Thursday, June 10, 2010

Austerity Hysteria: Krugman's Employer Joins the Chorus

In yesterday's post, I noted that Paul Krugman does not understand that an economy is made up of heterogeneous assets and that printing money is not the same thing as getting the fundamentals of the economy back into order. However, it seems that once again (as they tag-teamed after the election of Ron Paul), Krugman and his employer (most likely Gail Collins) are joining forces again to demand that our economic malinvestments continue until we inflate ourselves into oblivion.

Today, the NYT has an editorial, "The Wrong Message on Deficits," that Krugman himself could have written. While the "vulgar Keynesian" might agree with the assessment in this editorial, nonetheless it demonstrates that the editors are clueless about what an economy really is. The editorial begins with:
The whip-deficits-now fever is running hot on both sides of the Atlantic. In Europe, politicians are understandably spooked by investors dumping government bonds in the wake of the Greek meltdown. But the sudden fierce enthusiasm for fiscal austerity, especially among stronger economies, is likely to backfire, condemning Europe to years of stagnation or worse.

The United States is running the same very high risk. Democrats have soured on job creation and economic stimulus in favor of antideficit rhetoric, which Republicans have long seen as the easy road to discontented voters in a confusing election year.
Right. Democrats suddenly are turning "fiscally responsible" as an election ploy. From what I can recall about politicians, they usually begin spending like drunken sailors when up for re-election. Would be that were the case.

First, there is NO "job creation" going on, just wealth destruction. When the government borrows another trillion dollars in order to pay people to lay sod on median strips or to send to politicians somewhere, the government actually is moving resources from higher-valued uses to lower-valued uses.

For example, there is a reason that the "alternative energy" industries need to be subsidized: they are taking valuable resources that go into the growing of corn and then fermenting it in large-scale operations, and then forcing Americans to pay not only for inferior fuels, but also for the resources of these operations that would be better used elsewhere.

Contra Krugman and his employer, recessions don't occur because people spend less; people spend less because the economy is in recession. Furthermore, the only way to get OUT of the recession is to permit the fundamentals to get back into balance. This is not some sort of Zen "balance," but rather a reflection of the real opportunity costs of the factors of production.

Second, it is clear that Krugman and Collins and Company are clueless on what it will take to end this crisis, as they believe that the way to END the crisis is to continue upsetting the economic fundamentals, as though they did not matter. We have to face the issue that if this spending spree continues, we are headed for disaster, as the economy slowly but surely will deteriorate and our ability to repair things in the future will be even more difficult.

Even they point out things for which they have no explanation. For example, they acknowledge already that "global recovery is already faltering." Yet, they see no irony in that after the spending of trillions of "stimulus" money, things still are going downhill. It never seems to occur to this bunch that we have been going down the wrong path for several years, and we need to stop the madness.

The other path is to take the medicine now (medicine that should have been taken three years ago), deal with the temporary crisis, and then let a real recovery take place. Now, that is something that few politicians are willing to do, but that is what MUST be done, the NYT notwithstanding.


Brian J. Gladish said...

Watch the host here say that we "can't save our way to prosperity" while interviewing Nassim Taleb, who was quite complementary to Hayek in The Black Swan.

Dr. Anderson, keep up the good work. Great stuff!

Brent said...

You need to start calling Krugman out for his constant hedging, which he does so he has some wiggle room when his predictions and policy recommendations lead to misery.

For example, I see his ranting about so-called Eurozone "austerity" as nothing more than a "see, this is what went wrong... people didn't listen to my crackpot theories" card.