For nearly a century, clear economic reasoning and articulate writing have fallen by the wayside. This decline was sparked by the publication of John Maynard Keynes’ The General Theory of Employment, Interest and Money in 1936.
This complex text is not only difficult to understand, but it also seems to have a paradoxical effect: it often confounds its readers further. Sadly, Keynes’ theories have since become the foundation of misguided economic thought that continues to pervade discussions today.
Many politicians and mainstream economists cling to Keynes’ convoluted ideas. They appreciate the justification it provides for government behaviors they prefer—primarily borrowing money to fund extravagant programs.
For instance, Keynes once suggested that burying bottles of money in coal mines for people to dig up would remedy unemployment. According to him, this absurdity would generate jobs and wealth, creating a supposed economic boom for all.
Over the years, such faulty reasoning has sparked numerous government initiatives aimed at rescuing the economy from itself. Notable examples include the American Recovery and Reinvestment Act of 2009 and the American Rescue Plan of 2021—two monumental spending packages that echoed Keynesian principles. The repercussions of these misguided strategies will be felt for generations.
A decade ago, economist Paul Krugman took Keynesian reasoning to extreme lengths, ultimately losing his sense of rationality in the process.
In an astonishing display of imagination, Krugman suggested on cable television that the best way to boost economic growth is to borrow staggering sums of money to prepare for an alien invasion.
A Very Bad Call
Krugman’s approach illustrates a profound disconnect. He has spent so much time analyzing aggregate demand and supply metrics that he seems to have lost the ability to think critically.
Trapped within the confines of academic theory at Princeton, he has overlooked a fundamental truth: how to engage in logical reasoning.
However, moments of clarity sometimes emerge, as evidenced by his recent confrontation with stark reality: the rise of consumer price inflation, which hit an annual rate of 9.1 percent.
On July 21, 2022, Krugman published an op-ed in The New York Times titled: “I Was Wrong About Inflation.” In this piece, he reflected on the $1.9 trillion American Rescue Plan passed in March 2021, intended to alleviate the economic fallout from government-enforced coronavirus lockdowns.
In his article, Krugman acknowledged that some economists had predicted inflation would follow, but he claimed to have been “fairly relaxed” about the stimulus. He ultimately conceded, “As it turned out, of course, that was a very bad call.”
The past 18 months have demonstrated that the Keynesian dream of countercyclical stimulus spending is fundamentally flawed. Despite his extensive theories, Krugman failed to recognize the obvious consequences:
Printing trillions of dollars and injecting them directly into the economy through checks, PPP, and generous unemployment benefits would lead to rampant consumer price inflation.
Broken Models
Did Krugman believe this was just another instance of “pushing on a string,” akin to the 2008 bailout of major banks? Did he think that the fake money would remain confined to the financial sector, slowly seeping into the real economy as it did with TARP funds?
It seems so. Here’s Krugman’s rationale for his “very bad call.”
“Historical experience wouldn’t have led us to expect this much inflation from overheating. So something was wrong with my model of inflation — again, a model shared by many others, including those who were right to worry in early 2021.
“In any case, the whole experience has been a lesson in humility…But in retrospect I should have realized that, in the face of the new world created by Covid-19, that kind of extrapolation wasn’t a safe bet.”
Clearly, Krugman’s inflation model has failed spectacularly; it was incapable of predicting the highest consumer price inflation in over 40 years. If it can’t serve that purpose, what value does it have?
To clarify, a model’s usefulness is contingent on the quality of its inputs. The Keynesian method of relying on aggregate data to identify supposed demand deficiencies and price surpluses is inherently flawed. Unemployment figures, Gross Domestic Product, and price inflation statistics are often manipulated or massaged to fit governmental narratives.
Behind every headline figure lies a series of footnotes with caveats: hedonic price adjustments, seasonal adjustments, and others. Such subjective alterations significantly alter outcomes. So, how reliable are they?
Additionally, why does The New York Times continue to provide Krugman with a platform?
Paying the Price for Krugman’s Terrible Mistake
At this juncture, the real consequences of failed Keynesian policies combined with reckless monetary practices have left the U.S. economy and financial system in a precarious state, with consumer price inflation soaring while economic growth is faltering.
Recently released GDP data for the second quarter shows a contraction of 0.9 percent between April and June, following a 1.6 percent decline in the first quarter.
This consecutive shrinkage meets the technical definition of a recession. As a result, there’s no denying that the U.S. economy is currently in a recession.
Despite Treasury Secretary Janet Yellen declaring, “this is not an economy that’s in recession,” the conflicting data from the government speaks volumes.
Here’s where it becomes particularly concerning:
Due to the miscalculations of economists like Krugman and Yellen, compounded by the Federal Reserve’s inability to rein in inflation, the Fed has been forced to increase the federal funds rate even as the economy contracts. Recently, the Fed raised rates by another 75 basis points, reaching a range of 2.25 to 2.50 percent.
How much higher can the Fed push rates before something breaks?
The answer may be forthcoming. We are bracing for a significant disaster before inflation stabilizes. At this rate, the Federal Reserve may need to trigger a severe, 1930s-style depression to bring inflation to a halt.
In summary, Krugman was wrong, and he admitted it. Unfortunately, we all are paying the price for his significant error.
[Editor’s note: It’s crucial not to let the failures of economists like Krugman jeopardize the hard work you’ve put into securing your future. We find ourselves in a perilous time. Over the past six months, I’ve dedicated myself to researching actionable steps everyday Americans can take to safeguard their wealth and financial privacy. These findings are detailed in the Financial First Aid Kit. If you’re interested in learning more about this essential publication and how to obtain a copy, visit here today!]
Sincerely,
MN Gordon
for Economic Prism
Return from Paying the Price for Krugman’s Terrible Mistake to Economic Prism
