Tuesday, August 2, 2011

Debt and Delusion

I have stayed away from doing commentary on the whole debt ceiling "crisis" because nothing bugs me more than watching a bunch of hypocrites and frauds prattle around as though they were doing something important. Furthermore, we are dealing with a situation in which the contrived "crisis" is given more play than the real crisis that government has brought to us.

Nonetheless, we were supposed to have been transfixed with the dog-and-pony show in Washington, and now that the Political Classes have papered over yet another yawning hole, the pundits now are looking at winners and losers. In today's commentary, I deal with the angst emanating from the "Newspaper of Record," the editorial writers and, of course, Paul Krugman.

Like me, both entities consider the final decision to be a Really Bad Deal, but for reasons that demonstrate their own delusions about the economy. For all of the bad prose that these commentaries provide, I think that I can describe them in one sentence: We believe that government must spend and tax us into prosperity.

This is not possible, period. One can be of a socialist or Keynesian ideology and spout to the heavens that this time, such a scheme will work. It won't. Yet, Krugman gives us the same old delusion:
The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further. Pay no attention to those who invoke the confidence fairy, claiming that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn’t work that way, a fact confirmed by many studies of the historical record.

Indeed, slashing spending while the economy is depressed won’t even help the budget situation much, and might well make it worse. On one side, interest rates on federal borrowing are currently very low, so spending cuts now will do little to reduce future interest costs. On the other side, making the economy weaker now will also hurt its long-run prospects, which will in turn reduce future revenue. So those demanding spending cuts now are like medieval doctors who treated the sick by bleeding them, and thereby made them even sicker.
Krugman would be correct if assets were homogeneous, but they are not. Furthermore, he provides NO causal path as to how this continued government spending is going to lead to future prosperity. No, in Krugman's world, is just happens.

We are seeing a dearth of current private capital investment in this country, and no wonder. Krugman can ridicule business confidence all he wants by calling it the "confidence fairy," but when we have a government that has shown it is utterly hostile to investment that either is not directly subsidized or falls outside the president's view of what is right and proper (i.e. energy investments), then it is not hard to understand why businesses lack confidence to throw their money within U.S. shores.

Instead, Krugman wants us to believe that businesses automatically will invest when they see that the government is committed to showering the economy with new dollars. Well, government has been doing that for the past four year, and so far we are not seeing any results, and we won't see results, either.

What we are seeing is utter delusion in Washington, something I recently likened to the view from "Hitler's bunker" at the end of World War II. (I made the remarks while being interviewed on RT.)

So, Krugman and his employer can give us the Keynesian fairy tales all they want, but they are just as delusional as their friends in Washington. Krugman believes this madness is sustainable; it is not.


Mike Cheel said...

From an article on the just passed bill:

"Finally Washington is taking responsibility for spending money it doesn't have," Sen. Lamar Alexander, R-Tenn., said at the start of debate in the upper chamber.

"I'm not happy with it," Minority Leader Nancy Pelosi, D-Calif., said. "But I'm proud of some of the accomplishments in it. That's why I'm voting for it."

"It's about time that Congress come together and figure out a way to live within our means," said Rep. Sean Duffy, R-Wis. "This bill is going to start that process, although it doesn't go far enough."

zackA89 said...

Is this what austerity looks like?



tetchmagikos said...

Businesses have all the confidence in the world. They have confidence that individuals will continue curbing their spending and they have confidence that the government will not spend more than is on the books under current law. This confidence is what will keep them from ramping up production and thus unemployment will persist.

What's the Austrian script when the economy continues to falter with policies focused on austerity? Ah no rush; I'm sure you'll come up with something.

zackA89 said...

You consider 7 trillon in new debt over ten years austerity?

You consider current near record levels of debt and deficits, and unprecedented levels of both fiscal and monetary stimulus austerity?

were doomed.

Mike Cheel said...

"What's the Austrian script when the economy continues to falter with policies focused on austerity? Ah no rush; I'm sure you'll come up with something."

Why is the government responsible for the economy again?

Mike M said...

Why is the government responsible for the economy again?

Pottery Barn, you break it you own it. But wait! Every time they try to fix it they break something else and so on and so on. Let’s turn the clock off on this game and send them home. We will take over from here.

Waldenswimmer said...

