Krugman, Business Spending, and "Regime Uncertainty"

Paul Krugman has laid down a challenge in his latest blog post, claiming that much of the current joblessness is the result of businesses "sitting on a lot of cash, but not spending it." Indeed, he likens this situation to the extreme cautiousness of Gen. McClellan during the Civil War, which brought about the ire of President Lincoln.

At one level, Krugman claims that the reluctance of businesses to spend is understandable, given what he calls "huge excess capacity." (More on the "capacity" argument later.) He declares:

(Reluctance to spend) then raises the question: how can you believe that, and not also believe that if the U.S. government were to borrow some of the cash corporations aren’t spending, and spend it on, say, public works, this would also create jobs? (Brad DeLong has tried to make this argument repeatedly).

Which brings me to Lincoln and McClellan. General McClellan had raised a powerful army, but seemed disinclined to actually seek battle. So Lincoln sent him a letter: “My dear McClellan: If you don’t want to use the Army I should like to borrow it for a while.” (Yes, there are various versions of the quote).

So shouldn’t that be our response to all that idle corporate cash? We don’t literally have to borrow from the corporations; they’re parking their funds in the money market, and the feds would borrow from that market. But the end result would be to put some of that idle cash to work — and, ultimately, to give the corporations a reason to start investing, too, so that the deficit spending would crowd investment in, not out.

First, the government IS borrowing a lot of cash from businesses and especially from the banks. Second, Krugman is not advocating that businesses seek better deals; no, he is quietly but obviously demanding that government confiscate this "excess cash" if businesses don't increase their spending.

He then throws down the glove: "I have never seen a coherent objection to this line of argument."

My sense is that Krugman has seen "coherent" arguments against this line of thinking, but simply will not acknowledge that anyone else can fashion anything contrary to his own ex cathedra pronouncements. However, in the spirit of Krugman's challenge, I will fashion my own argument, and will lean heavily upon an economist that I really respect, Prof. Robert Higgs.

First, and most important, the "capacity" argument is a red herring that is based upon circular arguments (one of Krugman's favorite tactics). According to Krugman, businesses have large, unused productive capacity that will only become engaged after businesses start spending again. Thus, businesses are causing their own demise, so it is up to the government to break this circular pattern of job destruction and confiscate business cash and spend it wisely.

Once again, we see Krugman claiming that the CAUSE of a recession is less spending, which he also claims in a recent column. Yet, as I see it, this is a violation of what Carl Menger called "The Law of Cause and Effect." Krugman is confusing effect with cause and is missing the larger picture.

He is right that businesses (and many individuals) are putting money in relatively safe places (all of which Krugman would equate to stuffing money in one's mattress), but his circular argument as to why simply fails on its face. However, Robert Higgs has noted many times that "regime uncertainty" on behalf of the Obama administration's actions, which he equates to what happened during the Great Depression.

In 1997, Higgs published a paper in The Independent Review on the Great Depression in which he blamed the "regime uncertainty" promoted by the Roosevelt administration for the lack of long-term investment by businesses. Higgs writes:

Evidence from public opinion polls and corporate bond markets shows that FDR’s policies prevented a robust recovery of long-term private investment by significantly reducing investors’ confidence in the durability of private property rights. Not until the New Deal/war economy ended and resources became available for peacetime production did private investment—and the nation’s economic health—fully recover.

Higgs elaborates on the Great Depression theme in this piece, using a lengthy quote from a member of FDR's "brain trust," noting that FDR's anti-business rhetoric and his punitive policies toward business kept business owners from making longer-term decisions. Higgs in this column equates the current hostility to business by the Obama administration and the equally anti-business Congress to what happened with FDR and points out that we should not be surprised that the present "regime uncertainty" is not going to bring about recovery. He writes:

Speaking to CNBC in Las Vegas recently, Steve Wynn, the billionaire developer and operator of entertainment properties, said: “Washington is unpredictable these days. No one has any idea what’s next . . . the uncertainty of the business climate in America is frightening, frightening to everybody, and it’s delaying recovery.” Wynn complains of “wild, uncontrolled spending” and “unbelievable, unsustainable debt.”

Wynn also has operations in China, and he remarks that he “has no qualms about dealing with the Chinese government. Macau has been steady. The shocking, unexpected government is the one in Washington.” Not very long ago, such a statement would itself have been shocking.

The gambling and real estate magnate expresses concerns about inflation, FHA’s making the same mistakes Fannie and Freddie have made, and the business costs arising from the new health-care law. “We’re on our way to Greece,” he declares, “in the hands of a confused, foolish government.” Exasperated, he mutters, “It’s got to stop. It’s got to stop.”

These observations remind me of similar statements made by investor Lammot du Pont in 1937: “Uncertainty rules the tax situation, the labor situation, the monetary situation, and practically every legal condition under which industry must operate.” Even members of Franklin D. Roosevelt’s cabinet eventually appealed to him to clear the air in which private investors were finding it difficult to breathe, but he refused to do so, preferring to plunge ahead with the New Deal and to publicly blame “economic royalists” for his policies’ failures.

Now, I am sure that Krugman would claim that the above arguments are nonsense and don't provide a "coherent" argument, but nonetheless I believe Higgs has the much stronger argument than Krugman's claim, which is based upon circular logic.