The world's second most worthless winner of a Nobel Prize, Paul Krugman, is out with yet another column denouncing "austerity" as the cause of economic stagnation in the West. Today's target is France, a country that is now supposedly succumbing to that evil austerity even though the Socialist government in France raised both spending and taxes to new high levels. The French government, you see, is considering reducing some of the spending and taxation. For Krugman, that is a sure sign that economic disaster is just around the corner.
There is not much point parsing Krugman's column. He has nothing new to say; he just rehashes the same failed policies that he has been pushing for years. What is more interesting about the column, however, is that it sets up a rather strong tension between the views of Krugman and those of the world's most worthless winner of a Nobel Prize, president Obama. Krugman, you see, has been denouncing American policy as inadequately expansionist. Translating that view into English, one finds that Krugman wants government spending in the USA to be greatly expanded in order to get the economy moving again. Of course, after one quarter of good numbers that came as a result of a bounce back from the first quarter of 2014 when the US economy shrank at a rate of more than 2% per year, Obama has been busy announcing that happy days are here again as far as the economy is concerned. But both of these Nobel Prize winning "geniuses" cannot be correct. America is either suffering from stagnation or is in the midst of a vigorous recovery.
Let's put aside the obvious differences in what Krugman and Obama have to say, and let's focus instead on the merits of austerity. Would real austerity in the USA result in a slowdown of growth?
To answer this question, we first need to agree what constitutes "austerity". Austerity normally signifies that the government has made major cuts in spending from prior levels and has raised revenue sufficiently so that income at least equals expenditures. Most of the economic literature discussing austerity deals with this definition of the concept. And most of the literature agrees that real austerity likely results in a short term reduction of gross domestic product followed by a longer period of growth. But none of this matters for present purposes. That is because Krugman defines "austerity" as the government not increasing spending by a large enough amount to satisfy his vision. Remember, since 2008, federal spending has grown by over 25% (while receipts have grown only 16%). Krugman calls that austerity. Most observers would call that extravagant spending. Since we are discussing Krugman's views, however, let's use his definition.
So has the massive increase in spending just been too slow of an increase to pull the economy out of stagnation? Is Krugman correct?
I am sure, by now, that regular readers will understand that the answer to "is Krugman correct" is always "no!!!!!" We need to examine what it is that Krugman is advocating.
Krugman wants federal spending hiked significantly. That would increase the budget deficit and the national debt which is already approaching twenty trillion dollars. At some point, the people who buy treasury debt will decide that it no longer makes sense to purchase it for low interest rates and they will drive up those rates. No one knows if this will happen tomorrow, next month or next year. Pretty much every responsible economist agrees, however, that unchecked spending would lead to that result. The truth is that what Krugman wants is for America to inflate the bubble more and more and more while hoping that it does not burst. Remember, once that bubble bursts we will see a depression, not a recession. The American economy and likely the world economy will lay in ruins all around us. What Krugan wants, in short, is the equivalent of someone lighting the fuse to a stick of dynamite to improve the amount of light in a room. The obvious result is just not worth the small advantage gained for a few moments.
There is not much point parsing Krugman's column. He has nothing new to say; he just rehashes the same failed policies that he has been pushing for years. What is more interesting about the column, however, is that it sets up a rather strong tension between the views of Krugman and those of the world's most worthless winner of a Nobel Prize, president Obama. Krugman, you see, has been denouncing American policy as inadequately expansionist. Translating that view into English, one finds that Krugman wants government spending in the USA to be greatly expanded in order to get the economy moving again. Of course, after one quarter of good numbers that came as a result of a bounce back from the first quarter of 2014 when the US economy shrank at a rate of more than 2% per year, Obama has been busy announcing that happy days are here again as far as the economy is concerned. But both of these Nobel Prize winning "geniuses" cannot be correct. America is either suffering from stagnation or is in the midst of a vigorous recovery.
Let's put aside the obvious differences in what Krugman and Obama have to say, and let's focus instead on the merits of austerity. Would real austerity in the USA result in a slowdown of growth?
To answer this question, we first need to agree what constitutes "austerity". Austerity normally signifies that the government has made major cuts in spending from prior levels and has raised revenue sufficiently so that income at least equals expenditures. Most of the economic literature discussing austerity deals with this definition of the concept. And most of the literature agrees that real austerity likely results in a short term reduction of gross domestic product followed by a longer period of growth. But none of this matters for present purposes. That is because Krugman defines "austerity" as the government not increasing spending by a large enough amount to satisfy his vision. Remember, since 2008, federal spending has grown by over 25% (while receipts have grown only 16%). Krugman calls that austerity. Most observers would call that extravagant spending. Since we are discussing Krugman's views, however, let's use his definition.
So has the massive increase in spending just been too slow of an increase to pull the economy out of stagnation? Is Krugman correct?
I am sure, by now, that regular readers will understand that the answer to "is Krugman correct" is always "no!!!!!" We need to examine what it is that Krugman is advocating.
Krugman wants federal spending hiked significantly. That would increase the budget deficit and the national debt which is already approaching twenty trillion dollars. At some point, the people who buy treasury debt will decide that it no longer makes sense to purchase it for low interest rates and they will drive up those rates. No one knows if this will happen tomorrow, next month or next year. Pretty much every responsible economist agrees, however, that unchecked spending would lead to that result. The truth is that what Krugman wants is for America to inflate the bubble more and more and more while hoping that it does not burst. Remember, once that bubble bursts we will see a depression, not a recession. The American economy and likely the world economy will lay in ruins all around us. What Krugan wants, in short, is the equivalent of someone lighting the fuse to a stick of dynamite to improve the amount of light in a room. The obvious result is just not worth the small advantage gained for a few moments.
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