For years, elites of the academic, media, and political classes have argued that we should be more like Europe, but now that we have managed to create something akin to the European economy -- high rates of unemployment and high job stratification -- Paul Krugman and others don't like it.
Today, he argues that we need more "jobs programs," that young people cannot find work and that the Bad People in Congress aren't interested in spending billions more in "creating" new jobs for people who cannot find work. Now, I don't make light of people who lose their jobs and often lose their homes and face other financial calamities. Furthermore, it is very discouraging for young people who are graduated from college or even graduate school and then find door after door closed to them.
This is what we have seen in Europe for a long time, and I don't think we should be surprised that this country adopts European-style policies, that we get European-style results. I doubt Krugman recognizes this, and even if he did, he still would advocate that the government create what essentially would be "make-work" jobs.
In the past, Krugman has pointed to the "success" of the WPA during the Great Depression, a program that Krugman has claimed was devoid of politics. The truth is much, much different. Some WPA programs (which tended to be run by local Democratic politicians) required that anyone with a WPA job pay donations to the Democratic Party, and nationally, Harry Hopkins, FDR's right-hand-man who ran the program, used it as a way to buy votes for his party.
(William Shughart and James Couch in their book The Political Economy of the New Deal, do a lot of myth busting in this book, and I would tend to trust some people doing real research as opposed to a guy who has become a party shill under the guise of being an academic economist.)
Today, Krugman claims that the government not only should avoid cutting the budget, but should EXPAND this already unsustainable budget because, after all, interest rates are now very low. (Gee, think that the Federal Reserve might have something to do with this?) Thus, we are dealing with near-free money, he reasons:
Yet polls indicate that voters still care much more about jobs than they do about the budget deficit. So it’s quite remarkable that inside the Beltway, it’s just the opposite.Now, the only references I have seen to "bond vigilantes" in recent times have been in Krugman's columns. Second, cutting government spending is only one aspect of getting our economic house in order.
What makes this even more remarkable is the fact that the economic arguments used to justify the D.C. deficit obsession have been repeatedly refuted by experience.
On one side, we’ve been warned, over and over again, that “bond vigilantes” will turn on the U.S. government unless we slash spending immediately. Yet interest rates remain low by historical standards; indeed, they’re lower now than they were in the spring of 2009, when those dire warnings began.
On the other side, we’ve been assured that spending cuts would do wonders for business confidence. But that hasn’t happened in any of the countries currently pursuing harsh austerity programs. Notably, when the Cameron government in Britain announced austerity measures last May, it received fawning praise from U.S. deficit hawks. But British business confidence plunged, and it has not recovered.
Krugman approaches the subject purely from standard macroeconomic viewpoints. An economy is a homogeneous mass of factors that will become "fully employed" when enough money flows through the system, a "just add money." He has absolutely no idea of what entrepreneurs do, or that they even matter.
The problem, from an Austrian viewpoint, is not that of "idle resources," but instead we have massive amounts of malinvested resources. This country, like other countries in Europe, went whole hog in throwing money into housing at a rate that clearly was unsustainable, and when the crisis finally hit, the government's response was sad, but predictable: it ratcheted up the spending in hopes of propping up the housing market and everything else.
In the end, Krugman really does not believe that there is opportunity cost, or he seems to believe that opportunity cost does not matter when "interest rates are at the zero bound," as though the laws of economics are superseded by high rates of unemployment. The U.S. Government has thrown literally trillions of dollars at this economy and yet we are dead in the water.
It does not have to be like this, but we get the worst of both worlds. We have just enough "spending" to at least give the Keynesians a few bones, but then the government does everything it can to block real entrepreneurs through regulations and tax policies, which means the government is blocking a recovery.
Contra Krugman, contra the "Liquidity Trap" doctrines, the Law of Opportunity Cost is not repealed by low interest rates and high rates of unemployment.