Krugman and the false prophets of economics
The one-trick pony that is Paul Krugman, constantly pushes massive government spending as the panacea for all recessionary ills. It is supposed to be the way one “manages the economy” from a central government position – as collectivist a thought as one can imagine.
In fact, one of Krugman’s criticisms – despite the fact that his estimate of the amount needed to stimulate the economy was $200 billion less than what was passed in the stimulus package – is that the government hasn’t borrowed and spent enough. And he certainly is no fan of austerity, claiming that the “pain caucus” has been in charge (what almost a year trying to address decades of borrowing and spending?), with no significant results and oh, by the way, look at the UK.
“In Europe,” he wrote last week, “the pain caucus has been in control for more than a year, insisting that sound money and balanced budgets are the answer … [But] Europe’s troubled debtor nations are … suffering further economic decline thanks to those austerity programs.”
Yes, friends, “sound money and balanced budgets” are, apparently, things to be avoided.
But curiously Krugman never says, “oh, by the way, look at Switzerland” because if he did, he’d have to explain their positive outcome based on austerity:
The Swiss have run a prudent fiscal policy throughout the economic crisis. They have had a structural surplus in each of the past five years. Their net debt is actually lower today than it was in 2005. And guess what? In 2009 their economy suffered the smallest contraction in Europe, with unemployment today below 4 percent. As for sound money, the Swiss franc is up 95 percent against the dollar since 2000.
The key point is the Swiss never let their economy get in the shape that is now plaguing the rest of Europe and the US. It has never spent and taken on debt like the UK, much less Portugal and Greece. It has been a program of economic austerity for years. Consequently, the debt level is miniscule compared to other Western economies and recovery was quick with minimal intrusion (if any) from government. We, on the other hand, were borrowing in good times and borrowing heavily to spend on things our government has no business involving itself in much less borrowing money to do so. And it points out that even if you buy into the Krugman theory that we ought to be borrowing and spending in “bad times” ala Keynes, the other borrowing that has taken place limits those options considerably:
The real lessons for the United States are clear. Those who run up debt in good times can borrow only so much more when a recession strikes. And heavily indebted governments postpone fiscal stabilization at their peril. If you wait to reform until the bond market calls time, you are—to use a technical term from economics—screwed.
And we’re headed toward that “technical term” more quickly than we can imagine, and yet the Krugman’s of the world still counsel more spending of borrowed money leading to more accumulation of debt.
At a certain point, the amount of debt begins to shave percentage points off the GDP as the debt is serviced. That, at least in my opinion, is where we are now and one of the reasons we’re seeing such a slow recovery. GDP growth, last quarter for instance, is not at all robust:
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.8 percent in the first quarter of 2011…
Economically we have to understand, at the highest levels, that despite the siren songs of Keynesians like Krugman, that the bill has come due – in fact it is past due- and must be addressed and paid. We can’t afford to ignore it anymore, nor pretend that spending borrowed money will do more good than harm. We and the can are at the end of the road. It can’t be kicked anymore without dire consequences. Unfortunately, while it seems we’ve at least recognized that fact – for the most part – what we can’t seem to make ourselves do is that which is necessary – cut spending deeply. We continue to hear from the false economic prophets that we can fix all this if we’ll just borrow and spend.