems to be doing is increasingly chosing to lend the government money by buying government securities. Of course, some private savings is finding private investment opportunities, but not all. These unused savings can be"spent" by the government on behalf of the public without displacement.

      The only way Reidl's argument works is that he assumes we are permanently poorer and need to reset at a much lower equilibrium due to a sudden, massive shock to our productivity, but where is the evidence for this?

    2. Barb -mn says:

      Did Mr. Krugman graduate from Harvard also?

      Your a and b wouldn't exist if GOVERNMENT hadn't INTERVENED.

    3. Dexter Massoletti, S says:

      Mr. Krugman is a wonderful word-smith, but he has allowed himself to slip away from reality with glaring flaws: “Those vast quantities of potential savings — from consumers, corporations and institutional investors — have nowhere to go. By borrowing that excess money and using it to finance temporary budget deficits, the government can put it to good use, helping to sustain the economy."

      Just these few words expose the nature of the problems not being addressed. 'Potential savings' is not money. One cannot 'borrow' non-existent money nor claim it exits in 'excess.' There is no question, by the manipulations seen since the beginning of the War on Poverty, that the government 'can' (and will, unless stopped) do nearly anything, for example the Bridge to Nowhere. That being another demonstration of what the government considers put[ting] to good use. The latest legislation as ample supply of such determinations, signed-off and unread. The question is what we do about what the government 'may be permitted' to do. We have come to a time when the Whiskey Rebellion can be made to look like a Tea Party. In a land that has been rich enough to be constantly robbed, obviously the living Constitution is not a constraint on our dying government. What the limit to this actually is (as it painfully turns out) happens in fact to be the economy. Aside from the people the only thing that does work; we now have a system that cannot hide its sucking the life out of the country, the people and all that they produce — including their children. Those that find something desirable in slavery are still with us, no matter the language they would use to swindle us all for even the most brief access to power.

      This all amounts to an unlawful taking. Unchecked, it will sustain and further a wave of threats to our Republic and the people and will bring all down in our own time. Brought upon us by members of two branches of government and cohorts guilty of fraud and/or sedition.

      What representative government needs seniority rules or public employee unions — to protect them from the people? where those in government outnumber productive citizens, it is the only workers paradise. For a while.

      The last time I looked, John Maynard Keynes is one of the small few who are no longer with us. And facts never die.

    4. Brian Riedl Brian Riedl, Heritag says:

      Christian, what do you mean money is entering the banking system and not exiting?

      Is it sitting in safes in the banks' basement?

      You should know that its not. And unless the cash is sitting idle, it is being used somewhere in the economy.

      You mentioned

      1) banks paying down debt – but that provides money for others to spend; or

      2) banks lending to the government – and that is money government spends.

      And even if there had been no stimulus, banks could have purchased existing t-bills, or would have invested it somewhere else (likely low-risk).

      It would be ridiculously expensive for a bank to literally hoard extra cash in their basement.

      So, the money is circulating and financing someone's spending, no matter what.

    5. Christian, New York says:

      Whether Dr. Krugman (Yale, MIT; taught Stanford, Princeton) graduated from Harvard or not is beside the point.

      One can debate, although I think your assertion would still be wrong, that government was a/the cause of A and B, but that does not bear on argument that private savings is somehow seamlessly being returned to the economy through the financial system. Clearly, it is not, by a lot. If it is not, we are effectively in “paradox of thrift” territory and the money is not being spent.

      You can assume this away by positing that overnight we suddenly became poorer or less productive, i.e. the market should equilibrate at a lower equilibrium, but the onus for that account should be on you to flesh out that story.

    6. W A Razzak, Kuwait says:

      Recent data seem to suggest that the marginal propensity to consume out of disposable income in the US is 1. What private savings are you guys talking about? Enlighten us please.

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