Paul Krugman and His Beloved Deficits

A recent article by Paul Krugman on government deficits was brought to my attention (H/T Ad Orientem):

Dwindling Deficit Disorder

Krugman asserts the usual about how government spending really is good for us.

Put it this way: Smart fiscal policy involves having the government spend when the private sector won’t, supporting the economy when it is weak and reducing debt only when it is strong. – Paul Krugman

What a lot of these proponents don’t get, or don’t want to get due to their political beliefs, is expanding government spending often causes a ton of unintended consequences that hurts businesses. Sometimes the funds are used to subsidize pursuits that result in making companies less competitive. This is because they will use the funds to whitewash over their own deficiencies instead of fixing them. Or the spending may be used to direct R&D efforts into dead-end technologies that a politician favors (usually to their own benefit). This can then keep scientists from exploring their own directions that could result in major breakthroughs nobody had considered. Finally, businesses cannot build and sustain real growth based on government spending that can shift or end at any moment. All you’ll end up doing is making another charity case that will require those subsidies from now until eternity.

In terms of individual liberty, spending often expands the military/industrial/surveillance state in virtually every corner. Local police today have battlefield weapons being given to them. The Department of Homeland Security is buying billions of rounds of ammo and armored personnel carriers. Airports now put people through humiliating searches to travel freely (and want to bring the same searches to bus and train stations). Then there is the massive expansion of the entitlement state that is creating millions more dependent on government and will expect that entitlement to be there forever. It encourages and expands a growing underclass. On and on it goes.

But spending makes jobs, right? Sure I guess. But are those jobs good for you? If the government announces they are spending $1 Billion on making 10,000 new jobs what are those jobs going to be?

It won’t be daisy pickers. 

It will be new federal regulators, new DEA agents, new TSA agents, new military contractors, new Unmanned Aerial Vehicles, expansion of federal agencies, domestic surveillance expansion, etc.

So regardless of the good intentions, the outcome will be against the interests of citizens over the long term. I personally don’t care that 10,000 new jobs are available to people that want to fondle my crotch at the airport. Nor do I care that 10,000 new people are now working to expand domestic surveillance capability. Do you?

But the academic bean counters get so wrapped up in their ideas that they never seem to think about these and many other issues. However, these outcomes are almost always what happens when you give a large government a blank check to spend on whatever it fancies. The end result is not going to be good for anyone (or the economy) in the long run.

 

 

Craig Rowland

I own the place.

14 Responses

  1. David says:

    Did your college Econ course study Keynes at all? I love your permanent portfolio work but these comments make you sound poorly educated.

  2. Yes, college courses teach many subjects I disagree with and Keynes (and perhaps I should say the modern interpretation Keynes) is one of them.

    The ideas of various Keynesian schools are frequently used as an academic smokescreen by pols to justify all sorts of destructive spending and expansion. They are, after all, doing it to pull us out of a recession, etc. and are never doing it to further their own careers.

    So the outcome of the ideas, even if they sound rational on the face (and I don’t think they do), work poorly in practice long-term.

  3. Neverland says:

    I’m sitting in Europe right now and I can comprehensively tell you that cutting government spending spending in an economic downturn does not lead to economic recovery in the short to medium term

    We know because almost every country in Europe tried it to varying degrees and in most cases we look pretty sick

    It can look as if it works if you are a relatively small country and your trading partners have strong growing economies when you are cutting….but otherwise it appears not

    Maybe we’ll stick with it for another five years and you can come over to have a look at how we are doing

  4. Here’s the question though because it is chicken and the egg kind of problem. Would the cuts have mattered if the spending initially wasn’t so large to begin with? It’s very hard to take entitlements away from people once they are used to them.

    Secondly, does the government spending create dislocations in the economy where false growth signals enable bubbles to form and then collapse more often than if they had left things alone?

    I would argue that both of the above are very common attributes of managed economies following the stimulus/spending models.

  5. Neverland says:

    “It’s very hard to take entitlements away from people once they are used to them.”

    Actually many European governments have shown its very easy to take away entitlements. The government takes the entitlement away. The people protest. Largely they are ignored and they go home eventually. Sometimes tear gas, riot police and water cannon are used. Sometimes an election comes up and the government who made the cuts are turfed out. The new government, whoever it is, does not reinstate the entitlement in full.

