The Krugman Hemline

Geeks with formulas creating digital value, outrageous monetary pumping by an egomaniac central banker claiming a new paradigm, psychotic type A financiers stoking the frenzy of prices increases, and now competition between governments for the best Keynesian bailout to keep stock prices up at stratospheric levels the market has been trying to correct. The Nobel prize in Economics is become more like watching the fashion pages recently as it rewards disciples of very different and sometimes mutually exclusive schools depending on the economic season. It's an interesting coincidence that as policy makers turn to Keynesian government spending policies to prevent the recession Paul Krugman should be granted the Nobel prize in Economics. Krugman, a noted Keynesian, is major proponent of preventing downturns with government intervention and cannot seem to understand why bad investments should move into the wider economy:

"nobody has managed to explain why bad investments in the past require the unemployment of good workers in the present."

For a Keynesian economist who believes in the multiplier effect for getting economies on the move again it is odd that he doesn't see it working in the other direction. The bad, as Krugman would call them, workers directly related to the over investment (in the current downturn examples would be bankers, builders, property lawyers, real estate agents) are the ones making up the rise in unemployment. Their large disposable income emanating from the boom times will surely not be available in the same quantities to purchase the services of other workers who are not directly related to the bad investments. 'Good productive capacity' cannot be used in an absolute sense with relation to workers and capital, excluding workers/capital providing necessities such as undertakers/funeral homes and doctors/hospitals. A worker is neither good or bad but is in demand or not in demand.

But in Krugman's world things are very simple:

"Here's the problem: As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa). So if people decide to spend less on investment goods, doesn't that mean that they must be deciding to spend more on consumption goods—implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment? "

So when investment collapses there should be no problem as the slack will be replace by people going off on a consumption boom. The fact that people are poorer due to the collapse in prices at the margin from the slump doesn't seem to matter. Further, philosophically difficult mental constructs about how the poor information signals on account of the malinvestment during the boom period might have caused opportunity costs and destroyed wealth (for example a gifted teacher thinking they'd never be able to afford a house becoming a lawyer or an economist instead) leading to lower real wealth and income prospects for the economy as a whole are far beyond his simple way of looking at things. Keep it simple stupid especially if it brings you the Nobel prize.