In Krugman, Keynes Meets Orwell

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Paul Krugman is famous for his stridency. He advocates a dogmatic Keynesianism with an air of certainty and the frequently repeated aspersion that anyone who disagrees with him is dishonest, ignorant, a hack, a stooge. He cannot be swayed. If there are exceptions that disprove his theories--like, say, the Baltic states--he ignores and ridicules them. Admit nothing. Deny everything. Make counter-accusations.

But since his stridency has made him famous and won him adulation from the left, Krugman has been encouraged to emphasize this character trait to the point of comical exaggeration. He is heading into that strange netherworld where William Shatner has been living for the past twenty years. He is becoming a caricature of himself.

I don't know how else to explain his latest column, in which Krugman tries to recruit the launch of the iPhone 5 as evidence for the efficacy of government stimulus spending. No, really.

Citing "suggestions that the unveiling of the iPhone 5 might provide a significant boost to the U.S. economy, adding measurably to economic growth over the next quarter or two," he responds: "Do you find this plausible? If so, I have news for you: you are, whether you know it or not, a Keynesian--and you have implicitly accepted the case that the government should spend more, not less, in a depressed economy."

But the iPhone launch is the exact opposite of Keynesian stimulus. It is stimulus, not from new spending, but from new production. What is driving this economic activity is the fact that a big corporation invested a lot of money in research and development, in new engineering and materials and factory equipment, in order to produce more and better goods. Without that, there would be no boost to the economy at all.

Gee, maybe there should be a name for the theory that the economy is driven by investment decisions made on the supply side.

Yet Krugman takes a demonstration of supply-side economics, of the power of production in the economy, and tries to turn it into an example of Keynesian economics, the idea that consumption is what drives the economy. This is John Maynard Keynes meets George Orwell. Production is consumption.

How does Krugman achieve this illusion? By making the producer of goods into an unperson. His column goes on to talk about buying and selling and an awful lot about spending--but it tries to write out of existence the phenomenon of production and the existence of the producers. In fact, he openly denies the economic relevance of any productive or technological advance. Krugman says:

"The crucial thing to understand here is that these likely short-run benefits from the new phone have almost nothing to do with how good it is--with how much it improves the quality of buyers' lives or their productivity. Such effects will kick in only over the longer run. Instead, the reason JPMorgan believes that the iPhone 5 will boost the economy right away is simply that it will induce people to spend more."

In reality, the introduction of new and better products is economic growth, and spending is only incidental to the process. After all, what's the difference between spending $200 on a new iPhone and throwing that same $200 into a ditch? The only thing that makes $200 in spending worth it is the improvement in the quality of your life from having, say, a bigger screen, a longer battery life, faster processing speeds, and so on. (And since many of us will be upgrading not from the iPhone 4S but from older models, you can add a host of other features, such as Siri, which are not new to the iPhone but are new to us.) If this were just a plain transfer of $200 from one person to another, it would not grow the economy. I had $200 and now somebody else has it. It only grows the economy if I spend $200 to get something that is worth more to me than having the cash in my wallet.

But what Krugman is advocating is precisely the plain transfer of money from one person to another, as if that is the only economically relevant fact. This is, in fact, the basic Keynesian theory. Keynes famously said that you could stimulate the economy by paying people to build pyramids, or to dig holes and fill them back up again. Or to dig foxholes. Hence the theory that World War II ended the Great Depressions, and Keynes's warning that the post-war demobilization would crash the economy (which is the opposite of what actually happened).

Oddly, though, even Krugman finds it necessary to recognize the role of production as a driver of economic growth--though he uses his odd Keynesian jargon to hide it.

"[D]epressions do end, eventually, even without government policies to get the economy out of this trap. Why? Long ago, John Maynard Keynes suggested that the answer was 'use, decay, and obsolescence': even in a depressed economy, at some point businesses will start replacing equipment, either because the stuff they have has worn out, or because much better stuff has come along; and, once they start doing that, the economy perks up.... But why suffer through years of depressed output and high unemployment while waiting for enough obsolescence to accumulate?"

Get that? Better stuff "comes along" and obsolescence "accumulates," like unraked leaves in your yard. What makes new goods and services "come along," or rather who makes them? Well, we can't answer that question because the producer of better stuff doesn't exist in Krugman's universe.

Even talking in terms of "obsolescence" is a backwards way of describing what is actually happening. Obsolescence as such is a non-event. The existing goods are not worn out, have not ceased to function, and do just as good a job as they used to do. The actual event is that someone has created something new which does more and works better. The real event is innovation. So the basic question of economics isn't about "waiting for obsolescence to accumulate." Instead, it is about reducing the barriers to production so that innovators can created something new.

Krugman is right that what ends an economic downturn is more innovators created more and better products. But to understand that, we have to translate his statements out of the Keynesian Newspeak in which production is consumption, innovation is obsolescence, and the producer of wealth is an unperson.


Robert Tracinski is senior writer for The Federalist and editor of The Tracinski Letter.

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