We are for effective government works, not a big government for its own sake: private where private belongs; government where it is needed; circumstances alter cases. We are for an informed public sphere, not one that thinks a bigger or more active government is always better: we want to see voters who understand the technocratic pluses and minuses support politicians who recognize them.
So, am I a Keynesian because I want bigger government? If I were, shouldn’t I be advocating permanent expansion rather than temporary measures? Shouldn’t I be for stimulus all the time, not only when we’re at the zero lower bound? When I do call for bigger government — universal health care, higher Social Security benefits — shouldn’t I be pushing these things as job-creation measures? (I don’t think I ever have). I think if you look at the record, I’ve always argued for temporary fiscal expansion, and only when monetary policy is constrained. Meanwhile, my advocacy of an expanded welfare state has always been made on its own grounds, not in terms of alleged business cycle benefits.
In other words, I’ve been making policy arguments the way one would if one sincerely believed that fiscal policy helps fight unemployment under certain conditions, and not at all in the way one would if trying to use the slump as an excuse for permanently bigger government.
But in that case, why am I a Keynesian? Maybe because of convincing evidence?
The fiscal multiplier — the increase in real GDP per dollar of government stimulus spending, or the fall per dollar of austerity cuts — has assumed a lot of significance in recent years. When Bernstein and Romer assumed that it was 1.5, Robert Lucas accused them of “shlock economics“, and smeared Romer’s professional ethics. Since then there has been quite a lot of empirical work, which generally indicates a multiplier of about … 1.5.
That said, I still do believe that the multiplier is not much bigger than 1 — indeed, around 1.5; partly because of the econometrics, but also because taxes and transfers act as automatic stabilizers.
So how did Krugman know growth would be slow? He didn't (I hope) put his trust inReinhart and Rogoff's assertion that growth is always slow after financial crises. Maybe he just assumed that the underlying drivers of aggregate demand are sluggish, but I think Paulson's team could have done that just as easily.Economics can often use history as good source of data and prediction. Thomas Piketty's work has done similar work in turning to history for a broader perspective. This is why he considers himself much more a social scientist than anything else.
No, I think Krugman's real secret weapon is something else: Like Voltron before him, he's borrowing heavily from Japan.
3. This was a form of fiscal policy, to stimulate the economy in slow times, by employing craftsmen.
4. The guild of said craftsmen was an influential interest group.He is just having some fun, but it is theoretically sound. You could use the same economic reasoning to explain other grand works like the pyramids of Egypt.