    “does the government spending create dislocations in the economy where false growth signals enable bubbles to form and then collapse more often than if they had left things alone”

    Historically lots of bubbles like tulip-mania and the south sea bubble in economies where the state was a fraction of the size it is now in Europe or the US

    You get lots of malinvestment in vanity/stupid projects in both the public sector and the private sector

    What I can tell you about Europe is that there is very little investment going on right now from private sector because growth prospects look so low and there is little investment from the public sector because of spending cut targets are easiest to hit by cancelling investment projects

    Therefore there is very little investment. This does not bode well for Europe’s future growth

  6. It seems Europe’s bigger problem by far is they took a bunch of countries with different languages, different cultures, different outlooks on the use of government, different historical beefs with each other, and rammed them all under one big bureaucracy and monetary unit. I don’t see any chance that the EU/Euro is going to last long-term.

    I love visiting Europe and have been many times. However I like each country for what it is individually and just can’t imagine that they are ever going to get alone well enough to live under a unified government.

  7. Neverland says:

    “they took a bunch of countries with different languages, different cultures, different outlooks on the use of government, different historical beefs with each other, and rammed them all under one big bureaucracy and monetary unit”

    Maybe, but Europe has enjoyed peace for nearly 70 years, which hasn’t previously happened since the Roman Empire collapsed

  8. PedroPerez says:

    people against expansive fiscal policies in times of economic recession by default, normally do not understand what is fiat money and credit.

    what is happening right now is a totally lack of money. in times of gold standar, its like if gold owners would had withdrawed it from the market, so credit couldn’t continue. Right now is happening the same than in 1929. The percentage of money has decreased in 40% worldwide. Money scarcity causes that people can’t get it (even if they work double), so as a consequence, we can’t pay our debts.

    Its exactly the same than happend in USA the last time gold pattern was introduced, and caused the 1929 recession. Scarcity of money.

    Nowdays, money is debt by definition. If you cancel all debts in USA (public and private debt), nobody would have money, because almost all money is credit (debt). This is a concept people do not understand about the system. If you apply on this scenario (money scarcity), public austerity policies, what you are creating is more money scarcity, since goverments are the only ones right now (and central banks) that can create money from where people, through work, can get it and pay their debts.

    the issue nowdays is much more deep than simple debates about deficits or goberment expenses.

    regards


  9. PedroPerez:

    people against expansive fiscal policies in times of economic recession by default, normally do not understand what is fiat money and credit.

    Let me lay out the thrust of the piece once again:

    “But spending makes jobs, right? Sure I guess. But are those jobs good for you? If the government announces they are spending $1 Billion on making 10,000 new jobs what are those jobs going to be?

    It won’t be daisy pickers.

    It will be new federal regulators, new DEA agents, new TSA agents, new military contractors, new Unmanned Aerial Vehicles, expansion of federal agencies, domestic surveillance expansion, etc.

    So regardless of the good intentions, the outcome will be against the interests of citizens over the long term. I personally don’t care that 10,000 new jobs are available to people that want to fondle my crotch at the airport. Nor do I care that 10,000 new people are now working to expand domestic surveillance capability. Do you?”

    I am perfectly aware of the arguments about deficit spending and the contemporary arguments of credit vs. debt in the form of monetary realism or whatever name it wants to float under today. The arguments for allowing a government to spend until the cows come home is as old as the hills and results in the same problems.

    But most importantly of all, when government (especially the U.S. Government today) is allowed to spend without limits they end up doing destructive things with it.

    Stimulus funds are used as an excuse to spend more on military expansionism, homeland security police state non-sense, dubious make work projects in favored political districts to buy votes, etc. Any excuse is used to do a variety of these things in the name of some kind of magic fix. And all of that kind of spending is ultimately detrimental to anyone that doesn’t want a large and intrusive government.

    The reality is this spending will end up ultimately being against citizen’s interests if they value freedom. Governments are not good at spending money wisely and certainly aren’t good at “fixing” economies that their policies helped break from the beginning anyway. Indeed, the mortgage bubble in 2008 that lead to a lot of the problems today in the U.S. was not an accident. It was government/monetary policy that caused it at the root.

  10. PedroPerez says:

    @Craig,

    you analisys is stuck about budget deficits, democrats, jobs creation and public debt. You are focusing the issue just on the surface. Is not about supporting or not Keynes: is about the system by itself.

    in our actual monetary system, debt is necessary to create money, because money is debt in itself. Are payment promises. The money we have in our bank deposit account, or the money our boss pays us every month, is just debt, payment promises from another persons and institutions.

    If we were living on gold pattern, gold would be money, and our salaries just credit backed up with gold. But on our actually monetary fiat system, money is debt. If banks or goverments can’t continue creating credit (money) through morgages (fractional reserver banking system) or bonds (goverment or central bank), the money stops being created, so the system collapses.