I asked Mr. Krugman to just state his idea in actual words. He thinks the U.S. govt. should spend an additional $1 trillion in FY 2012, taking the budget to about $4.8 trillion against current revenues of $2.2 trillion. Stop beating about the bush with unquantified calls for "more spending" or criticisms that austerity is bad. Mr. Krugman should state unequivocally that he thinks a $2.6 trillion deficit, more than actual tax revenues, is the right path to follow.

Mike Cheel said...

@Mike M

Originally I had included in my comment that I was referring to overall and not culpability for all of the transgressions caused over the years.

I am actually targeting folks like tokenvoter who perceive the government to be some sort of charity or humanitarian organzization.

William L. Anderson said...

Well, there it is. Spend four trillion and then when unemployment increases and the crisis gets worse, Krugman can claim that he really meant the government should have spend FIVE trillion.

Sorry. The theory is bad and so is the execution.

Mike Cheel said...

Dow dives below 12,000


"Now that we have solved the debt ceiling issue the market has moved onto the other data, which has taken a significant turn for the worse," said Ryan Detrick, senior technical strategist with Schaeffer's Investment Research.

Bob Roddis said...

Delusional is the correct term here. “Denial” assumes at least some acknowledgment or recognition of reality if only at the subconscious level with attendant mental suppression of that reality. The establishment Keynesians live in such an alternative reality that they cannot even perceive the outlines of true reality. I had never heard of David Wessel until Friday night when I unfortunately saw him and a cohort of other half-wits on PBS discussing “the debt crisis“. This is probably more than a normal person can bear, but it is simply amazing to see how they understand nothing while thinking they know everything:


Wessel is “Economics Editor” of the WSJ. He explains why we must save banks that are too big to fail here:


He apparently gets paid for this. Wouldn't it be nice to have a press and TV news where the hosts actually understand reality and might report it to the people on occasion?

Bob Roddis said...
This comment has been removed by the author.
Mike M said...

Mike C. I'm with you. My attempt at sarcasm. We need a font for that. :-)

JG said...

By the mid-1930's the U.S. economy was beginning to show some improvement and recovery from the Great Depression. By 1934 GDP had actually begun to grow again. Then, in 1937 FDR decided to listen to his Treasury secretary and focus on balancing the budget. He cut spending drastically and the deficit was slashed to half a percentage point of GDP. At this same time inflation hawks at the Fed tightened monetary policy.

The result of these twin actions was the recession of 1937-38.

Here we are over 70 years later and I hear people on this blog arguing for spending cuts and condemning the Fed's monetary looseness and I've concluded that you people fall under one of two categories:

1) You genuinely believe that repeating the mistakes of 1937 will somehow result a different outcome despite the experience of history.

2) You know that the policies you're arguing for will cause another recession and you just don't care.

I'm guessing that cynics like Anderson fall into the latter category while more naive types like Zack fall under the former.

Mike Cheel said...



American Patriot said...

Progressive stupidity is simply amazing. How can an economist (lol) who is so removed from reality win a Nobel prize? Stop, do not answer that...I know how!

Reality no. 1: The money that the government spends does not materialize out of thin air. It comes out of the productive sector of the economy one way (taxation) or the other (all the implications of debt spending).
Therefore, to believe that government spending is beneficial, you must somehow have the convoluted mindset that filtering capital through government (which cannot possibly know what is the most efficient use for that capital) is more efficient than the capital being used directly by the private sector.

Reality no. 2: I don't care if Jesus himself came back to intervene in the economic crisis, until this Administration gets out of Dodge (and the incoming one being a more business friendly one), businesses are not willing to, and won't invest.

No, the lack of confidence is not due to deficits and the debt as much as it is due to the hostility of the Admin. as well as added costs of Obamacare. Every small business survey proves that. Period.


your knowledge of economic history is only skin deep. Yeah, the GDP was growing once again (as it has been for the past two years) but look at where unemployment was! GDP growth that results from G is unhealthy growth that does nothing for productivity, unemployment, innovation, .......

Bob Roddis said...

No discussion of the New Deal is complete without understanding that it (in the form of the NRA) was an attempt by the giant corporations to control the economy and eliminate competition, just as the Federal Reserve was a power grab by the giant banks.

In the NRA, we find that U.S. Steel and Bethlehem Steel effectively controlled the whole industry by virtue of their votes in the industrial codes; of a total of 1428 votes, these two companies alone were allowed a total of 671 votes, or 47.2 per cent, perilously close to outright control and with undoubted ability to find an ally among the smaller but still significant companies. @ page 121:


JG said...

