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Memo to Krugman: Please Keep Reading

Posted By Conn Carroll On March 9, 2009 @ 11:02 am In Ongoing Priorities | Comments Disabled

Paul Krugman

In the latest issue of Rolling Stone [1], 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 [2] 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 [3] 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 [4] 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.

Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2009/03/09/paul-krugman-disses-heritage-analyst/

URLs in this post:

[1] Rolling Stone: http://www.rollingstone.com/politics/story/26430979/obamas_bailout/print

[2] op-ed: http://online.wsj.com/article/SB122663413095027641.html

[3] wrote: http://select.nytimes.com/2006/03/20/opinion/20krugman.html?_r=1

[4] responded: http://query.nytimes.com/gst/fullpage.html?res=9E01EEDC1E30F933A25757C0A9609C8B63

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