Paul Krugman and the neo-Keynesian myth of full employment

July 5, 2011

In the most recent issue of Housing Wire Magazine, economist Paul Krugman suggests more government spending as the means of dealing with the economic slump and the housing crisis.

“We will be seeing low interest rates for a very long time,” the Nobel laureate said. “The thing about housing … housing prices were stable for a long period of time, then they soared and came back down.”  So now we know that what goes up must come down.  Thank you Dr. Krugman.

Incredibly, neither Krugman nor his soul mates among the neo-Keynesian elite, a distinct group which exercises hegemony over American economic policy, seem to accept that government spending and more debt, enabled by double digit inflation, is not a solution.

“Government policies promoting consumer indebtedness with low interest rates and low down payments were partly responsible for the housing bubble,” notes Anthony Sanders of George Mason University in Housing Wire.  “It should be called the Keynesian bubble.”

Despite all of the academic fussing about the triumph of neo-liberal economic thinking in the 1980s and 1990s, the real underlying model of American political economy is entirely socialist in political terms and inflationist as to the core monetary model.  When the advocates of free market economic tenants have shown the temerity to challenge the control of the temple by the neo-Keynesian Sanhedrin, the result has been more government and ever mounting piles of public debt.

The roots of neo-Keynesian socialism of the Krugman variety go back to before WWI, to the creation of the Federal Reserve System in 1913.  I spent a good bit of time talking about the statist and ultimately socialist roots of the Fed in my book Inflated: How Money and Debt Built the American Dream, including a number of sources that deserve more attention. One of these is “The Role of Keynesians in Wartime Policy and Postwar Planning,” by Byrd L. Jones of the University of Massachusetts, who described how Harry Hopkins and the socialist brain trust around FDR plotted a course to “full employment” using deficit spending funded with debt.  Historians of this era lionize these socialists for “saving what even conservatives call capitalism,” to quote James Galbraith on Alvin Hansen, another of the authors of the Keynesian illusion of pretend economic growth via deficits and debt.

Hansen was one of the key architects of the idea of “full employment,” a concept he developed during a series of lectures at Harvard University, one of the great birthing grounds of American socialism.  James Tobin wrote of Hansen in 1976 that as the principal intellectual leader of the Keynesian conquest, Hansen deserves major credit for the “fiscal revolution in America.”

That revolution, sadly, put the US on the road to fiscal recklessness and a steady rate of debt accumulation and inflation that has robbed Americans of most of the value of a dollar of a century ago. FDR operatives such as Leon Henderson, Richard Gilbert and Lauchlin Currie based the recovery of the US economy in the 1930s on defense spending, arms exports and domestic subsidies — a tendency for an expanded government learned in WWI, expanded in WWII and continued happily ever since.

Currie, a Canadian socialist who like Hansen worked at the Fed and later at the White House for FDR, also focused on war as a means of economic stimulus — a policy still followed under President Barrack Obama.  Jones writes that in Currie’s analysis, defense spending and arms exports were means to be “temporary” aids to the economy, but that a long run solution not dependent upon “chronic fiscal deficits” required “a liberal program of progressive taxes, increases in social security benefits, more public works projects and encouragement of investment (especially in home building).”

If you think that the last sentence sounds an awful lot like what we hear coming from the mouth of Paul Krugman and other advocates of more public spending today, then you’re correct.  The basic program of the neo-Keynesian socialists has not changed in decades, namely to expand the role of the state in the US economy and use inflation to create the illusion of economic prosperity — what liberals call “full employment.”

During the years following WWII, America donned the clothing of free market capitalism, at least in a rhetorical sense, but the underlying model of political economy has remained true to the socialist roots of FDR.  Conservatives from Hayek and Henry Hazlitt on forward have warned that the end result of the neo-Keynesian path is an authoritarian state and we have one today.

Yet even with a government monopoly on the housing sector, professor Krugman still wants to spend and borrow more.  In a post on Zero Hedge yesterday, “Counter-Cyclical Follies,” my friend Dick Alford argues that economists are finally realizing that “counter-cyclical fiscal and monetary policies do not address the cause of the under-performance of the US economy and hence are not solutions.”

Maybe.  But it has taken educationally deprived Americans a century to figure out this key economic insight.  So long as people take their policy guidance from committed neo-Keynesian advocates like Paul Krugman, who continue to follow the same socialist line set down a century ago by the likes of Hansen and Currie, we shall make no progress on truly fixing the US economy.


