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Published On: Tue, Feb 26th, 2013

Paul Krugman, NY Times ‘Consuming Wealth Actually is the Same as Producing Wealth’

With the Big, Bad Sequester looming as the Crisis of the Week and all of the media and political angst accompanying it, I have come to understand that how one responds to the prospect of the government being forced to cut back on spending also helps to define how one sees government spending as it relates to the economy. Not surprisingly, Paul Krugman and his part-time employer, the New York Times, believe that government spending is the very key to wealth itself.

In an unsigned editorial calling for higher taxes, the NYT declares:

Democrats and Republicans remain at odds on how to avoid a round of budget cuts so deep and arbitrary that to allow them now could push the economy back into recession. The cuts, known as a sequester, will kick in March 1 unless Republicans agree to President Obama’s demand to a legislative package that combines spending reductions and tax increases. As of Thursday, with the deadline a week off, Republicans seemed determined to say no to any new tax increases.

“Spending is the problem,” declared the House speaker, John Boehner. “Spending must be the focus.” Reflecting the views of many of her Republican colleagues, Representative Martha Roby said Wednesday that Mr. Obama “already got his tax increase” as part of the January agreement over the “fiscal cliff” and that no further increases were necessary. (Emphasis mine)

Now, I’m sure that Gail Collins actually believes what either she or one of her underlings has written, that a small cut in the increase of government spending will be so catastrophic that the entire economy will fall over the cliff. But the next paragraph is even more over-the-top, and demonstrates without a doubt that the editors of the “Newspaper of Record” are out of touch with reality:

Both are wrong. To reduce the deficit in a weak economy, new taxes on high-income Americans are a matter of necessity and fairness; they are also a necessary precondition to what in timewill have to be tax increases on the middle class. Contrary to Mr. Boehner’s “spending problem” claim, much of the deficit in the next 10 years can be chalked up to chronic revenue shortfalls from the Bush-era tax cuts, which were only partly undone in the fiscal-cliff deal earlier this year. (Wars and a recession also contributed.) It stands to reason that a deficit caused partly by inadequate revenue must be corrected in part by new taxes. And the only way to raise taxes now without harming the recovery is to impose them on high-income filers, for whom a tax increase is unlikely to cut into spending. (Emphasis mine)

This one calls for some analysis. First, the notion that almost the entire federal deficit is due to the fact that the Bush administration pushed through a reduction in the top tax rate from 39.6 percent to 35 percent is beyond laughable. It is dishonest, but what else can we expect from the newspaper that tried to convince its readers that prosecutor Mike Nifong had in his possession what literally would have been a “magic towel” that would prove those bad Duke lacrosse players raped Crystal Mangum?

Second, we see the real goal of Progressives, and that is to stick the middle class with even more burdens, with the idea that the poorer Progressive government makes people, the more they will have to depend upon government and, of course, Progressive politicians. But, as I read through this editorial along with Krugman’s post, “Sequester of Fools,” I realize that Krugman and those editors of his part-time employer are True Believers when it comes to the idea that government spending — no matter what kind of spending it might be — creates wealth.

This is not an argument about government building roads and bridges, and I’m not about to say that all government roads and bridges constitute economic waste. But the vast amount of government spending is not on constructing things or even providing the delivery system for formal education, but rather for wealth transfers, subsidizing public works boondoggles, and fighting wars of aggression.

It is this spending especially that Austrians see as a burden, but Keynesians see as wealth creation itself. In the Keynesian view,government consumption really is production. This is not the same as saying the end of production is consumption, which is fundamental to Austrian theory. No, this is a way of thinking that sees production as an end in itself (i.e., a “jobs” recovery) and holds that government spending (along with government money creation) is a source of wealth.

In Austrian theory, government spending generally is a burden upon taxpayers and the economy, but we also see that as an economy grows, government spending will grow in real terms along with it. The important thing to keep in mind, however, is that government spending grows with economic growth, not the other way around. The causality chain begins with the growing economy, not the government.

Keynesians would have you believe that it is government spending that triggers economic growth, and that private enterprise is the real burden. After all, individuals and businesses save money or they invest for the future instead of spending everything right now. Households and businesses balance budgets as opposed to governments that engage in deficit spending.

To buttress that point, I present the following from Krugman’s column:

Meanwhile, we have a weak economy that is recovering far too slowly from the recession that began in 2007. And, as Janet Yellen, the vice chairwoman of the Federal Reserve, recently emphasized, one main reason for the sluggish recovery is that government spending has been far weaker in this business cycle than in the past. We should be spending more, not less, until we’re close to full employment; the sequester is exactly what the doctor didn’t order. (Emphasis mine)

“Weak” government spending (a relative term if ever there was one) has come about because the economy and the recovery have been weak. This lack of spending has not occurred because Washington is beholden to an alien ideology that claims less government spending is a good thing; no the “lack” of spending is happening because the revenues are not there.

Given the Keynesian mentality, the NYT can editorialize that cutting a few government jobs here and there would devastate the economy and throw it back into recession and not surprisingly, the Obama administration will make sure that the job cutting will be done in the most public way possible, as the White House will work hand-in-hand with the adoring press to ensure that there will be maximum coverage of long lines at airports and elsewhere, as the government will make sure that individuals are inconvenienced or worse as much as can be done.

The purpose of this very public display of job cutting will be to make it seem as though the economy really is being destroyed, and no doubt Krugman and the NYT will be willing partners with the White House to write and distribute propaganda about what might be coming down the pipe. Since they have managed to convince a lot of people that economies grow because governments spend money, I’m sure they will be up to the task to help the Obama administration claim that those mean and nasty Republicans have trashed our fragile economy.

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.

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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. David Creighton says:

    Obviously the Keynesian model should be discussed and it may be wrong or right. I don’t actually know enough to speak definitively, but it does seem to me that cutting spending drastically to the point where you have to fire a bunch of government employees would certainly increase unemployment at least in the short term and lower the amount of consumption which would weaken the general economy.

    It seems to be the assumption that high unemployment is basically the driving factor of a recession. so the idea is that if you increase the number of people working directly or indirectly because of government spending that you kind of loosen up the economy and it can recover.

    We do need our bridges fixed and there are other infrastructure problems (when the levee breaks in New Orleans). We’ve known this for a while. Aside from selling them all to some guy in Dubai and having them be toll bridges, the government will have to step in and do something. When there is high unemployment that would likely be a good time to address that.

    But you can’t fix every bridge in America in a year, there isn’t that many qualified workers. If you keep giving unlimited unemployment benefits, people just don’t even look for jobs especially bridge fixing jobs.

    Another problem with Keynesian thought is that governments may decide to increase spending when the times are bad to stimulate an economy, but they are very bad at lowering it when the good times come back. I’m not calling for austerity, but I think we have to be realistic here.

    Generally across the board cuts would be the most fair and the most likely to pass. Maybe they could reduce the percentage some for a lesser effect on the economy, but there really is too much spending and it should be addressed.

    The other problem really lies in the fact that even though I agree that banks should have a lower leverage number to protect us from a debacle like 2008, when you make banks carry more capital, they have less to lend and that tends to slow the economy as well. Unless we just want the Fed to start lending us all money.

    In my view i think the FFR should be increased slowly and we should seriously look at some kind of way to encourage large banks to break up. Everything was too big too fail but when the dust settled all the banks left were bigger.

    Oh yeah and while we are at it tell S&P where to stick it because if they weren’t giving subprime securities AAA ratings we wouldn’t be in this mess.

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