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Krugmania: why everyone loves to hate Paul Krugman

(Author's Note: This post has been updated to reflect a material change: that Paul Krugman was the victim of an identity theft. The Google+ profile that's referred to was an impersonation, as he notes in his blog. However, since he himself acknowledges that he stands by his earlier assertions referred to in this post, the larger point about Keynesianism gone wild still stands.)

Within hours of the overnight quake that rattled the east coast of America, an intriguing comment appeared on what's ostensiblywhat appeared to be the Google+ profile page (UPDATE: it's since been scrubbed) of Nobel Prize-winning economist and New York Times columnist Paul Krugman (see footnote below).

It read:"People on twitter might be joking, but in all seriousness, we would see a bigger boost in spending and hence economic growth if the earthquake had done more damage."

That's right: Krugman (if, indeed, it is him)The underlying argument is that if the earthquake had caused more damage, it would have done the down-and-out US economy some good because then the government and private enterprises and homeowners would have had to spend money to rebuild their cities and businesses and homes - which would have grown the economy.

 Krugmania: why everyone loves to hate Paul Krugman

Bob Strong/Reuters

That message, which some see as perverse and heartless, has internal consistency with all of Krugman's writings over the years, and particularly since the 2008 financial crisis. Krugman is a Keynesian at heart, and believes that what the US needs now is not spending cuts - of the sort that are contributing to Europe's economic slowdown - but more spending, despite the government's high burden of debt.

Many of Krugman's commentaries in recent weeks and months have focussed excessively on getting spending levels up to generate employment and defeat the deflationary trend. To this end, he's waged intellectual war with far-right Republicans and Tea Party activists in the US, who have been pushing for spending cuts.

Reasoning that a more destructive quake would have stimulated the economy better would tie in neatly with the "broken window theory" - which is shown up as a fallacy in this educative video. (Other Keynesian economists, like Matthew Yglesias, for instance, argue that shoplifting can lift up the economy!)

Yet, there are times when Krugman's Keynesian instincts appear to have gone completely wild.

The 'star wars' stimulus

Just last fortnight, for instance, appearing on Fareed Zakaria's GPS show, Krugman argued, somewhat bizarrely, that preparing for an attack by space aliens would ramp up spending to levels that would drag the US economy out of its downward spiral.

"It's very hard to get inflation in a depressed economy," Krugman said. "But if you had a program of government spending plus an expansionary policy by the Fed, you could get that....

"If we discovered that space aliens were planning to attack and we needed a massive buildup to counter the space alien threat - and inflation and budget deficits took secondary place to that - this slump would be over in 18 months. And then if we discovered, oops, we made a mistake, there aren't any aliens, we'd be better (off).

He then cited an episode of Twilight Zone in which scientists fake an alien threat in order to achieve world peace. ""Well, this time...we need it in order to get some fiscal stimulus."

Predictably, Krugman drew a lot of flak from libertarian schools of economics, and in fact there's a big cottage industry of economists and commentators who love to hate Krugman.

In that same GPS video interaction, Krugman endorses the theory that it was all the military spending associated with the Second World War that dragged the US out of the Great Depression. Yet, even he didn't allude to his New York Times column written just three days after the 9/11 terrorist attacks on New York, in which he had argued that the economic aftershocks of the attacks "need not be major".

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Terrorism as stimulus

"Ghastly as it may seem to say this, the terror attack...could even do some economic good." The American economy, he reasoned, was "so huge that the scenes of destruction, awesome as they are, are only a pinprick." Doing some back-of-the envelope real estate calculations, he concluded that the loss from the collapse of the Twin Towers would be only about 0.1 percent of US wealth - "comparable to the material effects of a major earthquake or hurricane."

That calculation is, as I've argued here, overly simplistic - since the 9/11 attacks set America on a geopolitical path that accelerated the decline of the US economy.

Yet, it is entirely in keeping with the economist John Maynard Keynes' General Theory of Employment, Interest and Money, in which he argued that the government could do away with unemployment if it buried old bottles with banknotes and buried them in disused coalmines - and have people dig them up.

Paul Krugman is a professor of Economics at Princeton University. Tami Chappell/Reuters

Such examples of Keynesian economics gone wild of course abound around the world. In 2009 in China, for instance, an outspoken Communist Party official confirmed long-held suspicions that the country's high-octane GDP data was being exaggeratedby regional party leaders to show higher economic growth, in the process "squandering social resources."

'Ghost cities' as GDP boosters

In a brutally honest speech, the powerful official of a southern Chinese province said: "Some of our GDP data sure looks rosy... But they do not amount to growth of social wealth; in fact, social resources are being wasted to show GDP growth." For instance, he said, provincial party officials build a bridge, which contributes to GDP; they then "dismantle" and rebuild the bridge, each time contributing to GDP. "We may have boosted our GDP this way, but this is a huge waste of social resources."

The empty "ghost cities" and malls in China also offer more striking evidence of Keynesianism running amok.

Even if there is some merit in the notion that it was a resort to classical Keynesian theory in 2008 that averted another Great Depression in the US, when a Nobel Prize-winning economist uses it to push for spending to fight "space aliens" or argues that a terrorist attack can serve as a GDP booster, you have to wonder at what stage economic nerds lose touch with their humanity.

It's had commentators wondering, only half in jest, how soon it will be before Krugman burns down the New York Times building " to double his employer's top and bottom line."

(Footnote: The possibility that this isn't really Paul Krugman's Google+ account, but a fake one, isn't lost on me. But everything from his circle of acquaintances to his previous posts on his profile page to the internal consistency in his philosophy appears to me to suggest that this could indeed be the real deal. )

(UPDATE: Krugman has since clarified that the Google+ profile is an impersonation; but since he has said he stands by his earlier assertions, the larger point about Keynesianism gone wild still stands.)

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Updated Date: Dec 20, 2014 05:31:58 IST

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