Paul Krugman- Wrong Again

Paul Krugman never ceases to amaze me. I’m convinced he masquerades as an economist hoping to give himself some legitimacy. He might convince the ignorant, but those of us that actually understand economics know him as an economist in title only. No self-respecting economist would ever argue for the economically backwards “solutions” to problems that Krugman does.

In his article, Krugman argues that not enough has been done to save jobs and that nobody in Washington seems to care about unemployment anymore now that the worst of the recession seems to be behind us. I’ll agree with him on one point: the stimulus didn’t work.

Krugman seems to believe that it didn’t work because it wasn’t big enough – not big enough! No Mr. Krugman, the stimulus didn’t work because artificially created demand is a band-aid fix at best. In Krugman’s world, the best fix would be to pass a second, larger stimulus package. That is insanity! He does, at least, accept the fact that a second stimulus seems to be a political impossibility.

As most politicians do (for that is the only way we can view Krugman), he seeks to address the symptom instead of the cause. He proposes a New-Deal-type workers program that would amount to nothing more than digging holes only to fill them again. This is no way to talk about job creation. That type of government program is the economic equivalent of empty calories – they might seem tasty but they will never fill you up, and instead, only make you unhealthier.

A second “solution” Krugman offers is government-provided subsidies to employers to hire more workers. Let’s think about this for a second regarding what incentives it creates. A subsidized worker is cheaper for the employer to hire. Why would he keep his expensive employees that he must pay full price for when he can hire cheaper employees whose wages are subsidized by the government? I’m afraid a very real consequence to Krugman’s idea would be that employers fire at least as many workers that they hire on (if not more).

Krugman has the gall in his article to imply that, if we don’t implement his ideas, we are being cruel and short-sighted. Krugman, a Keynesian interventionist, is calling us short-sighted? That’s the pot calling the kettle black.

One of the biggest complaints I have with Keynesian economics is the short-sightedness of it. By continually intervening and preventing the market from self-correcting, we are doing nothing but perpetuating the problem, ensuring it’s never fixed! Short-term and empty job creation that is unsustainable and does nothing to address the underlying cause is what’s short-sighted, Mr. Krugman.

Krugman casually dismissed tax cuts as ineffective and not really worth talking about. Instead he argues for any number of programs that will have to be funded by increased taxes. He goes beyond dismissing tax cuts and actually argues for tax increases – in a recession!

Income tax cuts would give the worker more money to buy goods and services which would increase the demand for workers. If they didn’t spend their extra money, they would save it. Savings necessarily fuels investment, which is critical for growth.

There are those who argue that cutting taxes would only lead to a greater deficit. So what? Deficits are not nearly the nasty beast they’ve been made out to be. The Great Depression was aggravated because the federal government sought to preserve a balanced budget, which meant they needed to raise taxes and cut spending – both bad options in times of economic trouble.

In any case, the responsibility to prevent a deficit is not on the taxpayer. This idea that the government can spend freely and then simply keep on raising taxes to cover the deficit is absolutely inconsistent with our founding ideals.

The burden is on the government to spend as little as possible, and only spend on those areas that are legitimately governmental – providing national defense, protecting property rights, providing a criminal justice system, enforcing contracts, and ensuring economic integrity is maintained (accounting for market failures, i.e. monopolies, public goods and externalities). Beyond these core responsibilities of government, there is not much for them to do. We as citizens have a duty to pay the taxes that are necessary to fund the government that we created.

But for the government to spend recklessly and then look to us to pay for it is backwards. The burden is on the government to not out-spend revenue, not on us to ensure that we pay for everything they want to do.

If government didn’t have the blank check that it does now, it would never have the means or capacity to intervene in every aspect of our lives and the economy. If government never intervened, many of the problems we face today never would have been created. It is excessive government intervention in the market that causes most recessions, and if it doesn’t cause them, it definitely prolongs them.

Yes, tax cuts are the more responsible, sustainable and economically sound solution to our problems. It addresses the underlying cause and it’s consistent with liberty and the founding ideals of our country.

In case I haven’t convinced you, consider this example on why stimulus spending will never be successful in maintaining jobs.

By pumping so much liquidity into the market, inflation is almost sure to rise (especially so when you couple it with loose monetary policy and seignoirage that we're currently experiencing).

So, we can reasonably expect high inflation in the near to mid future. Inflation and employment are necessarily economic trade-offs. If unemployment rises, inflation falls. If inflation rises, unemployment falls. This is known as the Phillips Curve.

So, assuming jobs were actually created by this spending, we've effectively traded more jobs for more inflation. So far so good. I think everybody would say that's a fair short-term trade off.

So after unemployment returns to its natural rate, people will want to bring down the high inflation. To bring down inflation, GDP must be sacrificed (called the sacrifice ratio).

Typically about 5% of GDP must be "sacrificed" to bring down inflation by 1%.

Okun's Law tells us that a 1% change in unemployment results in a 2% change in GDP. Putting this all together, a 1% reduction in the inflation rate requires a 2.5% rise in unemployment. The higher inflation goes, the higher is the unemployment that's required to bring it down. The higher unemployment goes, the greater the drop in GDP.

For example, if we want to bring down inflation by 4%, we would need to sacrifice 20% of one year’s GDP and unemployment would have to rise by 10%. This all doesn't have to happen in one year. It can be spread out over 5 years of a 4% reduction in GDP and a 2% rise in unemployment.

So what has the stimulus actually accomplished? It may have created some jobs (a dubious claim), but in the not-so-near future those jobs will have to be lost and GDP will have to be sacrificed for inflation to come down. And you know what it's called when GDP shrinks instead of grows? A recession!

This stimulus money was maybe a flicker of light in the darkness, but its long term effects will be nothing but prolonging the recession it was meant to save us from.