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Saturday, November 15, 2014

'The Unwisdom of Crowding Out'

Here's Paul Krugman's response to the Vox EU piece by Peter Temin and David Vines that I posted yesterday:

The Unwisdom of Crowding Out (Wonkish): I am, to my own surprise, not too happy with the defense of Keynes by Peter Temin and David Vines in VoxEU. Peter and David are of course right that Keynes has a lot to teach us, and are also right that the anti-Keynesians aren’t just making really bad arguments; they’re making the very same really bad arguments Keynes refuted 80 years ago.
But the Temin-Vines piece seems to conflate several different bad arguments under the heading of “Ricardian equivalence”, and in so doing understates the badness.
The anti-Keynesian proposition is that government spending to boost a depressed economy will fail, because it will lead to an equal or greater fall in private spending — it will crowd out investment and maybe consumption, and therefore accomplish nothing except a shift in who spends. But why do the AKs claim this will happen? I actually see five arguments out there — two (including the actual Ricardian equivalence argument) completely and embarrassingly wrong on logical grounds, three more that aren’t logical nonsense but fly in the face of the evidence.
Here they are...[explains all five]...

He ends with:

My point is that you do a disservice to the debate by calling all of these things Ricardian equivalence; and the nature of that disservice is that you end up making the really, really bad arguments sound more respectable than they are. We do not want to lose sight of the fact that many influential people, including economists with impressive CVs, responded to macroeconomic crisis with crude logical fallacies that reflected not just sloppy thinking but ignorance of history.

    Posted by on Saturday, November 15, 2014 at 11:40 AM in Economics, Macroeconomics | Permalink  Comments (27)


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