Edited by Gavriel D. Rosenfeld

Edited by Gavriel D. Rosenfeld

Friday, September 6, 2013

Krugman's Counterfactual

I don't usually post comments about present-day economic counterfactuals (because there are so many of them and they rarely qualify as history).  

But since Paul Krugman's column in today's New York Times perfectly illustrates how "what if?" fantasy scenarios can be used to critique present-day problems, I thought it was worth excerpting.

In assessing the lackluster state of the current U. S. economy, Krugman asks "what the past five years would have looked like if the U.S. government had actually been able and willing to do what textbook macroeconomics says it should have done — namely, make a big enough push for job creation to offset the effects of the financial crunch and the housing bust, postponing fiscal austerity and tax increases until the private sector was ready to take up the slack.  I’ve done a back-of-the-envelope calculation of what such a program would have entailed: It would have been about three times as big as the stimulus we actually got, and would have been much more focused on spending rather than tax cuts.

Would such a policy have worked? All the evidence of the past five years says yes.  Would such a policy have worked? All the evidence of the past five years says yes. The Obama stimulus, inadequate as it was, stopped the economy’s plunge in 2009Europe’s experiment in anti-stimulus — the harsh spending cuts imposed on debtor nations — didn’t produce the promised surge in private-sector confidence. Instead, it produced severe economic contraction, just as textbook economics predicted. Government spending on job creation would, indeed, have created jobs....
We would be a richer nation, with a brighter future — not a nation where millions of discouraged Americans have probably dropped permanently out of the labor force."
Unfortunately, for Krugman, this fantasy merely underscores the magnitude of the U. S. government's failure to arrest the country's economic decline. Here again, wondering  "what if?" is synonymous with wishing "if only."

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