by: Paul Krugman, Krugman & Co. | Op-Ed
(Image: CartoonArts International / The New York Times )
The economist Dean Baker is once again justifiably mad at Robert Samuelson at The Washington Post who, in a column titled “Bye-Bye Keynes?” published on Dec. 18, writes: “Were [John Maynard] Keynes alive now, he would almost certainly acknowledge the limits of Keynesian policies. High debt complicates the analysis and subverts the solutions. What might have worked in the 1930s offers no panacea today.”
Mr. Baker, in a blog post for the Center for Economic Policy and Research, pointed out the next day that “Samuelson actually wants to say goodbye to Keynes, but he would have had a better case if he was talking about Darwin and the theory of evolution. After all, when we have seen nothing but confirming evidence for years, why should we still accept the theory?”
It is indeed frustrating that after three years in which Keynesian predictions have been spectacularly correct, pundits insist on reading the evidence as a rejection of his work.
What do I mean by saying that predictions were correct? Three things:
1. There has been no crowding out; interest rates outside the euro area have remained low despite massive government borrowing, which is what you’d expect in a liquidity trap.
2. Inflation has been quiescent despite huge increases in the monetary base, again what you’d expect in a liquidity trap.
3. Fiscal austerity has deepened the economic downturn everywhere it has been put in place.
Were these predictions different from what non-Keynesians were saying? And how. Go back to Niall Ferguson, or Brian Riedl, etc., and you’ll find confident assertions that all that government borrowing would send interest rates soaring. Go back to the likes of Allan Meltzer or the Austrians, and you’ll find confident predictions that all that money printing would cause an explosion of inflation.
And just about everyone on the right bought into some version of the doctrine of expansionary austerity.
But, but, the Obama stimulus didn’t bring unemployment way down! Indeed — and those of us who took our Keynes seriously warned of just that.
So what the anti-Keynesians are left with are the sovereign debt troubles in the euro area. But as many of us have tried to explain, these are really balance of payments crises exacerbated by the refusal of the European Central Bank to act as lender of last resort.
And bear this in mind: no country has driven itself into a debt crisis with stimulus — nor has any country with significant debt regained investor confidence through austerity.
Look, I know that many people can’t bring themselves to even consider the possibility that Mr. Keynes was right — or, for that matter, that I personally might have gotten anything right. But reality has been really clear here.