The Other McCain

"One should either write ruthlessly what one believes to be the truth, or else shut up." — Arthur Koestler

Paul Krugman, Mystifield

Posted on | January 25, 2011 | 18 Comments

“Something really strange has happened to the debate over economic policy in the face of the Great Recession and its aftermath . . .
“Now, however, we’re seeing a much more widespread attack on demand-side economics. More than that, it’s becoming clear that many people don’t so much disagree with the idea that demand matters as find it abhorrent, incomprehensible, or both. . . .
“I fairly often get comments to the effect that I can’t possibly believe what I’m saying about monetary or fiscal policy, that no sensible person could believe that printing money or engaging in deficit spending will increase output and employment — never mind that all I’m saying is what Econ 101 textbooks have been saying for the last 62 years.”

Paul Krugman, “The War on Demand,” New York Times

He’s got a Nobel Prize in economics and yet Krugman can’t see that the essential problem of our economy is a capital shortage. Defiict spending can’t remedy that problem, because before the government can spend money it doesn’t have, it must first borrow that money. And where does government borrow money? From the capital markets. Money that might be invested in businesses is instead siphoned away to fund deficits.

The wipeout of the housing bubble destroyed a vast reserve of asset value. Deficit spending cannot restore the loss, but actually aggravates the problem. The private sector is starved by the resulting shortage of capital. The fact that unemployment has remained stubbornly high for 18 months, that the real-estate market is stagnant and that commercial banking perilously shaky — all of these are symptoms of the same disease. Yet Krugman would rather cling to his Keynesian theory like a toddler hugging his teddy bear than to confront the sober reality.


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