Is Government a Bottomless Well of Wealth Creation?

Having essentially adopted the MMT position on "endogenous" monetary creation by the U.S. Government, Paul Krugman goes whole hog in claiming that economies themselves are near-totally dependent upon government spending. To put it another way, government spending (in Krugman's view) is the source of wealth creation.

Now, Krugman does not use terms like "wealth" because, in his view, an economy is a mechanism by which people have jobs, spend money and buy things. Those "things" simply appear on store shelves put there by people who are employed, and as long as people are employed, they will have money to buy those things and clear the shelves so that they can make more things for people to buy in the future.

While macroeconomists might call this the "Circular-Flow" model, I would say it more resembles circular reasoning. As long as people continue to spend, then the model can flow freely, but if people stop spending, then the economy breaks down. So, the argument goes as follows: (1) People quit spending which then causes the economy to slow down, and people then lose their jobs; (2) Why did they quit spending? (3) Because they either lost their jobs or were afraid they would lose their jobs, so they needed to save money.

The reasoning problem here is obvious, but let us move on. When people stop spending, and when the "animal spirits" of investors turn investors from tigers to pussycats, then it is government to the rescue. Government reaches into its own currency well (as in the case of the USA, where its official money is monopolized by the government) and spends (we call it "fiscal policy") until people have jobs again and start spending confidently.

As Krugman and other Keynesians note, this is "counter-cyclical" policy. Government spends a lot when the economy is in the tank and adopts more "austerity" when the economy is doing well.

A lot of Keynesians and fellow-travelers have told me that the real problem is that when times are good, governments still continue free-spending habits. Hey, no joke! When the economy is good, tax takes are higher, and the prospect of more revenue then feeds the spending habits of politicians. Why is this such a surprise?

So the government then is supposed to resort to what essentially are gimmicks, such as "Operation Twist" or QEWhatever, in which the Federal Reserve System purchases assets that the market already has declared worthless in order to try to prop up their prices. The idea is that if the government can prevent prices from adjusting downward (or should I say, correcting downward) the economy won't go bad, since everyone knows that falling prices are not an effect of a downturn, but a cause. (More interesting causal logic from the Keynesians.)

Out of all this comes Krugman's view that government wealth creation is endogenous, that is, economies grow because government spend money. (Because people save money, i.e., don't spend all of their income immediately, Keynesians believe market economies are always in peril of imploding, so the only thing that can keep that from happening is for governments to spend, and that is how economies grow.)

The problem with Krugman's view is that in reality, economies grow when entrepreneurs over a wide scale have the freedom to bring resources from lower-valued uses to higher-valued uses as ultimately determined by consumers. During that process, other resources can be applied to those uses that previously were being neglected.

In the Keynesian view, governments flood the markets with new money (or new spending) and stuff just appears out of thin air. Capital just happens. Investment just happens. All it takes is a new injection of money.

As I read Krugman over and over again, I see that there are three things he clearly does not understand: (1) Opportunity Cost, (2) Capital, and (3) Entrepreneurship. To Krugman, an entrepreneur is someone who makes something in a garage, and his or her actions have little to do with the economy. He already has noted that to him, the real value of capital is the spending required to create it, and anyone who believes governments can create prosperity by printing money does not understand opportunity cost.

So, from where I sit, it seems that Krugman is saying that government endogenously can reignite an entire economy by spending on those things that, frankly, are tied to political connections, such as "green energy," which is nothing more than an industry on federal life supports. Yet, Krugman insists that by draining profitable ventures and redirecting resources into failing industries, the entire economy can be reborn!