home  |  book  |  blogs  |   RSS  |  contact  |

Entitlements: What Difference Does It Make? Liberal Barnacles Show How Not To Do It

print view

Austerity: Krugman's False Message

by Christopher Chantrill
May 14, 2013 at 12:00 am

|

AUSTERITY IS failing, crowed Paul Krugman last week in “The Chutzpah Caucus.” By austerity, he means the policy of “slashing” government spending. The case is clear, he writes.

Claims that spending cuts would actually boost employment by promoting confidence have fallen apart. Claims that there is some kind of red line of debt that countries dare not cross have turned out to rest on fuzzy and to some extent just plain erroneous math. Predictions of fiscal crisis keep not coming true; predictions of disaster from harsh austerity policies have proved all too accurate.

Actually, most of the austerity over in Europe and here in the US has featured tax increases. But we’ll let that pass. Krugman then goes on to unearth the dusty remains of the 1937 recession-within-a-depression.

In the United States, government spending programs designed to boost the economy are in fact rare — F.D.R.’s New Deal and President Obama’s much smaller Recovery Act are the only big examples. And neither program became permanent — in fact, both were scaled back much too soon. F.D.R. cut back sharply in 1937, plunging America back into recession; the Recovery Act had its peak effect in 2010, and has since faded away, a fade that has been a major reason for our slow recovery.

You can see the damage of this sort of talk. It is economic rubbish. Let’s take a look.

In the first place, the First New Deal was not a Keynesian stimulus program; it was a program of cartelization called the Nation Industrial Recovery Act, keeping prices and wages high with price and wage controls. Settled science says that’s a good way to throttle the economy. Then in 1935 the New Dealers passed a raft of vote-buying schemes to juice the voters in 1936 that ran out in 1937. But Krugman doesn’t mention the contribution in 1937 of the newly minted FICA tax and the big union wage increases resulting from the Wagner Act of 1935. Settled science says that big tax increases and monopoly wage increases will smother a recovery in its cradle.

The real problem with Keynesianism is not its hair-of-the-dog pick-me-ups. It is that it does a misdirection on the whole meaning of a recession. A recession, according to the Austrian economists, is a period of adjustment in which the malinvestments of the previous boom get liquidated.

In other words, the sooner that people give up on their failed projects, the better. In the case of the 2000s boom, we are talking about failed construction firms, underwater mortgages and insolvent banks. Writes Ludwig von Mises in Human Action:

It is this process of liquidation of faults committed in the boom and of readjustment to the wishes of the consumers which is called the depression.

Go ahead; check it out yourself.

What we call “stimulus” is almost always an attempt by the government to shovel money at its supporters so that they don’t have to readjust their economic behavior to the new conditions. What’s needed instead is for underwater homeowners to give up on their mortgages and stop pumping money into them. What’s needed is for laid-off workers to get a job, any job, as soon as possible. What’s needed is getting new businesses started right now.

But what have the Obamis done? They have pushed green energy, investing billions in loans to Solyndras and Fiskers and Telsas, and billions of subsidies for wind and solar. Get a clue! If these cronies need loans and subsidies it means that their projects can’t make money on their own; they are a drag on the economy, not a boost. It stands to reason that anyone trying to get money from the government is pushing a loser. If it were such a great idea, the venture capitalists would be happy to fund it without government money.

The fact is that millions of businessmen and tens of millions of consumers are much smarter, in aggregate, than a team of politicos and fixers ginning up a stimulus program. This is settled science from another Austrian economist, F.A. Hayek. The politician and the activist can never equal the businessman’s hard-won knowledge of the needs of the consumers.

Now, of course, in a recession the government spends a ton of money on unemployment and food stamps to help people thrown out of work. But recession aid is not stimulus; it is a more like a dead loss to the economy, because it isn’t producing a product.

In 1981, Ronald Reagan cut tax rates and domestic spending: businesses boomed and prosperity returned. In 2009 Barack Obama shoveled money at cronies and supporters and dissed businessmen as millionaires and billionaires. Is it any wonder, Dr. Krugman, that the results are so different?

Christopher Chantrill blogs at www.roadtothemiddleclass.com.

Buy his Road to the Middle Class.

print view

To comment on this article at American Thinker click here.

To email the author, click here.

 

 TAGS


Action

The incentive that impels a man to act is always some uneasiness... But to make a man act [he must have] the expectation that purposeful behavior has the power to remove or at least to alleviate the felt uneasiness.
Ludwig von Mises, Human Action


Chappies

“But I saw a man yesterday who knows a fellow who had it from a chappie that said that Urquhart had been dipping himself a bit recklessly off the deep end.”  —Freddy Arbuthnot
Dorothy L. Sayers, Strong Poison


China and Christianity

At first, we thought [the power of the West] was because you had more powerful guns than we had. Then we thought it was because you had the best political system. Next we focused on your economic system. But in the past twenty years, we have realized that the heart of your culture is your religion: Christianity.
David Aikman, Jesus in Beijing


Churches

[In the] higher Christian churches... they saunter through the liturgy like Mohawks along a string of scaffolding who have long since forgotten their danger. If God were to blast such a service to bits, the congregation would be, I believe, genuinely shocked. But in the low churches you expect it every minute.
Annie Dillard, Holy the Firm


Civil Society

“Civil Society”—a complex welter of intermediate institutions, including businesses, voluntary associations, educational institutions, clubs, unions, media, charities, and churches—builds, in turn, on the family, the primary instrument by which people are socialized into their culture and given the skills that allow them to live in broader society and through which the values and knowledge of that society are transmitted across the generations.
Francis Fukuyama, Trust


Class War

In England there were always two sharply opposed middle classes, the academic middle class and the commercial middle class. In the nineteenth century, the academic middle class won the battle for power and status... Then came the triumph of Margaret Thatcher... The academics lost their power and prestige and... have been gloomy ever since.
Freeman Dyson, “The Scientist as Rebel”


Conservatism

Conservatism is the philosophy of society. Its ethic is fraternity and its characteristic is authority — the non-coercive social persuasion which operates in a family or a community. It says ‘we should...’.
Danny Kruger, On Fraternity


Conservatism's Holy Grail

What distinguishes true Conservatism from the rest, and from the Blair project, is the belief in more personal freedom and more market freedom, along with less state intervention... The true Third Way is the Holy Grail of Tory politics today - compassion and community without compulsion.
Minette Marrin, The Daily Telegraph


Conversion

“When we received Christ,” Phil added, “all of a sudden we now had a rule book to go by, and when we had problems the preacher was right there to give us the answers.”
James M. Ault, Jr., Spirit and Flesh


Democratic Capitalism

I mean three systems in one: a predominantly market economy; a polity respectful of the rights of the individual to life, liberty, and the pursuit of happiness; and a system of cultural institutions moved by ideals of liberty and justice for all. In short, three dynamic and converging systems functioning as one: a democratic polity, an economy based on markets and incentives, and a moral-cultural system which is plural and, in the largest sense, liberal.
Michael Novak, The Spirit of Democratic Capitalism


Drang nach Osten

There was nothing new about the Frankish drive to the east... [let] us recall that the continuance of their rule depended upon regular, successful, predatory warfare.
Richard Fletcher, The Barbarian Conversion


Education

“We have met with families in which for weeks together, not an article of sustenance but potatoes had been used; yet for every child the hard-earned sum was provided to send them to school.”
E. G. West, Education and the State


presented by Christopher Chantrill

Data Sources  •   •  Contact