@ Mike Cheel-

I checked out that link to the mises blog, the author of that article pretty much dances around my point. He talks around the fact that the year of peak stimulus spending (1934) was also the year of peak growth for that decade. He also paints the simultaneous tax increases as somehow unrelated to the misguided obsession with deficit reduction, as though tax increases somehow undermine the Keynesian position that deficit reduction (through either tax raises or spending cuts) during a time of weakness will aggravate the weakness.

Also, regarding monetary policy he refuses to acknowledge the harmful effects of the Fed's credit tightening during this time and puts forth his unsupported and illogical theory that the money supply really contracted because of "entrepeneurial uncertainty". He throws this opinion out there with nothing to back it up.

This article only reinforced my perception of the mises institute as a center of revisionist history and dogmatic ideology.

zackA89 said...


Higgs gives his regime uncertainty explanation to 1937. worth a look.

Im beginning to think JG really is just some statist who blindly adheres to his progressive Keynesian ideological dogma. JG is probably just spoon fed his left wing Keynesian talking points form statists like Rachael Maddow or Paul Krugman himself then comes on these blogs and regurgitates what his masters have been telling him.

João Marcus said...

He talks around the fact that the year of peak stimulus spending (1934) was also the year of peak growth for that decade.

Yay! Peak stimulus growth in 1934! Unemployment at 21% in 1934, because the stimulus growth was so awesome! In 1938, 19% unemployment. Woohoo! 2% less unemployment. Peak stimulus growth saved the US people, as we all can see.
Humm. Wait.

Bob Roddis said...

The entire “Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War” by Robert Higgs is found here:


Only a statist boob could fail to see that an economy in the fifth year of depression should start to show some signs of life. The fact that it collapsed like tissue paper in 1937 demonstrates that whatever GDP growth after 1933 was pure malinvestment. Of course, Keynesians are too dumb to understand what malinvestment even means so it’s really a waste of time “debating” them. If they don’t know what economic calculation means, how can they grasp malinvestment? They just can’t.

Keynesians are also too dumb to understand what Higgs is saying. Being little children, they cannot grasp the complexity of real life or that it consists of real people making real decisions with limited knowledge. Instead, they try to cram real life into a silly childish mechanical model of “the economy” which they desperately clutch like their blankie.

Bob Roddis said...

Higgs slices and dices Krugman today:


Krugman’s own vulgar Keynesianism relies on a much more ethereal explanatory force for its own account of macroeconomic fluctuations–namely, the so-called animal spirits. The master himself wrote in The General Theory: “Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die. . . . [I]ndividual initiative will only be adequate when reasonable calculation is supplemented and supported by animal spirits. . . .” (p. 162). Because Keynes conceived of his “animal spirits” as “a spontaneous urge to action rather than inaction” (p. 161), he of course had no way to explain their coming and going or to measure or evaluate them in any way. They are as surreal as a ghost–when and why they come and go, no man knows or can know.

American Patriot said...


funny how when it comes to addressing evidence, you move on to criticizing others' theories.

So, you think having a half ass growth rate with persistently high unemployment is sign of a healthy economy? Or should there be 7+% growth with 4-5x the job creation as there was 31 months in to the Reagan recovery?

JG said...


Yes, I'm trapped in a Rachel Maddow trance. I'm so madly in love with her Clark Kent hair and Henry Kissinger glasses that I can't see the statist brainwashing for what it is. God, she's hot!


You post here more than anyone else yet you have the least to say. Every post from you has the tone of some cranky old man complaining about how the kids wear their hair too long. "Damn statists, I told you stimulus won't work, now get off my lawn!"

Bob Roddis said...


You have less substance than even LK and none of his extensive research skills.

ekeyra said...

And get off my lawn

Tel said...

My take on it is that the Republicans have made a big strategic blunder here. I could be wrong but have a read of this:


Now, first off, I don't personally believe that Robert Reich has any economic credibility whatsoever... but be that as it may, lots of people are going to read him and take it seriously.

So now there is a failure narrative available that puts any and all future blame on those dreadful Republicans that forced Obama into an austerity drive.

The right strategic move would have been for Republicans to have just given in completely at the last minute and let Obama have absolutely everything he wanted. They should have used the opportunity to say how dreadful it was to be spending all that money, but then said they feel strangely compelled to support the President, because this is not the time to divide the country, yadda, yadda.

Their silly compromise position is the worst of all worlds. The spending continues while the people who tried to stop it take all the blame.