March of the Princeton Peacock

by William L. Anderson
by William L. Anderson
Recently by William L. Anderson: Krugman Without a Clue

In his January 29 column, "March of the Peacocks," we see proof of what I have been saying for years: Paul Krugman is not an economist. He is a political operative, period.

OK, why do I claim that a NOBEL LAUREATE in economics is not an economist? Is not the Nobel given to someone who has contributed something important to economic science? (Not really, but that will not be the topic of discussion today, as this column is dedicated to debunking the wit and wisdom of Paul Krugman, not trashing the Swedish Academy of Sciences, which gives the award.)

Instead, we deal with Krugman's latest missive of rage that Obama has announced a toothless "spending freeze," which apparently turns the poor president into a ... Republican. Besides Krugman's gratuitous insults of President Obama, however, I also think this column presents a very good view of what Robert Higgs calls "vulgar Keynesianism." So, let us begin.

Right out of the box, Krugman proclaims:

Last week, the Center for American Progress, a think tank with close ties to the Obama administration, published an acerbic essay about the difference between true deficit hawks and showy “deficit peacocks.” You can identify deficit peacocks, readers were told, by the way they pretend that our budget problems can be solved with gimmicks like a temporary freeze in nondefense discretionary spending.

Horrors! Obama has endorsed such a scheme, and The Great One is enraged:

What’s going on here? The answer, presumably, is that Mr. Obama’s advisers believed he could score some political points by doing the deficit-peacock strut. I think they were wrong, that he did himself more harm than good. Either way, however, the fact that anyone thought such a dumb policy idea was politically smart is bad news because it’s an indication of the extent to which we’re failing to come to grips with our economic and fiscal problems.

So, let us stop for a moment and think. What is a "dumb policy idea"? Why, according to Krugman, it is anything that lessens the burden that government place on individuals. And it gets better:

The nature of America’s troubles is easy to state. We’re in the aftermath of a severe financial crisis, which has led to mass job destruction. The only thing that’s keeping us from sliding into a second Great Depression is deficit spending. And right now we need more of that deficit spending because millions of American lives are being blighted by high unemployment, and the government should be doing everything it can to bring unemployment down.

Only in Paul Krugman's Wonderland can such a series of words be put into one supposed coherent thought. We are in a severe financial crisis because the financial institutions followed the government's directive and went bonkers in lending money for housing, paying no attention to the growing bubble. Furthermore, they took these risks not because the bank regulators had been seized by "Reaganite free market ideology," but because of the explicit and implicit guarantees by government authorities and especially the Federal Reserve System.

Furthermore, deficit spending is making things worse, not better. It adds to our crushing debt and it further distorts the fundamentals of the U.S. economy in a way that makes us worse off now than when presidents Bush and Obama began their attempts to "spend our way out of the recession."

Unfortunately, as they say on the late-night infomercials, "Wait! There's more!"

In the long run, however, even the U.S. government has to pay its way. And the long-run budget outlook was dire even before the recent surge in the deficit, mainly because of inexorably rising health care costs. Looking ahead, we’re going to have to find a way to run smaller, not larger, deficits.

How can this apparent conflict between short-run needs and long-run responsibilities be resolved? Intellectually, it’s not hard at all. We should combine actions that create jobs now with other actions that will reduce deficits later. And economic officials in the Obama administration understand that logic: for the past year they have been very clear that their vision involves combining fiscal stimulus to help the economy now with health care reform to help the budget later.

The sad truth, however, is that our political system doesn’t seem capable of doing what’s necessary.

If anything exposes the shallow thinking that comprises Keynesianism, here it is. First, Krugman resorts to, well, gimmicks. Only a Keynesian-socialist would believe that a program based upon a 2,000-plus-page bill that uses a combination of criminal law, government spending mandates, and price controls would lower the federal deficit.

Second, he uses rhetorical trickery in declaring that somehow the government can identify those very jobs (and then create them) which will result in later deficit-reduction. Does he mean more tax collectors? Perhaps we need more people to run printing presses, since he tries to tell us that printing money actually creates a "solution" to our economic problems.

In fact, why create "jobs" at all? For Krugman, everything is based upon spending, spending, spending. Why not just give everyone bagfuls of money and let them quit working? After all, in the Keynesian world, an economy magically appears when we start spending money. Economic fundamentals? Why those are just the creations of sick, "Reaganite" minds!

Here is the problem. Krugman has endorsed time and again government initiatives that increase the burdens that private businesses must bear. (No problem to a Keynesian, as the increases in costs require more spending which – Presto! – creates prosperity.) In the real world, when businesses bear heavier burdens and consumers cannot pay higher prices, we have this thing called bankruptcy.

Furthermore, when companies like General Motors and Chrysler are no longer solvent, that means that the sum of their assets is greater than the whole of the company, the very definition of being bankrupt. But instead of allowing those assets to be liquidated and turned over to companies that can run them profitably, Krugman and his Keynesian-socialist friends demand that government prop up those companies, which creates a further drain on the economy.

During the past two years, we have seen the burden of U.S. debt grow to insurmountable levels. The government has increased its spending wildly, has increased the minimum wage (and, not surprisingly, teenage unemployment is at record levels), and is ramping up environmental rules that make it even more costly for businesses.

Unfortunately, the Keynesian mind cannot see any of this. All it can see is spending, and if spending is up, then unemployment must be falling. Keynesians simply cannot fathom the obvious: the more government increases its burdens, the more difficult it is for people to engage in simple economic transactions, and that means the destruction of wealth.

Now, I will give Krugman credit for saying the political system is incapable of doing what is necessary. However, he is making the absurd statement that politicians are not willing to spend even more money, which is an oxymoron. (I agree that the American political system, which is geared to increased spending, is incapable of taking any long-run action to stop the bleeding and put the U.S. economy back on a sound, or at least semi-sound footing.)

Perhaps it is ironic that Krugman uses the peacock as the symbol for someone who believes that cutting government spending is a good thing. After all, the guy has been strutting about for a long time, advocating unsound economic policies, demanding more inflation, and generally calling for the destruction of private enterprise.

Unfortunately, he cannot see the damage behind him because his tail feathers are in the way.

February 2, 2010

William L. Anderson, Ph.D. [send him mail], teaches economics at Frostburg State University in Maryland, and is an adjunct scholar of the Ludwig von Mises Institute. He also is a consultant with American Economic Services. Visit his blog.

Copyright © 2010 William L. Anderson

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