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Published On: Mon, May 6th, 2013

Chutzpah Economics, more on government spending from Paul Krugman

It is nice to see that Paul Krugman learned his Yiddish as a young man, although I’m afraid that he is accusing the wrong people of having chutzpah. You see, when an economist claims that the causeof economic malaise is the lack of “enough” inflation, it seems to me that we are seeing chutzpah on steroids.

His latest column declares:

At this point the economic case for austerity — for slashing government spending even in the face of a weak economy — has collapsed. Claims that spending cuts would actually boost employment by promoting confidence have fallen apart. Claims that there is some kind of red line of debt that countries dare not cross have turned out to rest on fuzzy and to some extent just plain erroneous math. Predictions of fiscal crisis keep not coming true; predictions of disaster from harsh austerity policies have proved all too accurate.

I’m not sure what Krugman means by claiming that the world is in “austerity” when national governments across the globe have accelerated spending and especially borrowing. But then, I have to remember that according to Krugman, the difference between this recovery and other recoveries that actually were “recoveries,” is thelack of spending by state governments. State governments cannot print money, and there are borrowing restrictions (state and municipal governments cannot pay back bonds by issuing other bonds — it’s called fraud). Thus, when the economy is weak, state revenues are relatively lower than they are in good times.

Economic chutzpah is theme in this Krugman in Wonderman

Economic chutzpah is theme in this Krugman in Wonderman

As anyone can see, such a situation is the result of an economic downturn, not its cause, yet Krugman insists on turning cause-and-effect upon its head, at least when it suits his point of view. Governments as a whole create little economic wealth, and instead are huge consumers of wealth. Yet, as I read Krugman, he seems to believe that the very act of spending is, in fact, a form of production. In his view, when governments borrow huge amounts of money for consumption purposes, and when governments impose taxes upon private economic production, such things are the epitome of government responsibility.

True, Krugman writes that during “good” times, governments should pay down debt, but he never explains how it is that we will sustain such “good” times for any length of time. Krugman’s hostility toward private enterprise is evident (unless the private firm is being subsidized by the government and engaged in outright crony capitalism). I cannot understand how he believes that private enterprise activity could keep an economy going for more than five minutes, given the Keynesian viewpoint that private enterprise creates underconsumption.

I do need to add the following point: Krugman is right in saying that the Republican conservatives are hypocrites in the worst kind of way. The Reagan and Bush (both) administrations were profligate, and none of them were “austerians” in any meaningful way. This did not keep Progressives from claiming that they were running “austere” governments. I remember the howling from the New York Times and CBS News (especially Bill Moyers and Dan Rather) about Ronald Reagan’s supposedly austere budgets, even though welfare spending grew in real terms while Reagan was president.

And who can forget the “three million homeless” hoax during the Reagan years. We were told that the spending cuts were so severe that millions of people were on the streets, out of work and living in shelters or worse. My favorite line on this came during one of the Dukakis-Bush debates when Dukakis declared, “There are three million homeless people in America, and a third of them are Vietnam veterans.”

I quickly checked some sources and found that about 4.25 million people served in that war, so Dukakis wanted us to believe that nearly a quarter of Vietnam vets were on the streets. And the reason given was that the Reagan administration allegedly was spending less on public housing, as though there suddenly were three million fewer public housing units in the country.

No one is making those claims today, but the idea that the Obama administration is an “austerity” government is a howler. Furthermore, the proclivity of politicians is to spend, and Krugman wants us to believe that politicians all over the world are closely watching the “90-percent threshold” set by that space alien himself, Ken Rogoff, and then spending less.

Although Krugman’s words may seem to be hyperbole, there is true method in what he is saying. No matter how much money the government borrows, prints, and spends in search of a fiscal policy that Krugman will accept, it never will be enough spending. Why? Because this spending is not going to bring about a real economic recovery, and according to Krugman’s logic, the economy in a “liquidity trap” will recover only if government spends enough. The Debt Fairy will be successful only if the fairy can be given enough steroids.

On the monetary end, the economy can recover only if the Inflation Fairy is summoned and given enough money (magic) dust to break the “liquidity trap” logjam. And when will inflation be high enough? When Krugman says it is.

If this looks like heads-I-win-tails-you-lose logic, then move to the head of the line. If Krugman is claiming that it takes chutzpah to claim that governments cannot spend a country into prosperity, then he truly has redefined the meaning of that word.

You see, by invoking his third fairy, the Spending Fairy, Krugman is the one showing chutzpah. Why? He is the one who truly believes that we can totally uncouple government spending from any constraints that an economy lays upon it.

Krugman in Wonderland 624


William L. Anderson is an author and an associate professor of economics at Frostburg State University in Maryland. He is also an adjunct scholar with the Mackinac Center for Public Policy as well as for the Ludwig von Mises Institute in Alabama.

Read more at “Krugman-in-Wonderland”

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About the Author

- William L. Anderson is an author and an associate professor of economics at Frostburg State University in Maryland. He is also an adjunct scholar with the Mackinac Center for Public Policy as well as for the Ludwig von Mises Institute in Alabama.

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  1. Krugman calls out Trump for cholera in Puerto Rico, CDC does not anticipate | The Global Dispatch says:

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