Cochrane: How Did Paul Krugman Get It So Wrong?

The Supply and Demand blog by University of Chicago Economics Professor Casey Mulligan links to a paper by University of Chicago Booth School of Business Professor John H. Cochrane,"How did Paul Krugman get it so Wrong?"

Here is one passage from an excellent paper:

In fact, I propose that Krugman himself doesn’t really believe the Keynesian logic for that stimulus. I doubt he would follow that logic to its inevitable conclusions. Stimulus must have some other attraction to him.

If you believe the Keynesian argument for stimulus, you should think Bernie Madoff is a hero. He took money from people who were saving it, and gave it to people who most assuredly were going to spend it. Each dollar so transferred, in Krugman’s world, generates an additional dollar and a half of national income. The analogy is even closer. Madoff didn’t just take money from his savers, he essentially borrowed it from them, giving them phony accounts with promises of great profits to come. This looks a lot like government debt.

If you believe the Keynesian argument for stimulus, you don’t care how the money is spent. All this puffery about “infrastructure,” monitoring, wise investment, jobs “created” and so on is pointless. Keynes thought the government should pay people to dig ditches and fill them up.

If you believe in Keynesian stimulus, you don’t even care if the government spending money is stolen. Actually, that would be better. Thieves have notoriously high propensities to consume.

The latest version of the full paper is available here.

For those of you that lack administrator privileges or are behind firewalls and cannot download the paper, here is the Scribd embedded version as of 9/11/09, 1:30 pm est.

Update: Also, see Levine's response to Krugman here.

How did Paul Krugman get it... by Milton Recht on Scribd