Krugman right on the Euro? Wrong on US Fiscal Policy?

November 22, 2011

Is this the exception that proves the rule. Paul Krugman thinks the Euro was a mistake from the beginning. You’ll have to take my word for it, but so did I.

It’s kind of nice to see Krugman and I agree on something. It gives me some credibility for my disagreement with nearly everything else he says, which is pretty much what the rest of this post is about.

A few of my friends and I were discussing Krugman’s views on the US economy a few weeks ago; specifically his view of taxes, spending, and debt. “Confidence” was the key word we came up with.  Krugman scoffs at the notion that fiscal prudence can lead to confidence which can lead to economic expansion. He also scoffs at the notion accumulating (even rapidly accumulating) debt should create a crisis of confidence.

I’ve got a different view. Yes, in parts of Europe there is some serious austerity going on. Several of the nations can’t pay their debt, and they can’t inflate their way out of it. Austerity isn’t so much about fiscal prudence as it is trying to keep one’s house from being foreclosed upon. There is no confidence to be had regardless.

Many people in the United States are suffering. But as far as the United States government goes there hasn’t been anything close to austerity. 60% (maybe 80%) of what one needs to know about the US fiscal policy is shown on page xv in the summary of this CBO report.

The takeaway from the page is that recently spending has gone up and revenues have gone down. There’s nothing else remotely like it on the chart. So, Krugman’s point about fiscal restraint not causing economic growth is a red herring argument. The present US experience of reduced taxes and increased spending is a Keynesian’s wet dream. The problem is it hasn’t worked. Krugman believes the reason it hasn’t worked is that the government hasn’t been sufficiently aggressive. It should be spending more!

This bring us back to the conversation my friends and I were having. Krugman’s point about how to dig ourselves out of our present ditch is centered on the experience of the US after WWII. The theory goes WWII ended the Great Depression through a massive increase in government spending. The idea is that if the economy isn’t moving on its own, then the government can “prime the pump” and after a while it will just get along humming on its own.

A couple of problems: The first is that it treats the Nation as if it were populated by simpletons. Liberals don’t give people enough credit. If people know a government “stimulus” is going to end at a given point in the future, then why would they base long-term decisions on it. The only problem with the American public is their thinking is more sophisticated than for which they are given credit.

The second is that Krugman’s theory ignores a chasm of a difference between the years following WWII and the present one. In the former era we were the only industrial nation in the world whose assets hadn’t been subject to air and/or land assault. We had a monopoly on atomic weapons which made us the King of the Hill.

We came out of WWII overflowing with confidence and we had the wisdom to loan out money to allied nations so they could stuff we produced. And enough of them were afraid of the Soviet Union and subsequently the People’s Republic of China to make us a lot of temporary friends. And if you don’t think pre-eminent military power is useful in international relations just you wait and see how many nations care what we think when we don’t have it any more.

Even nations we thoroughly destroyed during the Second World War treated us better than the nations we’re now actively trying to help. We were supremely confident, and we rode a wave that lasted decades.

But where are we now? We live in a world awash in information. Outside of North Korea there’s no such thing as blind faith in leaders. When everyone in the US is trying to pay down their debt, it doesn’t inspire confidence the Federal Government is loading up on the stuff. Why? Because we all have a heightened awareness that someday it’s going to have to be paid back. And in case anyone wanted to put that out of their minds all they have to do is watch Europe implode. If you want you can watch it twenty-four hours a day/seven days a week.

And even that hasn’t made us serious. The Super Committee (Can any group which includes Patty Murray be regarded as anything but sub par?) can’t find $1.2 trillion in “savings” over ten years. The stimulus alone cost $800 billion in three. Do the math and, I mean it, look at the chart I referenced above.

Stimuli that didn’t stimulate, Blind faith in “green energy”, and the direction of funds to favored constituents. These are the forces that erode confidence. How many times was the term “shovel-ready” thrown around? It’s a great term that creates images of projects employing engineers, construction workers, and mechanics; not civil servants who already make more than the average worker in the private sector.

Listen to our President joke about his apparent lack of concern at how he misspent $800 billion of our money.

“Not as shovel ready as we expected” hardeeharhar.

So, just because Paul Krugman and I actually agree on something doesn’t mean he isn’t wrong about everything else. 😉


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