Kick That (Keynesian) Habit

One think I do like about Paul Krugman’s columns extolling Keynesian theory is that they are predictable and easy to follow. I cannot say they really constitute economics, given that Krugman seems to believe that government can eliminate the Law of Scarcity if the economy allegedly is in a “liquidity trap,” but at least one can follow them.

Krugman’s latest creation, “Kick That Can,” is more of the same. The Evil Republicans want to downsize spending, ostensibly to reduce it to the size where it can be drowned in a bathtub, and then throw the economy into depression where there will be poverty, starvation and, of course, weeping and gnashing of teeth:

While it’s true that we will eventually need some combination of revenue increases and spending cuts to rein in the growth of U.S. government debt, now is very much not the time to act. Given the state we’re in, it would be irresponsible and destructive not to kick that can down the road.

Start with a basic point: Slashing government spending destroys jobs and causes the economy to shrink.

This really isn’t a debatable proposition at this point. The contractionary effects of fiscal austerity have been demonstrated by study after study and overwhelmingly confirmed by recent experience — for example, by the severe and continuing slump in Ireland, which was for a while touted as a shining example of responsible policy, or by the way the Cameron government’s turn to austerity derailed recovery in Britain.

He adds:

But aren’t we facing a fiscal crisis? No, not at all. The federal government can borrow more cheaply than at almost any point in history, and medium-term forecasts, like the 10-year projections released Tuesday by the Congressional Budget Office, are distinctly not alarming. Yes, there’s a long-term fiscal problem, but it’s not urgent that we resolve that long-term problem right now. The alleged fiscal crisis exists only in the minds of Beltway insiders.

In other words, it really does not matter that the debts the U.S. Government has accumulated — especially in the current downturn — cannot and will not be repaid. After all, the government can print whatever it wants or have the Fed buy and hold all its debts and if bondholders are paid back with dollars worth a tenth of what they were when the bondholders purchased those bonds, well, it is good for exports!

The Keynesian paradigm always points to a non-existent future in which a rush of present spending will produce magical “traction” for the economy, the product of Krugman’s Inflation Fairy. Unfortunately, Krugman refuses to admit that what he touts as new spending, or “stimulus,” actually is nothing more than a thinly-disguised wealth transfer. Yes, we can transfer spend ourselves into prosperity.

We don’t need to “kick the can” down the road; we need to kick the Keynesian habit.

About William L. Anderson 48 Articles

Affiliation: Frostburg State University

William L. Anderson is an author and an associate professor of economics at Frostburg State University in Maryland. He is also an adjunct scholar with the Mackinac Center for Public Policy as well as for the Ludwig von Mises Institute in Alabama.

Anderson was formerly a professor of economics at North Greenville College in Tigerville, South Carolina.

Visit: William Anderson's Blog

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