The Krugman delusion

Last week I gave credit to John Maynard Keynes for drawing the attention of both academics and policymakers to the fact that savings rates, household spending, and business investment are significantly affected by highly volatile public expectations. I realize that it comes as very disappointing news to our social engineers, but there is no mathematical formula or applied macro model anywhere in the econometrics research of this year's Nobel Prize economists, Thomas J. Sargent and Christopher A. Sims, that could predict the impact on the "animal spirits" from any sharp turn in monetary and fiscal policies, domestic or foreign. A decision from the Federal Reserve (or another major central bank) that artificially suppresses interest rates and a "recovery and reinvestment" bill passed by Congress (or the government of another leading economy) may be advertised as complementary tools for encouraging employers to hire the unemployed and expand production, but after three years of "stimulating" the economy, those jobs are still a mirage.

The extent of booms, the timing of busts, and the path to recovery from financial meltdowns have a lot to do with the way entrepreneurs perceive the major reforms in one or more areas of the vast cobweb of bureaucratic regulations. (Obamacare and the recent financial "overhaul" of Wall Street are the first examples that come to mind.)

Since Keynes obviously recognized the problem, one may observe with curiosity how Paul Krugman, the "conscience" of today's Keynesian interventionist hardliners, keeps yelling from the pages of The New York Times that the current stagnation in the labor markets has nothing to do with the fears of business owners and managers. But we have to cut the guy some slack-after decades of preaching to the "progressive" choir that red tape and overspending could cure any and all economic ills, it would be very embarrassing to admit that the legislative surge in 2009 and 2010 has increased uncertainty and stifled growth.

Think about it for a minute: How crazy do you have to be to invest and create new jobs in a place where new rules are manufactured at such speed that party whips have to encourage their troops to vote on bills before they get the chance to read them?