The ghost of John Maynard Keynes lives at Princeton University, where Paul Krugman continues his life’s work as the new prophet of the Keynesian Gospel. (One would hope that Krugman’s efforts would have the same rate of success of one trying to revive Zoroastrianism, but I’m afraid that the Nobel committee just gave Keynesianism a new lease on life.)
Today, the Prophet tells us that the consumer is just not up to do doing the job:
The long-feared capitulation of American consumers has arrived. According to Thursday’s G.D.P. report, real consumer spending fell at an annual rate of 3.1 percent in the third quarter; real spending on durable goods (stuff like cars and TVs) fell at an annual rate of 14 percent.
To appreciate the significance of these numbers, you need to know that American consumers almost never cut spending. Consumer demand kept rising right through the 2001 recession; the last time it fell even for a single quarter was in 1991, and there hasn’t been a decline this steep since 1980, when the economy was suffering from a severe recession combined with double-digit inflation.
I find the last sentence to be quite instructive, as Orthodox Keynesian Theology says that there cannot be an inflationary recession. (Yes, I know they have a convoluted explanation, but it really is no better than what Jake Blues gave to his jilted girlfriend in the sewer tunnel in “The Blues Brothers.”)
Ah, but the Great Prophet and Nobel Laureate knows why this behavior is awful, as he channels Bernard Mandeville and “The Fable of the Bees”:
Some background: one of the high points of the semester, if you’re a teacher of introductory macroeconomics, comes when you explain how individual virtue can be public vice, how attempts by consumers to do the right thing by saving more can leave everyone worse off. The point is that if consumers cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone’s income.
In fact, consumers’ income may actually fall more than their spending, so that their attempt to save more backfires — a possibility known as the paradox of thrift.
What to do? Government to the rescue to spend, spend, spend. Actually, it is “borrow, borrow, borrow, print, print, print, and then spend, spend, spend:
No, what the economy needs now is something to take the place of retrenching consumers. That means a major fiscal stimulus. And this time the stimulus should take the form of actual government spending rather than rebate checks that consumers probably wouldn’t spend.
Let’s hope, then, that Congress gets to work on a package to rescue the economy as soon as the election is behind us. And let’s also hope that the lame-duck Bush administration doesn’t get in the way.
Yeah, those “free marketeers” in the Bush administration, the same administration that has given us nationalization of just about everything, are going to keep us from having this wonderful “stimulus.”
Stay tuned. As we slide into recession — and maybe worse — perhaps Krugman will take on the very visage of his Savior or maybe he will become secretary of education and force us to teach Keynesian Theology in our classrooms.6:44 am on October 31, 2008 Email Bill Anderson