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Krugman, Unemployment and Structure Shifts in the Economy

Samuel Staley
February 19, 2011, 8:37am

Economist Bill Watkins has an useful and pithy analysis of why the Keynesians are wrong about unemployment rates and using spending (aggregate demand) to get the economy on track.

In essence, when the economy is undergoing major shifts in employment from one industry to another, aggregate demand policies like fiscal stimulus don't work. The premise for these economywide spending policies is that all industries are suffering across the board declines in consumer spending (consumer demand). Watkins, in contrast, points out that that the employment effects of the recession are quite uneven, implying that aggregate demand policies will be ineffective.

He also provides a little fodder for those unhappy with Paul Krugman's missives recommending government spending to jack up the economy. Here's what Watkins, a professional forecaster and economic analyst formerly at the University of California at Santa Barbara, has to say about Krugman's analysis:

"Krugman is not a dumb guy.  He has a well-deserved Nobel Prize for his work on international economics.  He has a career of looking at data, in depth and with insight.  His failure to provide the entire story has to be considered something besides an oversight.  We have to conclude that he’s purposely being deceitful.

"I don’t know why a guy with all of Krugman’s gifts and accomplishments would use data deceitfully.  It is a shame, though, that an economist at the top of his profession and with the New York Times bullhorn uses that bullhorn to confuse instead of to enlighten."

Ouch.


Samuel Staley is Research Fellow


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