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“. . . war as a means of economic stimulus — a policy still followed under President Barrack Obama.” A whacked-out lie!

“Conservatives from Hayek and Henry Hazlitt on forward have warned that the end result of the neo-Keynesian path is an authoritarian state and we have one today.” Pure paranoia and fear-bating.

Posted by Kithara | Report as abusive

Ah, so what you’re saying is, Ron Paul and the Austrians were right all along! Yes, we’ve been trying to tell people for years, but they’re actually listening now. Soon, people are going to realize that not only is Austrian economics the correct choice, it is also the only moral choice.

Posted by lnardozi | Report as abusive

Sir, you’ve basically outlined why you think Krugman is wrong, yet provided no concrete solutions yourself, that would both solve the problem, and have a chance of passing legislative muster.

I know, I know, it’s much easier to tear something down and build it back up. Way to do exactly what the person you’re attacking can do. He has a Nobel prize. Do you?

Posted by Adam_S | Report as abusive

Go ahead if you want to call Krugman a socialist left-wingnut, I don’t think you’re really going to hurt his feelings but please don’t insult your loyal readers with obsolete fantasies like full employment, free tradeism or the tooth fairy. Only starry eyed econo-undergrads fall for that dreamy stuff ..

Posted by Woltmann | Report as abusive

In that corner, dogmatism advocating spending with no rational provision for said spending, the biggest chunks of the discretionary pie being military; the debate to allow the Bush tax cuts to be re-extended should have been discussed at the same time as the debt ceiling debate, if the true intent was to lower the deficit.

In the other corner, same “conservative” dogma as ever against taxes and government spending, even though spending on military is even acknowledged by former Sec of Defense Gates as being excessive.

Priorities, priorities: first, the priority was to extend tax cuts and now to reduce the deficit. Let’s just get it over and drown it in the bathtub like Grover Norquist said.

What will be left with? I’m not sure, but it’s not pretty, right now.

My solution: end tax loopholes, end Bush tax cuts, balance the budget, reduce military spending to levels that are much more sustainable & aligned with spending elsewhere, invest in domestic energy production especially carbon neutral ones, stimulate solar and renewable industries before we’ve lost the race, and let’s see the business community do what they say they’re good for, creating jobs and innovating.

Posted by Kalib_Kersh | Report as abusive

Full employment may be a delusional aspiration, but so is the “invisible hand”.

Posted by prad0597 | Report as abusive

This article makes grandiose use of creative labels but avoids some critical facts:

A third of the stimulus was comprised of tax cuts. Another third went to shore up state budgets which were being slashed and so did not add new spending to the economy. The actual amount of stimulus was just over 300 billion, spread out over two years. Krugman estimated that for the stimulus to reverse the effects of the recession, it would need to be 2 trillion. So there really was no stimulus.

Krugman, and Keynes, never advocated stimulus in good times. It is a tool to be used sparingly and wisely only when capital and labor are idle because of a vicious cycle. Once the markets recover and growth resumes, both economists say that stimulus spending should not be used. Whalen conflates the pre-recession government support of the housing market with “neo-Keynesian” (an absurd attempt at slur) stimulus, which it is not. Further, the housing bubble wasn’t an American phenomenon. Investors around the globe grew the housing bubble. Is Whalen saying the US government policies buttressing Fannie and Freddie are to blame for the housing bubble in Spain, Ireland, Italy, etc.? This is a ridiculous and dishonest claim. Does Whalen know better or is he simply blinded by ideology?

The only moment in history when stimulus spending of the scale proposed by Keynes was actually deployed was during WW2. And it worked. The economy of the US was put back on track and the growth it enabled lasted decades. This fact is well understood by all who are not blinded by fear and hatred of American hegemony. The very term is a dead giveaway.

Finally, we have plentiful examples of the effects of austerity and raising interest rates on a global recession. Britain has gained nothing by cutting its public spending. Revenues are down because growth is still nonexistent. Businesses have cash but won’t invest until the economy begins to grow again. In the absence of public spending, the economy will take perhaps decades to begin growing again on its own, thus the recession deepens and lengthens.

This is all so elementary, but like most facts it stands no chance of being recognized by those who cling to their irrational belief systems.

Whalen is not credible.

Posted by BajaArizona | Report as abusive