Heir To A Fool

I happened upon this piece by economist Paul Krugman in the New York Times, predicting that our economy is in the first stages of a long depression. Nobel prize winner or not, this places Krugman behind the curve. People like Thomas Woods and Nouriel Rabini have been hitting this point for some time now. As the standard bearer for Keynsian economics in the 21st century, and a self described “European Style Social Democrat” (Socialist), his proposed solution isn’t all that surprising: more spending.

That’s a sage prescription, more of the same. This has all of the wisdom of an airline pilot who, upon realizing he’s had one too many, resolves to drink himself sober to make his flight time. Even assuming that lowering interest rates and expanding budget deficits to stimulus spend was the correct solution, interest rates are already low and our nation’s debt is unseasonably high. Lest I be accused of being inadequate in my analysis, I will go to great length to spell it out.

You see, the central idea of Keynesian economics is that allocation of resources by the private sector leads to inefficiency, and that to prevent this government must take a strong role in the economy through active monetary and fiscal policies. In reality, just the opposite is true. Individuals in the private sector have to make careful decisions about how make best use of their resources. Allowing these decision making processes to take place millions of times throughout our economy leads to a state of inherent efficiency. When government interferes with this, it diverts resources from individuals making decisions through economic means to bureaucrats making decisions through political means. Government is the source of inefficiency.

It’s easiest to illustrate this point in looking at Keynes’ formula for calculation of Gross National Product:


It is the sum of Consumer Spending plus Private Investment plus Government Spending. The idea is that you can compensate for a decrease in one area through an increase in others. If negative economic conditions cause GNP to fall, you can “stimulate” the economy by growing deficits to increase government spending, raising GNP and spurring private spending and investment. This is fallacious.

Our government has already blown an amount equal to 11% of GDP on stimulus efforts for barely perceptible growth, just .7% growth for each 1% of GDP in spending. Yet despite pumping trillions into the economy, and near zero interest rates, we’re seeing a deflationary dollar as credit is shrinking. The M3 money supply has contracted at an annual rate of 9.6%. from $14.2 trillion to $13.9 trillion. That is the sharpest decline since the great depression, and it’s still falling. 10+% unemployment will soon be a moot point when there’s no longer enough money circulating through the economy to pay those who do have jobs.

Government spending is parasitic. What government gives it must first take away, be it now or later. Every dollar that government confiscates is one less dollar available for consumer spending, and when the government spends it, they crowd out private investment immediately and by a large amount. I defy anyone to provide an example of government spending having a net positive effect upon the economy.

Bottom line, you cannot create prosperity by suggesting we all turn and pick the pocket of the person to our left. Once government is ceded responsibility for economic prosperity, there is no logical stopping point. It will always degenerate into Socialism and central control of the economy; requiring both the conceit inherent in the desire to plan the lives of others, and the force necessary to impose that plan on unwilling subjects.