Krugman on Economic Policy Uncertainty

In his column “Phony Fear Factor,” published in The New York Times on August 8, 2013, Paul Krugman mocks the view that “economic policy uncertainty” helps to explain the failure of the American economy to recover from the collapse of 2008. Unfortunately, Krugman displays little knowledge of the view he wishes to challenge. He says very little about it. As he sees it, it is the “the Great Whinethe declaration by one leading business figure after another that President Obama was undermining confidence by saying mean things about businesspeople and doing outrageous things like helping the uninsured.” Cutting away the rhetoric, Krugman is saying that the view he wishes to challenge claims that business is unwilling to invest because of a hostile “climate of opinion” in the Administration, as well as policies that business dislikes.

But this is not the uncertainty hypothesis, at least as this is found in the best version of it, the brilliant work of Robert Higgs on “regime uncertainty”. Krugman nowhere refers to Higgs; instead, he cites, if only to dismiss, the paper “Measuring Economic  Policy Uncertainty” by Scott R. Baker, Nicholas Bloom, and Steven J. Davis, economists from Stanford and Chicago.. The uncertainty view, as the word suggests, is that business is reluctant to invest because it isn’t possible to foresee what the government intends to do. The view is not that the government follows policies that business doesn’t like: if these were known, it would be possible for investors to take them into account. The claim, rather, is that investment is lacking because people are in the dark about the government’s intentions.

Krugman, following a paper of 1943 by the Polish Marxist Michal Kalecki, claims that business propagandists appeal to the lack of business confidence in order to deter the government from instituting policies that go against the interests of the wealthy. No doubt they do, but Kalecki’s point does not speak at all to the surely plausible hypothesis that doubt about the government’s intentions may adversely affect investment.

Krugman has another argument against the uncertainty view.  Recovery has been “slow”, he euphemistically says; but this is merely “the normal aftermath of a debt-fueled asset bubble”. Besides, we have failed to spend enough money. The logic of Krugman’s argument is hard to discern. It is hardly a point against the view that regime uncertainty inhibits investment to say that current investment has not been more lacking  than in periods that followed past economic collapses.

One implication of Kalecki’s paper should not be missed. Kalecki said that business assertions of lack of confidence could be countered by an increase in government spending. In other words, if private business will not invest, the government can  through increased spending step in to do the job. The is a recipe for government control of large parts of the economy, a state of affairs no doubt welcome to Kalecki and his latter-day successor.

Comments

  1. “Krugman nowhere refers to Higgs”

    Of course not… to do so would run against his standard policy of pretending Austrians don’t have viable positions on anything. Countering the work of Higgs would require first admitting the work of Higgs exists and merits being countered!

  2. A YouTube Krugman-apologist asked me to say what I thought Krugman’s economic theory was, since he repeatedly wrote to me that Krugman wasn’t a Keynesian (since Keynesian models have been proven false, he said).

    My response, “Expedience.”

  3. Paul Krugman has a psychological theory of business cycles (animal spirits) except when it is inconvenient for his world view. “Business investment is fickle and arbitrarily based on sentiment, but businessmen become emotionless automatons as soon as the government does something negative.”

    If you believe in “animal spirits” you should also believe in the “confidence fairy”, at the margin at least.

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