Professor Krugman and Professor Keynes

Paul Krugman is already setting us up for the failure of Obama’s Keynesian stimulus.     

For once I agree with Paul Krugman. We both believe that the stimulus bill won’t work, but for much different reasons.

Prof. Krugman is one of my favorite liberals because he is held out to be a paragon of liberal intellectual thought. He got his Ph.D. at MIT and won a Nobel prize in economics for his work on international trade. He’s an economics professor at Princeton and is a very bright man. His NY Times columns regularly support Keynesian economics and government economic intervention.

Lately Prof. Krugman has been preparing his Keynesian followers for the failure of the Obama stimulus plan.

He’s a big believer in Keynesian stimulus, but he’s saying that there is not enough stimulus to revive consumer spending and thus get the economy going again. When the government creates jobs, he says, consumers will have additional funds, they will spend, and the economy will get better.

In his NY Times column on March 9, he said “many economists, myself included, actually argued that the plan was too small and too cautious. The latest data confirm those worries — and suggest that the Obama administration’s economic policies are already falling behind the curve.”

He notes that the projected saving of 3.5 million jobs is insufficient in light of increasing unemployment levels. The Administration predicts that the maximum impact of the stimulus will peak in 4Q 2010 and then rapidly fade away. He recommends that they junk useless tax cuts and focus on getting more projects underway by late 2010 to take up the slack. That requires much greater spending than is presently planned.

The Obama 2010 budget projects $3.5 trillion of federal spending out of a projected $14.9 trillion GDP. When the federal government controls almost 25% of GDP, I would say this is central planning. You may say this is an unfair conclusion, but 25% is a big chunk of the entire economy. Prof. Krugman believes that if you substantially increase fiscal stimulus (i.e., government spending), it will help the economy and prevent a recession/depression. But then you would have the government planning, say, 30% of the economy.

The problem with government central economic planning is that it doesn’t work. Well, I guess you could say it “works,” but not very well. Compare any capitalist economy with any socialist economy and you’ll see what I mean. The Obama Administration will direct a lot of money to be spent on government approved projects, and it will have an impact on the economy, but it won’t create anything lasting. When the money stops, the economic activity it creates will stop.

Consumer demand is how the free market determines what businesses should or should not produce. The reason central planning never works is that the money goes where the government wants it to go, not where consumers want it to go. Most of what is spent in this stimulus will be wasted because, other than the desire of the government, there is no real demand for the government directed economic activity. And remember, you are the consumer who decides.

One can point to the military and the many government agencies that spend and inject money into the economy and argue that it creates economic activity (true) but it doesn’t create wealth and real economically viable jobs. Money is taken out of the economy by the government and given to someone else to perform some government desired service. While the defense industry may support a valid activity of the government, and its employees perform valuable activities, very few defense companies would survive absent government dollars.

The result is that economic activity will be suppressed, not stimulated and we face the real possibility of long-term economic stagnation, similar to what the Japanese went through in the ‘90’s (actually 14 years). Prof. Krugman has the same fear, but what he doesn’t realize is that the solution he proposes will cause the stagnation, not prevent it.

I have a few questions for Prof. Krugman to consider. Perhaps he will consider this to be a test like the ones he gives to his students. I wonder how he would do?

1. If you take the money out of the hands of businesses when they need it the most wouldn’t that reduce jobs?

2. If massive deficit spending creates employment, why wasn’t the Bush Administration’s $482 billion deficit creating jobs and preventing unemployment?

3. If the government can create jobs by spending your money, why don’t we just let them control all economic spending since it will result in more jobs? If it’s good for 25% of GDP, why not for all of it?

4. Why has massive stimulus spending by the government never worked to revive an economy? It’s been tried before and it has failed every time. But Prof. Krugman always says the same thing: we didn’t spend enough.

5. If people have too much debt and are consuming less and saving more to protect themselves from an uncertain future, why would stimulating consumer spending and creating more consumer debt help?

6. If home prices are still declining, why would anyone buy a home if its price is artificially propped up by the government?

7. What would businesses have done with the money the government sucked out of the economy?

8. If there is too little capital available, why would discouraging saving and giving taxpayers’ funds to someone the government favors help?

9. What will be the true cost to us for all this borrowing from the Chinese (if they continue to lend)?

10. Why is saddling American taxpayers with huge debt good for us? (Don’t worry, Keynes said, in the long run we’re all dead.)

Inquiring minds want to know,