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Yes, Paul Krugman is an Underconsumptionist

March 13, 2014 in Economics

By William Anderson

One way to make a Keynesian bristle is to tell him that Keynesian theory at its core is little more than the discredited belief of “underconsumption.” Now, the standard “underconsumption” theory is built upon the premise that unless an economy can “buy back” the products that are created, the economy will drift into crisis as inventories pile up, layoffs occur, and the economy implodes into a perverse equilibrium — and stays there unless government intervenes to save the economy.

The problem, according to “underconsumptionists” is that people save too much (called “hoarding”) and that they are unwilling or unable to spend enough to purchase goods at prices that will permit the owners of factors of production to be paid their opportunity costs. Thus, the imbalance begins and then metastasizes unless government steps in with more spending and/or easy money.

For all of the supposed sophistication of the Keynesian theory, at heart it is nothing more than “underconsumption.” Certainly the so-called Keynesian cures for depressions are right in line with “underconsumption” theory even if they have sophisticated names like Monetary Policy or Fiscal Policy.

Enter Paul Krugman. Although he has said before that he does not subscribe to “underconsumption” theories, nonetheless his prescription for more economic growth — that government impose much steeper graduated tax rates than currently exist in the USA — fits exactly into the “underconsumption” mold. Furthermore, he argues that “equality of outcomes” is superior, economically speaking, than “equality of opportunity,” writing:

But how can the effects of redistribution on growth be benign? Doesn’t generous aid to the poor reduce their incentive to work? Don’t taxes on the rich reduce their incentive to get even richer? Yes and yes — but incentives aren’t the only things that matter. Resources matter too — and in a highly unequal society, many people don’t have them.

Think, in particular, about the ever-popular slogan that we should seek equality of opportunity, not equality of outcomes. That may sound good to people with no idea what life is like for tens of millions of Americans; but for those with any reality sense, it’s a cruel joke. Almost 40 percent of American children live in poverty or near-poverty. Do you really think they have the same access to education and jobs as the children of the affluent?

In fact, low-income children are much less likely to complete college than their affluent counterparts, with …read more


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