Krugman Misses The Point On Stimulus
Paul Krugman hails the alleged 3.5% growth rate in the third quarter as a vindication of Keynesianism.
Against those non-Keynesians who argue that growth was "artificial" because it was the result of "cash for clunkers" and other parts of the stimulus package, he correctly pointed out that "artificial" (in the sense of being caused by government action) is in fact the intended effect and purpose of the stimulus package. If it didn't cause growth to be higher, it wouldn't make sense to implement it, but if it does cause growth to be higher than it has achieved its intended purpose.
However, while libertarians, objectivists and small-government conservatives may nevertheless oppose government induced increases on growth for non-economic reasons, the economic case against the stimulus does not lie in it being "artificial" per se, but on the fact that it is unsustainable and could create negative after effects.
Take the "cash for clunkers" scheme. No reasonable observer could sincerely believe that it didn’t cause U.S. car sales to be higher than it otherwise would have been during July and August this year. However, the argument was instead that first of all the increases in sales while the scheme was implemented would largely come at the expense of sales after the scheme expired, producing little total increase in sales. The fact that short-term gains produced by monetary or fiscal stimulus is usually unsustainable has always been a key argument against such measures.
And because the scheme raised prices it would also crowd out other activites, reducing even the short-term gains while also creating future problems. And because in this case the scheme meant that older but fully functional cars would be destroyed, it would destroy the value of those cars, destroying even more of the value created by the increased sales resulting perhaps in a net destruction of value..
Against those non-Keynesians who argue that growth was "artificial" because it was the result of "cash for clunkers" and other parts of the stimulus package, he correctly pointed out that "artificial" (in the sense of being caused by government action) is in fact the intended effect and purpose of the stimulus package. If it didn't cause growth to be higher, it wouldn't make sense to implement it, but if it does cause growth to be higher than it has achieved its intended purpose.
However, while libertarians, objectivists and small-government conservatives may nevertheless oppose government induced increases on growth for non-economic reasons, the economic case against the stimulus does not lie in it being "artificial" per se, but on the fact that it is unsustainable and could create negative after effects.
Take the "cash for clunkers" scheme. No reasonable observer could sincerely believe that it didn’t cause U.S. car sales to be higher than it otherwise would have been during July and August this year. However, the argument was instead that first of all the increases in sales while the scheme was implemented would largely come at the expense of sales after the scheme expired, producing little total increase in sales. The fact that short-term gains produced by monetary or fiscal stimulus is usually unsustainable has always been a key argument against such measures.
And because the scheme raised prices it would also crowd out other activites, reducing even the short-term gains while also creating future problems. And because in this case the scheme meant that older but fully functional cars would be destroyed, it would destroy the value of those cars, destroying even more of the value created by the increased sales resulting perhaps in a net destruction of value..
posted by stefankarlsson at 10:04 PM
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