    This is an issue people do not understand. Or the public system has to enter in debt, or the private system. But one of two has to be in debt to provide money to society. Money that can be get by companies to grow and create employment. If you cut both, its like in 1929: scarcity of money.

    Right now private area (banks) can’t create more money to continue the snow ball of our monetary system. If goverments doesn’t create more through debt (bonds), happens what is happening in Europe: more recession step by step, because nobody from outside of Europe is introducing new money into the system.

    as i am saying, this crisis is far more than a simple economic perspective. democrats vs republicans. Austrians vs Keynes. Is about something much more deep: the roots of our world monetary system that is a cancer by itself, but is not understood by 99% of people.

    regards.

  11. Pedro,

    I truly do understand. I’ve read all the same things and there are many people on the forum that are advocates of MMT. It’s just that we don’t agree on the prescription. I also understand that the hyperbole about the Fed printing money/buying debt means nothing if that money is not circulating at a rate to cause inflation. This is why I ignore charts people show of massive monetary expansion because I know that money is not making it into the economy in a destructive way (yet).

    A big problem with the idea of credit manipulation is you can’t force people/business to spend money they don’t want to spend. The next problem is that even government spending can get to the point where they can saturate the markets and still find it doesn’t respond (ask Japan for over 20 years now).

    So the issue you bring up is a great theory and I understand it. My point is simply that given the choices of government deficit spending and not. I’d rather have much less of it. Mainly because I trust the markets to be able to correct their problems if left alone and I don’t trust the government to use a blank checkbook.

    Thanks for your comments.

  12. PedroPerez says:

    @Craig,

    Mainly because I trust the markets to be able to correct their problems if left alone and I don’t trust the government to use a blank checkbook.

    we all agree that markets return to their balance and correct their problems. The main issue is, how much time will take? how many millions of citizens will have to suffer until the market corrects itself? How many years, unemployment and hunger took 1929 until it return to a balance situation?

    the objective here is to try to minimize the consequences. If you ask me, i really do not want to see again in USA (and Europe) in the same real crisis that happened in 1929. Increasing the public budget is not the best decision? you are right, but is the less bad decision once we are living into a evil monetary system that requieres that somebody has to get in debt to create money and growth. If the private area is totally collapsed in debt, and we can not raise up public debt, who creates money? nobody.

    what is interesting is that we always blame on public goverment (me too :-), but we never blame on the private sector that is three times more in debt that the public system. Are we sure that the private sector is efficient? Of course, when it collapses, it will automatically return to its balance, but .. how many millions of citizens will go behind them?

    Thats my point.

    regards

  13. In the U.S. in the 1930s there was the National Recovery Act that setup price controls, production limits, called for farmers to destroy crops to prop up prices, etc. I know someone who’s uncle was a farmer and couldn’t grow excess food without threats of jail time and punishment. Chicken butchers were jailed for selling chicken too cheaply (http://en.wikipedia.org/wiki/Schechter_Poultry_Corp._v._United_States).

    So I hear all the time that it was not enough money in the Great Depression that exacerbated the problem. But you know we’ve never had soup lines in this country before someone came in and created artificial shortages by ordering food be destroyed. In fact, there were even orders to slaughter millions of pigs to keep them off the market to keep prices high (search for Wallace’s pig slaughter).

    When looking at the Great Depression, what lengthened it was not a shortage of money, but quasi-communsit economics that crippled free markets. People can adapt to just about anything, but when you tell them they can’t make a product, can’t sell a product for their needed price, etc. you will cause far more problems than not having enough gold to go around. If prices had been allowed to fall where the markets wanted them, then there would have been no money shortages as commonly stated.

  14. PedroPerez says:

    here in Europe we are applying public cut budget (above all south of Europe), so we have the following situation: private economy almost collapsed in the south because of lack of new ‘money’ (debt). Second public goverments cutting deficits (so also new money is not issued). Third investors from outside of Europe not investing inside the region (‘new’ money). Result? the crisis is spreading out like a cancer. Started in Greece (they were the bad guys in the beginning), and now hitting France and starting in the core of Europe (Germany). Everything is collapsing because of lack of new debt.

    what i am trying to transmit is that crisis, in our actual monetary systems, and inevitable. The system needs expansion and contraction to work out. But now, the contraction is worldwide. Only emerging markets have excess capital to inyect a little bit new money, but not during a long time. The issue here is that the world can’t ask for new money to Mars, because the whole world is in debt collapsed.

    i understand your point of view. You affirm that with more free market, less taxes, less goverment, countries can superate the situation. I support this ideas, but i really doubt that are enough to create new debt for the actual system collapse. But this is just and opinion, not based on scientific facts.

    regards