Krugman writes today: "That’s almost surely false: the evidence strongly says that the real reason businesses are sitting on cash is lack of consumer demand." But Krugman has not broken free of the pump priming thesis. He seems to think that public investment could set things right pretty quickly.
Public spending will not necessarily stimulate private investment as the result of the stimulus it gives to private consumption. The system has not fallen into an unstable equilibrium which merely needs an injection of new spending to push it back on track. It’s exactly because unemployment has become stable that repeated shoves and not just a single shove are required, coupled with new forms of planning, to move the economic machine back up to full employment. Krugman is certain that we can do something this big without offending the confidence fairies. I think we should certainly try because unemployment is intolerable and interest rates are low, but I think we should push for this while preparing for the possibility that the fairies will exact a mean revenge. At any rate, the theory of the multiplier can be defended without the pump-priming thesis, that is the thesis i that “temporary injections of government spending would set the wheels of private enterprise in motion and, once private enterprise was back on its feet, the government expenditures could be withdrawn without causing any relapse in economic activity.” The Economics of John Maynard Keynes , p. 126 (Some of the most lucid post war Keynesians Dillard, Lawrence Klein, and Hyman Minsky all took or had taken their Marx very seriously). The pump priming thesis as summarized here by Dudley Dillard is exactly the mistake that Keynes and FDR took some time to overcome. And it is the mistake that Obama already made. I don’t think Professors Quiggan, DeLong or Krugman have pinpointed the problem. It’s the mistake of the pump priming thesis.
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