Does 'Depression Economics' Change the Rules?

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Wily competitors have known for ages that if you can’t win the game, you can simply change the rules. Now, during normal economic times, if somebody recommended that the government borrow a trillion dollars and spend it on anything that moves, most economists (as well as common sense) would say, "That’s nuts." So one would think that especially in the middle of a severe recession, in which the American public has to recover from misguided overconsumption (fueled by Fed policies), such massive deficit spending would be all the more ludicrous.

Ah, enter the wily academics. According to our most recent Nobel laureate, Paul Krugman, we are now in a period of "depression economics," where the standard rules don’t apply. In particular, the argument goes, when there are idle resources lying around, the traditional economic problem of scarcity disappears. The government can prime the pump by throwing borrowed money around, and this can only boost total output, because employed workers produce more than unemployed workers.

In the present article I will pick apart this reasoning and show that the standard rules still apply. It’s wasteful for the government to commandeer resources from the private sector during good times, and it’s even more harmful when the government kicks the economy during a recession.

The Argument From Idle Resources

First let’s make sure we fairly present the argument in favor of massive government "stimulus." Although Krugman has said equivalent things over the last few months, Mark Thoma actually provides the most succinct statement I have seen of the position. I ask the reader to forgive the following lengthy quotation, but this issue is crucial and we really need to understand the Krugman/Thoma point.

Read the rest of the article

Bob Murphy [send him mail] runs the blog Free Advice and is the author of The Politically Incorrect Guide to Capitalism.

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