Contributed by “The Ed”
On April 24th Yahoo Finance’s internet show “The Daily Ticker” produced a rather audacious video in which co-host Henry Blodget (above, right) proclaimed that the economic argument is over and Paul Krugman won. The theme of Nobel Prize winner Paul Krugman’s approach to the economy is that the government should spend more money to get us out of a recession. Blodget too is claiming that government should not be cut back – that the economy will suffer if we do. His claim is that there was a mistake made on the austerity side. The 90% debt to GDP ratio is not a point of disaster and that the government should go on spending.
Ugh. I hate this. Instinctively I know that Henry Blodget is wrong. It makes no sense that government can spend the economy into prosperity. There have to be arguments on the other side. And if there are arguments on the other side then the debate is not over.
Admittedly, I am not an economist. I find my predictions for the economy will never make me a rich man. Even when I am right about my predictions, I am way off about the time the predictions take to come true. Take what happened with the subprime lending crisis. A federal law – the Alternative Mortgage Transaction Parity Act –preempted state law to allow adjustable rate mortgages, interest only mortgages and negative amortization mortgages. I would have expected that consequences of this law would take about ten years to show up. That would be time enough to start seeing the mortgages and time enough for the interest rate adjustments to force people to default on their mortgages. I was clearly wrong.
The Act was signed into law in 1982. It was one of the necessary ingredients that led to the sub-prime crisis which hit us in 2007 and 2008. It took 25 years. The consequences of bad economic policy take the time that they take to unfold. That time is invariably unknown. We don’t know what the tipping point is. We don’t even know if we have passed it. And make no mistake: Krugman and Blodget don’t know either.
Dr. Peter Bernholz has defined a line of hyperinflation. Throughout history hyperinflation has occurred when governments borrow more than a third of what they spend for a number of years. The number of years varies. But the results are the same. According to Paul Krugman and Henry Blodget we should continue to borrow and spend, to get us out of the economic slump we are in. I would ask them how that is working but I already know their answer. According to Paul Krugman, in July 2010, we did not spend enough. Yes, it is said that the dollar is almighty. Nevertheless, the thought that Krugman’s policy of spending borrowed money cannot cause inflation or hyperinflation is more hubris.
Henry Blodget, here is some news for you: There are indeed cogent arguments on the other side. The debate is not over.
Dissecting arguments given by economists is hard. So let’s try a different approach, one that is driven by principles that can be proven or axiomatically accepted. Here are the ones that instinctively tell me that Henry Blodget has it wrong:
- To consume, somebody has to produce. When the US government consumes, that somebody is the US economy. So how does US Government spending make the US economy better? It only takes away the production of the US economy for mostly non-productive ends.
- A dollar spent is a dollar taxed. Sure, I have said it before. I have even devoted a whole article to this idea. So to keep the reader from having to go back, let me state a few of the salient points. The government can’t buy anything without taking it out of the economy. It can’t provide a service. It can’t write laws. It can’t write regulations. It is non-functional without the money that it taxes out of the economy. I find it mind boggling how anyone can believe that government spending, which removes resources from the economy, is going to make the economy better. Is there something magical about government spending? Actually, according to Keynesians like Paul Krugman, there is something magical. It is called the multiplier effect. The problem with this assertion is that multiplier gets applied to the money that everybody spends. We don’t need government spending for the multiplier effect.
- Debt is a burden. While government accumulates its debt, the economy pays the burden. So how does adding burden to the economy make it better?
- Government spending is overhead to the economy. Government is necessary and it has its place. But government is overhead to the economy. It should be minimized to make the economy better. The spending proposed by Paul Krugman only maximizes government burden.
We should not be spending like there is no tomorrow. Spending will not get us out of recession. Spending will ultimately make the economy worse, not better.
The debate is not over. I don’t need to be an economist. I don’t even need to quote economists. By applying basic principles, I know government cannot spend the economy into prosperity. Paul Krugman’s Nobel Prize does not leave me in awe. It makes me wonder what happened to the prestige of the Royal Swedish Academy of Sciences that chose to award it to him.