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Home > Macroeconomic Issues Viewpoints > What Krugman Is Saying Is Simply Untrue

Macroeconomic Issues Viewpoints

What Krugman Is Saying Is Simply Untrue

by Allan Meltzer

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Allan Meltzer is a distinguished monetary economist who believes that tax cuts would be more beneficial to the US economy than continued fiscal stimulus. He is professor of political economy and public policy at Carnegie Mellon University and visiting scholar at the American Enterprise Institute.

He has been a visiting professor at Harvard, the University of Chicago, the University of Rochester, the Yugoslav Institute for Economic Research, the Austrian Institute for Advanced Study, the Getulio Vargas Foundation in Rio de Janeiro, and City University, London. He has served as a consultant for congressional committees, the President’s Council of Economic Advisers, the US Treasury, the US Federal Reserve, the World Bank, foreign governments, and central banks. In 1999–2000 he chaired the Meltzer Commission, which proposed major reforms of the International Monetary Fund and development banks. From 1973 to 1996 he was coeditor of the Carnegie-Rochester Conference Series on public policy, the Journal of Economic Literature, and the Journal of Finance. From 1973 to 1999 he was chairman of the Shadow Open Market Committee. He is a director of the Sarah Scaife Foundation.

Meltzer is a past president of the Western Economic Association and a fellow of the National Association for Business Economics. He is a distinguished fellow of the American Economic Association. In 2003 he received the Irving Kristol Award of the American Enterprise Institute and the Adam Smith Award from the National Association for Business Economics. He is the author of several books, including A History of the Federal Reserve, and of more than 300 papers on economics.

Those who advocate continued fiscal stimulus in the United States, including the economist Paul Krugman, are described as Keynesians or neo-Keynesians. Do you consider this an accurate description?

I have read all of Keynes’s work, because I wrote a book about Keynes. There were very few circumstances in which Keynes favored consumption spending. He was in favor of investment. He opposed large permanent deficits. For 40 years now, economists have worked very hard to build future expectations into their dynamic models. Paul Krugman writes as if it doesn’t matter that people will have to pay higher taxes in future. He just says: “If we spend more now, we will be better off.”

Look at what’s happening in Britain now. Are they suffering a Great Depression because the government is making deep spending cuts? No. The economy is doing okay and sterling has appreciated. Is the German economy about to tank because they announced spending cuts? Not at all; it seems to be doing rather well and the euro has appreciated. What Krugman is saying is simply untrue. I’m constantly surprised that the media take him so seriously.

In Margaret Thatcher’s first term as prime minister, 364 economists warned her that if she maintained her policy of deficit cutting, Britain would never recover. Some 12 of us signed a letter arguing the opposite. She stuck to her policies and what happened? The British economy entered the longest period of growth in the post-war period.

The policies that President Barack Obama is following are wrong-headed. Everyone in his right mind knows that if you have an unsustainable set of deficits, you have to do something about it.

The Obama administration is calling for an extra US$316 billion of stimulus spending, in addition to the US$800 billion already spent. Is this a bad idea?

In a recent paper published in the American Economic Review, Christina Romer argued that corporate tax cuts would be the most powerful stimulant. One of the architects of the Kennedy–Johnson tax cuts, Arthur Okun, said exactly the same thing in a book published shortly after he left office. Of course the two most successful fiscal policies of the post-Second World War years were the Kennedy–Johnson cuts and the Reagan cuts. There’s a massive amount of evidence to prove that temporary tax cuts don’t work! So why do they do them? It makes no sense. A big part of Obama’s stimulus money is being handed to state and local governments so that they can pay more to teachers, etc. All that does is to transfer the deficit from the state governments to the federal government. That’s about winning the support of unionized teachers and unions, not stimulus.

Do you think that Obama’s economic policies are going to be harmful for the future of America’s economy?

They will be very harmful, yes. Contrary to what Obama and his acolytes tell us, the evidence suggests that the policies have already failed. Otherwise, why would the administration say we need further stimulus! Reagan inherited an economy that was in a mess, with 17% inflation and 8–9% unemployment. But within 18 months he had turned it round. How did he do that? He cut tax rates; he got the private sector to work.

What will happen if Obama persists with his current economic policies?

If there is an unsustainable deficit, there will be pressure on the Federal Reserve to finance it. And there will be pressure on the dollar. Will there be a collapse? Well, that depends on many things. The Chinese and Japanese still seem to be happy to buy our bonds in order to stimulate their exports. As long as they continue to do that, the downside is limited. But how long will they do it for?

What is your take on Congressman Paul Ryan’s “Roadmap for America’s Future”?

The Roadmap is incomplete but it is a courageous plan. I wish the Republican Party would more actively endorse those proposals.

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Further reading


  • Brunner, Karl, and Allan H. Meltzer. Money and the Economy: Issues in Monetary Analysis. Cambridge, UK: Cambridge University Press, 1993.
  • Meltzer, Allan H. A History of the Federal Reserve. 2 vols. Chicago, IL: University of Chicago Press, 2003, 2010.
  • Meltzer, Allan H., Alex Cukierman and Scott F. Richard. Political Economy. Oxford, UK: Oxford University Press, 1991.


  • Meltzer, Allan. “Report of the International Financial Institution Advisory Commission.” IFIAC, March 2000. Online at:

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