July 28, 2009

RICHARD POSNER: LIBERALS FORGETTING KEYNES: “Krugman’s passionate support for the Administration’s health-care program suggests that he has not absorbed one of the central elements of Keynes’s theory, which is the role of uncertainty in depressing investment spending and, both by depressing investment and by increasing passive savings, in depressing consumption spending as well. . . . When uncertainty in the sense of risk that cannot be calculated rises, it tends to make businessmen and consumers alike freeze–they hoard money rather than spend it, whether spending on investment in the case of businessmen or sending on consumption in the case of consumers. That is the prudent response to increased uncertainty, because by holding off on spending the businessman or the consumer buys time to gather information about his options, or simply wait for the situation to clarify itself, and also accumulates cash with which to deal with emergencies to which an uncertain economic environment can give rise. We see these tendencies at work today, in the huge excess reserves accumulated by the banks, the decline in new bank loans, the massive layoffs by employers uncertain about the demand for the goods and services they produce, the decline in business deals, and the sharp increase in the personal savings rate.”

And what’s the biggest source of uncertainty right now? The Administration and Congress! “I therefore thought it a mistake, as I have noted often in the blog, for the Administration to embark, without waiting for the recovery from the depression, on ambitious social programs that are likely to add substantially to the national debt. These programs, if enacted, will increase the likelihood of a severe aftershock.”

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