Monday, January 13, 2014

Why Do Some Economists Reject Government Efforts To Reduce Unemployment?

Paul Krugman has been very critical of economists who have rejected the idea that government can take actions which will reduce unemployment without creating other problems.  He portrays this as an anti-scientific revolution within economics.  It is anti-scientific in his mind because most of the claims made against government efforts to reduce unemployment have been shown to be wrong.  He believes that this should persuade economists to change their minds.  In fact, prominent economists, like Robert Barro at Harvard have argued that there is no such thing as insufficient aggregate demand.  His system of economics focuses entirely on the problem of inadequate supply. In response Krugman points out that there is no evidence that supply factors should have led to our extended period of high unemployment.  He also points us to other claims that have been proven to be wrong:

* We were told that the Fed can't print money without causing inflation. The Fed has been printing money and there are no signs of inflation.

* We were told that government could not run budget deficits without driving up interest rates because government would be reducing the supply of funds required for business investment.  In fact, government deficits have not led to higher rates of interest for private investments.

* We were told that government can't increase public spending without reducing private spending.  Government would be competing for the use of scarce resources that would not be available for private spending.  In fact nations with higher levels of government spending have had higher levels of private spending.

Krugman has been pointing these inconsistencies out for some time yet they continue. However, it may not indicate an anti-scientific revolution as he indicates.  The false assumptions that he attacks are consistent with an economic doctrine that has been resistant to counter evidence for many years.  It is the world's most powerful religion without a church. Faith in the religion is a powerful force because it is also consistent with many of the ethical beliefs that underlie our economic system.  For example, "sound government finance" is necessary for business confidence; you can't pay people not to work; private investment is superior to government investment etc. etc.  We should regard the business cycle as a normal state of affairs.  The maintenance of a full-employment economy is not the objective of the economy.  We should only expect full-employment at the peak of the cycle and the slumps will be mild and short lived as long as government does not interfere with the economy.

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