Yes, Paul Krugman, Booms Are Unsustainable

That Austrians and Keynesians do not share many views on economics (or probably anything else) is obvious, so a difference of opinion between the two hardly should surprise anyone. However, it still is important to point out the differences between the two camps, especially at the current time when Keynesians are all the rage in Washington (When did they ever leave?) and especially in the Joe Biden administration and, of course, the editorial pages of the New York Times.


Perhaps there is no greater difference between Keynesians and Austrians than their beliefs on economic booms. In short, Keynesians believe that all policies should promote the booms and even when they crash, that government should employ all means to continue the boom. Austrians, on the other hand, see booms as times when massive mal-investments pile up until the whole unwieldy system no longer can stand, leading to the inevitable crashes. In short, Keynesians claim that booms should be the goal of economic policymakers while Austrians see them as wasteful, dangerous, and ultimately destructive.

As noted before, Keynesians definitely hold the official reins of governmental power and also are the darlings of the mainstream media. Janet Yellen, US secretary of the Treasury, is a Keynesian. Chairman of the Federal Reserve System, Jerome Powell, is not a Keynesian by formal academic training but certainly has operated his office in the spirit of Keynes. And the loudest Keynesian shill, Paul Krugman, wields much influence from his perch at the NYT. Austrians, on the other hand, are nowhere to be found in the reaches of government nor in the influential corporate office and certainly not on Wall Street.

If political and academic dominance were the arbiter of truth, then Keynesians are right, and Austrians are dangerously deluded. Keynesians have the raw numbers and the loudest and most powerful institutional voices. Austrians enjoy none of those perks.

A thousand Keynesians speaking with one voice, however, still are wrong about economic booms, and none is more mistaken than Krugman. In a recent column, “Who’s afraid of the big, bad boom,” Krugman presents the Keynesian view of economic booms and concludes that the end of all economic policies should be the initiation and sustaining of the boom. He writes:

There definitely is a boom underway, even if a vast majority of Republicans claim to believe that the economy is getting worse. All indications are that we’re headed for the fastest year of growth since the “Morning in America” boom of 1983–84. What’s not to like?

Krugman goes on to write that booms are not perfect and sometimes can lead to economic “bottlenecks” (such as the current spike in lumber prices), but such things are little more than temporary glitches to the happy world of prosperity for all, made possible by permanent spending sprees:

But do such bottlenecks pose a risk to overall recovery? Do they mean that policymakers need to pull back? No. The overwhelming lesson of the past 15 years or so is that short-term fluctuations in raw material prices tell you nothing about future inflation, and that policymakers that overreact to these fluctuations—like the European Central Bank, which raised interest rates in the midst of a debt crisis because it was spooked by commodity prices—are always sorry in retrospect.

So, pay no attention to the man behind the curtain. Commodity prices always fluctuate, boom or no boom, so if lumber prices go up and housing markets start to resemble to real estate bubble of the mid-2000s, that is the natural consequences of prosperity brought to you by loose monetary policies and increased government spending.

But what happens if the housing markets—and the stock markets—crash as they did in 2007 and 2008? In 2008, Krugman squarely laid the problem upon inadequate financial and economic regulation and claimed Ronald Reagan was responsible for the deregulation that created the mess. (Not surprisingly, Krugman also got it wrong on the history of deregulation, but like Bluto Blutarsky, who wrongly claimed that “the Germans bombed Pearl Harbor,” we can’t interrupt someone when he is on a roll.)

Since 2008 and the presidency of Barack Obama, things have changed drastically. This time there are no subprime mortgage securities cooked up by Wall Street geniuses and the federal government essentially nationalized the mortgage industry as a response to the meltdown, something that met Krugman’s approval. Furthermore, the government’s monetary policies of suppressing interest rates (ostensibly to fuel that Keynesian polestar, aggregate demand) have created the stock market bubble—that is the only thing we can call it—which has accelerated that “wealth gap” that Krugman claims is perhaps the major economic problem this country faces.

(Krugman believes that we can both create stock bubbles and then alleviate the results through massive wealth and progressive income taxes, as both are forms of economic stimulation that encourage spending and discourage alleged “hoarding” by the rich. That is something for a future commentary.)

When this current boom crashes (as inevitably it will), one suspects that Krugman first will blame free market capitalism and claim that part of the problem is a lack of regulation, since everyone knows that since the advent of the Ronald Reagan presidency, there has been no government regulation of any markets. To Krugman and the Keynesians, it will be proof that markets cannot be trusted and further proof that market prices are little more than a right-wing plot by the intellectual descendants of Milton Friedman.

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