Steve Keen: Oh My, Paul Krugman Edition


On Naked Capitalism Yves Smith has the article Steve Keen: Oh My, Paul Krugman Edition.

Yves here. In some ways, I hate to be having such a run of Paul Krugman posts, but his stand on the TransPacific Partnership and his continued defense of dubious economic ideas that were long ago disproven, like loanable funds, in combination with his prominence, means the attention is well warranted.
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Have you heard the old joke that an economist is someone who, seeing that something works in practice, then says “Ah! But does it work in theory?”. I’m not going to pull that swifty here: as I noted last week, I see the role of debt adding to aggregate demand as an empirical reality that economists have to explain – not something that can’t exist unless economists have a model that explains it.

In some  ways, I see this article as economists on both side misunderstanding each other and trying to argue over who is right about what happens in the real world, when a plain look at recent history seems to me to provide irrefutable evidence that debt does have an impact on demand under some (but not all) circumstances.

I don’t understand this wondering if debt creates demand.

I thought the whole housing bubble was about middle-class people artificially maintaining their customary buying power in the face of declining income by borrowing on the rising equity in their homes.

As soon as the rising value of the homes had a hesitation, the whole house of cards collapsed.

Isn’t this proof enough of the impact of debt on consumption?  Let’s move onto the next question already.

I also take the position as does Yves Smith that lowering the cost of borrowing is not going to make companies invest in new capacity if there is no demand for the products of that capacity.  This is a different circumstance from borrowing on home equity during the housing bubble.  Also one situation is talking about the difficulty in getting people to borrow (invest) as opposed to the impact that the borrowing has once the borrowing has been done.

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