Notice that Krugman provides very little hard evidence to completely discard the entire school of thought of the Austrian economists. He even sneers at them using blatant straw-man attacks: "some people probably are attracted to Austrianism because they imagine that it devalues the intellectual pretensions of economics professors."
Regardless of whether all the Austrian school's claims turn out to be correct or not, they certainly deserve a seat at the table. Hayek, in particular, was a true polymath, contributing brilliant ideas to everything from philosophy of science to biologically-grounded psychology. Read the first several chapters of Law, Legislation, and Liberty, and decide for yourself if Krugman has any right to sneer at the "supposedly deep Austrian theorists".
The substance of his criticism of the Austrian school is in his fifth paragraph. It's not "sneering" or a straw-man attack; it asks a question that (Krugman claims) the Austrian economists' theories can't answer. If you want to defend them, try addressing that question rather than making irrelevant claims for Hayek's brilliance.
The worst error of this piece is the nebulous concept of "good times". Japan in the 1980s and the US recently didn't have generic "good times" but an ill-considered economic bubbles. Even at the height of supposed "good times", there was lot of wealth transfer from the productive sector of the economy to the speculative side. Some ordinary people paid real money for houses of inflate value prices and others attained illusory wealth by watching their house values increase - upshot was not "good times".
There are two ideas of the Austrians and the Keynesians that both seem true that I have a hard time reconciling. The Keynesian idea that depressions are caused by everyone cutting back at the same time, and results in a downward positive feedback loop that can be combated by government spending makes sense. But at the same time, Krugman asserts that there is no reason unemployment should rise because of a previous misallocation of capital (ie a bubble), and that just doesn't seem right. When a bubble bursts, there are too many people who work in previously inflated industries, and their skill sets and geographic location are not things that change easily. People aren't going to learn a new trade, take a pay cut, or move unless there is a real threat to their livelihood if they continue doing what they are doing now.
It seems like the classic conservative vs. liberal argument over social safety nets. Yes, we need safety nets to keep people's lives from being ruined by things largely outside their control. But at the same time, those safety nets introduce moral hazard, and the more bad situations you promise to protect people from, the more people who don't really need that safety net are going to take advantage of it.
and years of negative savings encouraged by a highly inflationary policy have nothing to do it?
this "cutting back" is consumption returning to sane levels.
"Here's the problem: As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa). So if people decide to spend less on investment goods, doesn't that mean that they must be deciding to spend more on consumption goods—implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?"
Isn't the issue that total spending / income decreases? I.e., people are just putting money into the bank instead of external investments or consumption? And the banks themselves are just sitting on the cash?
yes, after many years of negative real savings we are now trying to make up for it with positive real savings. but because the years of negative savings eventually caused the loan bubble to pop now banks are doing the same thing, saving cash instead of investing it.
banks aggravate the business cycle instead of dampen it.
> So if people decide to spend less on investment goods, doesn't that mean that they must be deciding to spend more on consumption goods—implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?
Does he have a good reason not to mention the elephant in the room here? (I'm thinking of monetary policy and trade partners such as China)
I personally consider most of what Krugman writes to be utterly non-sensical. Unfortunately the policies of the Clinton, Bush, and Obama administrations agree with Krugman's Keynesian view.
"The Great Depression happened largely because policy-makers imagined that austerity was the way to fight a recession."
I have heard the opposite in many "Austrian"-tilted debates, how accurate is that?
From checking Wikipedia, Roosevelt did try to stimulate the economy with government investment near the end. It also says that "Keynesian economists assumed poor people would spend new incomes; however, they saved much of the new money."
So is it Krugman's point of view that the policies weren't Keynesian enough to be effective (or too late)? The same arguments were made about the failure of communism and more recently free markets.
That may be the biggest flaw in economic ideas/models, they take a high level of purity to be effective but that's rarely the case.
Saying that Roosevelt tried to "stimulate the economy with government investment near the end" of the Depression is a little misleading.
So is Krugman's statement about Hayek arguing, "in the depths of the Depression", against credit expansion.
This makes it sound like we were in the middle of the depression -- without any government intervention yet -- and suddenly the State decides to expanding credit. This is far from the truth. By the middle of the depression, say 1936, the government had already been intervening and expanding credit for seven years. Though I'm sure Hayek and Mises spoke out against such intervention on day one, anyone with half a brain would speak out against a policy that hadn't been working for seven years.
Hoover, like Bush, implemented massive government interventions. Both Hoover and Bush somehow get labeled as Economic "do nothings", but check Hoover's record: after the crash in 1929 he implemented massive trade tariffs (Smoot-Hawely), signed a "Home Loan" act to encourage more houses and protect against foreclosure (sound familiar?), raised income tax, raised corporate taxes, signed the "Emergency Relief and Construction Act" to fund massive infrastructure projects (like the Hoover Dam), etc...
Then, after Hoover's interventions, FDR came along and continued intervening with even larger, New Deal, programs.
Krugman's point of view does seem to be that FDR's New Deal started too late, but he, and other Keynesians, never explain why Hoover's 3+ years of interventions just made things worse. I'm with the Austrians on this one - If the State stayed out of the economy, these depressions and down-turns would fix themselves MUCH quicker.
Thanks, that answered my question on Krugman's perspective on Roosevelt's policies.
The current stimulus seems to be inline with Krugman's recommendation. I'm more on the "Austrian" side but it will be an interesting experiment to see if the Keynesian approach can be effective on such a wide scale.
for the hangover theory is disastrously wrongheaded. Recessions are not necessary consequences of booms. They can and should be fought, not with austerity but with liberality—with policies that encourage people to spend more, not less
Ten years later, well. We are coming out of a situation where 40,000/year salaries could get you a mortgage on a 400,000 dollar house. There are 101 reasons why that situation emerged, and most of them are directly related to prior policies to get people to buy "more". Sure, it would be stupid to suggest a repeat of this process as a solution.
Krugman isn't stupid. Read the "stimulus" bill. Most of it doesn't even pretend to address the situation at hand. It's a list of very expensive programs that Democrats and their lobbyists have always wanted. Krugman approves of this, why not?
The same thing happened with the "Patriot" bill and the TARP. Crises are useful.
probably the first time i vigorously disagree with krugman....and oddly he appears to be in stark contrast to some of his own writings.
austrian economics has probably become too dogmatic for some, but i do think there is validity in the notion that recessions realign capital flows in more constructive directions. look at what we are trying to do now - fight excess debt brought on by overconsumption with more debt to support overconsumption.
the stimulus bill subsidizes the purchase of new cars...but we just spent ten years watching people blow too much of their net worth on cars...is more of this really constructive? what next...government mandates that we all buy (taxpayer subsidized) home theater systems?
i'm troubled that the government is working hard to promote the same reckless overconsumption that put us in this mess to begin with...but it won't work, people out there are getting the message that debt is poison.
Regardless of whether all the Austrian school's claims turn out to be correct or not, they certainly deserve a seat at the table. Hayek, in particular, was a true polymath, contributing brilliant ideas to everything from philosophy of science to biologically-grounded psychology. Read the first several chapters of Law, Legislation, and Liberty, and decide for yourself if Krugman has any right to sneer at the "supposedly deep Austrian theorists".