Krugman Is Wrong on Stimulus Spending… Again

The fact that Paul Krugman received the Nobel Prize in economics makes sense given that both Al Gore and Obama received the Nobel Peace Prize. But that is the only way that it makes sense.

In his December 29th column in the New York Times, Keynes Was Right, he continues to make the case that the only reason we haven’t come roaring out of the Great Recession is because we spent too little.

Krugman cites the downturn of 1937 when FDR’s government programs were curtailed and unemployment rose. He says that unlike in that fateful year we should instead redouble our efforts and spend more to prime the economic pump. Austerity is insanity he says. We must spend more as Keynes would have advised, deficits (and inflation) be damned.

Build pyramids as Keynes said we should. So what if the they do not contribute, and probably detract, from the quality of the economy. It is the quantity of economic activity that we are interested in not quality. Get people employed doing whatever. This is the road to prosperity!

Interestingly the Chinese employed this philosophy over the past 3 years by building the modern equivalent of pyramids all over their country. Through various means money was poured into the hinterlands from central managing authorities to regional managing authorities, to local managing authorities. The result has been the creation of a vast archipelago of empty cities.

I’m not kidding. There are cities with no one in them, completely constructed and rotting away empty. As I have said before, it takes some serious economic incompetence to create cities where no one lives, in a country of 1.3 billion people.

But this is Krugman’s prescription for economic success. In relative terms the size of the Chinese stimulus in 2008 was twice as large as the American one and happened over half the time. That should have done the trick right Mr. Krugman? Or perhaps the Chinese did not spend enough?

Krugman doesn’t seem to understand one of the fundamental lessons every good stock broker learns in his or her first year on the job. Trees do not grow to the sky. Everything reverts to the mean, including economies.

The further an economy is pushed beyond it’s natural trajectory (via stimulus etc) which in a healthy economy is determined by the creativity, ingenuity, and shrewdness of its individual participants, the worse the pain when the economy reverts back to it’s natural state.

Stimulus is like steroids for the economy. One can inject only so much until the patient either falls over from the unnatural weight and physical stress to the system or goes insane.

When are we supposed to go back to some semblance of an economy based on reality Mr. Krugman? It appears that his response is – never.

I fear an entire globe going into a fit of economic “roid rage” at the same time. Yet this will be the end result if we continue to follow the Krugman/Keynesian line of economic reasoning. We must stop now.