Interesting: Krugman gets into fisticuffs...

[piezoe]

Cutten, while i am in agreement with the tenor of your interesting remarks, i would like to suggest that there is a big difference between the Japanese economy and the US. Whereas the Japanese Government has spent wildly at times, the nation overall is a nation of savers and scrimpers, the US on the other hand has been a nation of profligate borrowers and spenders -- both its government and citizens. A Keynesian approach in Japan is against what is in the best interest of savers, who are harmed by deficits and eventual inflation.

In the US, however, deficit spending and inflation is, in the short run, a far more attractive proposition, and certainly no one could argue that it is politically expedient. I wonder what role the essential differences in character of these two nations might play in the success or failure of Keynesian economics?

Of course, in the long run, spending that wildly outstrips productivity can not be sustained. The question in my mind is whether the US economy can succeed in rescuing itself using a Keynesian approach; yet return ultimately to a balance between productivity and consumption. Or is it too late for that?

I wouldn't rule out the possibility that a Keynesian solution could work in the US even though it seemed to fail in Japan.

 

[dhpar]

Quote from Martinghoul:

However, stop bashing Keynes, pls, folks. He was a genius (just like Marx) for his time and he advanced our understanding of economics a lot, even with the things that subsequently were demonstrated to be incorrect.

second that motion!

 

[buzzy2]

Zimbabwe's finance minister is also a genius. He has made everybody a millionaire there. He should be awarded the Nobel Prize next year.

 

[Onlygold]

Quote from jueco2005:

As Albert Einstein said:

"Any intelligent fool can make things bigger and more complex... It takes a touch of genius - and a lot of courage to move in the opposite direction."

Paul Krugman did make a huge breakthrough in econometrics if you carefully read "Revenge of the Glut".

He reduced one variable from economics - Savings. Those not in the know may think one variable is no big deal - but it is tsunamic in econometrics.

His singular ingenuity is he sees a new definition:
Savings == Capital Account Deficit.

See his genius?

 

[ByLoSellHi]

Krugman succinctly and accurately predicted not only the collapse of the housing market, as some others did, but he spoke in detail about the knock on effects that would result from that collapse, and in great detail, and his predictions as to those effects have all come to fruition.

Like I said, I vehemently disagree with his opinion that stimulus needs to be much larger to counter this crisis (I happen to think the stimulus package was a bailout of inefficient state, county and city/village/township governments, who seem to think they're immune from belt tightening and cost cutting measures), but give the man credit for some of his excellent calls.

 

[buzzy2]

Krugman also accurately identify the real culprits of this crisis: the wealthy, Bush dropped taxes so they pay less!! what an outrage!! they should be taxed to death to pay the good guys salaries like Geithner's and Ben Bernanke, not to mention Fannie Mae's executives. They are all the evil republicans' victims and Bush is the devil according to Paul "Nobel genius" Krugman.

 

[hofficita]

Quote from Cutten:

Why is the economy "going down the tubes" disastrous? Unproductive or foolhardy economic activity can only be replaced by productive and wise economic activity through the total annihilation of the former. This means huge swathes of people getting fired, firms going bust etc. Without this the economy cannot adapt. Without adaptation you end up like the GDR, USSR, N Korea etc.

Thus the economy going down the tubes by people saving is not only not disastrous, it is *absolutely essential to prosperity*, and the only way for an economy to get much, much richer in the long run. Avoiding short-term "disaster" means guaranteed long-run disaster.

This was widely known in the 19th century, let alone Keynes's time (e.g. Schumpeter popularized this notion).

Bear in mind also that savings are the sole source of investment capital, which is the only source of funding for entrepreneurs, who are the main source of job and productivity growth in the economy.

One should note that Keynesianism was tried to the letter in Japan post 1990, and the result was the longest economic stagnation and deflation of any advanced economy since the Great Depression. Keynes' ideas failed the test of the real world.

Furthermore, advice derived from a theoretical construct is of no use whatsoever if it cannot actually be implemented in the real world. A political system which relies on humans always being good and nice is useless because humans will not always be good and nice. An economic policy prescription which relies on government being wise, impartial, and consistent will never work because no government has ever possessed those qualities.

Thus Keynes ideas are not only arguably refuted since a few months after he published them, but even if you think he is correct, they are incredibly unlikely to be implemented properly by any government. And the only time a government implemented them to the maximum one can realistically expect, the result was utter disaster. I still remember my Keynesian economics professor in the mid 90s, a guy who had advised in UK politics for 2 decades, admitting that so far the Japan experience was proving Keynesianism was not working. His words were basically that they were following textbook Keynesian policy and it had not produced any results. Another 7 years passed, same policy, same lack of results. Now its 2009, 19 years of Keynesian policy and virtually no growth, and huge government debt with nothing to show with it, bridges to nowhere and white elephants galore. This is success?

Keynes' policies have failed every test they have ever encountered. By the standard of real world results, he is the 2nd worst economist of all time (Marx being the worst). If he was a trader he would have busted out time and time again with this level of performance (ironically he was a better trader than economist).

Great post.

The relationship between savings and capital formation has been completely forgotten. Governments today actually believe currency inflation is an legitimate substitute.