No, Mr. Krugman, You're Eating America Alive
Neeraj Chaudhary, On Thursday December 23, 2010, 6:36 pm EST
Here we go again. This week, Paul Krugman, the 2008 Nobel Prize winner in economics and the go-to guy for progressives who need a morale boost, launched another misguided attack on Austrian School economists. From his New York Times soapbox, he referred to the free-market Austrian "hard money" philosophy as a "zombie idea" that is inexplicably eating the brains of the voting public.
The attack would hardly be worth a reaction if it weren't for the fact that column did create a buzz. In the piece, he repeated a refrain that has become common for the empirically defeated Keynesians. Said Krugman, "many economists, myself included, warned from the beginning that [President Obama's original stimulus plan] was grossly inadequate." He continued, "[a] policy under which government employment actually fell, under which government spending on goods and services grew more slowly than during the Bush years, hardly constitutes a test of Keynesian economics."
When looking for zombies, the first place Mr. Krugman should look is in the mirror. He has one answer to every problem: eat more taxpayers. He isn't even a true Keynesian. Mr. Krugman is the guardian of a system that died a long time ago. He is the walking undead of the New Deal era.
What Keynes actually said about government spending is that during recessions, governments should run budget deficits to boost aggregate demand, and during expansions, governments should run budget surpluses in order to save up for the inevitable recession years.
Now, whether you agree with this or not - and I happen to disagree with this approach - what we have actually done is run deficits, year-in, year-out, almost every single year for 40 years! And, as a result, we have accumulated a national debt approaching 100% of our annual gross domestic product.
This level of indebtedness has been shown to reduce the level of growth in an economy, no matter how advanced. Yet, Mr. Krugman argues that we should spend more money and run even higher deficits. So, who are the real zombies: those economists who mindlessly favor more and more government deficits in perpetuity, or those who have struggled to warn their fellow man that we are approaching a point of no return?
In the 1990s, the Austrians warned of a tech bubble. The Krugmanites urged lower interest rates and more government spending. In the 2000s, the Austrians warned of a housing bubble. The Krugmanites urged lower interest rates and more government spending. Today, the Austrians warn of a bond bubble that will lead to potential sovereign default. And, with the terrifying zeal of a flesh-eating corpse, Krugman urges lower interest rates and more government spending.
To me, it's very clear: just as a family or a business cannot continuously spend more than it earns, governments must live within their means as well. The US government has had special privileges since 1944 because our currency serves as the international reserve. But we are not behaving as good stewards of this responsibility, and, if we are not careful, the world is going to dump the dollar. If that happens, the trillions of dollars that are held by foreign central banks could come flooding back into the US economy, causing an inflationary period that dwarfs the stagflation era of the 1970s. It certainly won't help that our nation is more dependent than ever on foreign oil.
Austrians believe foremost in sound money - the idea that the amount of currency in the economy should be relatively stable, so that its purchasing power is maintained over time. This minimizes inflation, and allows consumers, businesses, and lenders to make efficient financial decisions. It also keeps government in check, because the Treasury cannot run perpetual deficits and simply print new money when the bills come due. It is no coincidence that our nation's descent into near-constant annual deficits took place right around the same time as President Nixon took us off the gold standard.
Austrians believe that free markets are largely self-regulating. This means that people will tend to make choices in what they perceive to be their own best interest. Government interventions are almost always meant to override individual choice because politicians think they know better. This is not only personally offensive, but leaves us with an economy that can provide less of what people actually want and too much of what they don't want. Look at the housing bubble. Government incentives caused miles and miles of McMansions to be built across the country - houses that most people could not actually afford. In the meantime, productivity was diverted from producing things people actually need and can afford. The result is an economic depression and heart-breaking dislocation for millions of Americans.
Austrian School economists are not zombies. Our philosophy promotes life, liberty, and prosperity - last time I checked these are not the goals which get zombies up in the morning. Meanwhile, economists such as Mr. Krugman continue to argue for lower interest rates, more intervention, more spending, and larger deficits. He advocates for an economic system that feeds off the productive strata of society to support the unproductive. Now there's a philosophy that any self-respecting zombie could support!
Where does it end, Mr. Krugman? At what point do we stop running our deficits and start to pay back the money that we have borrowed? At what point will enough wealth be extracted from producers to support your voracious appetite for spending? Perhaps you think we should we mindlessly devour the purchasing power of our fellow nations until there is nothing left, but what happens when they take a shotgun to our heads?
Neeraj Chaudhary is an experienced Investment Consultant in the Los Angeles branch of Euro Pacific Capital. He shares Peter Schiff's views on the US dollar, the importance of the gold standard, and the rise of Asia as an economic power. He holds a B.A. in Economics from the University of California at Berkeley
The New Ideological Divide
By: Peter Schiff
Monday, June 28, 2010
Despite the apparent deficit-cutting solidarity that emerged from this weekend’s G-20 meeting in Toronto, it is clear that the great powers of the industrialized world have not been this philosophically estranged since the end of the Cold War. Ironically, in this new contest, the former belligerents have switched sides – the capitalists are now the socialists, and vice versa.
We now are witnessing a struggle between two camps that I playfully call the “Stimulators” and the “Austereians.” Both warn that a worldwide depression will ensue if governments now make the wrong choices: the Stimulators say the danger lies in spending too little and the Austereians from spending too much. Each side also has their own economic champion: the Stimulators follow the banner of Nobel Prize-winning economist Paul Krugman, while the Austereians are forming up behind the recently reformed former Fed Chairman Alan Greenspan. (It is cold comfort to witness “The Maestro” belatedly returning to the hard-money positions that characterized his earlier years.)
In a recent Wall Street Journal editorial, Greenspan argued that the best economic stimulus would be for the world’s leading debtors (the United States, UK, Japan, Italy, et al) to rein in their budget deficits, a strategy dubbed “austerity” by the press. Greenspan explains that because lower deficits will restore confidence, diminish the threat of inflation, and allow savings to flow to private-sector investment rather than public-sector consumption, the short-term pain will lead to gains both in the mid- and long-term. Rather than redistributing a shrinking pie, this approach allows the pie to grow. Greenspan’s Austereian view has been echoed loudly in the highest policy circles of Berlin, Ottawa, Moscow, Beijing, and Canberra.
Meanwhile, in several articles for his New York Times column, including one today, Krugman has argued that those who push for austerity in the face of recession are either doing so for political expediency or out of a “crazy” fealty to archaic economic views. Krugman has apparently judged inadequate the trillions of dollars worth of deficit spending unleashed by the United States and European governments in the last 24 months. He believes our only remedy is to spend more – no matter how much debt results. Absent this, he claims, millions of workers “will never work again.” Unfortunately, Washington has clearly aligned itself with Krugman and the Stimulators.
Reading straight from the Keynesian playbook, Krugman argues that cutting government spending now will simply send the economy back into recession. He asserts that by flooding the economy with money, i.e. “stimulus,” governments can encourage consumers to spend. Once the spending creates better conditions, so the argument goes, the economy will be better positioned to withstand the spending cuts, tax hikes, and higher interest rates necessary to address the staggering deficits left behind.
Krugman proposes an enticing argument that is nevertheless built on rubbish. Economies do not grow because consumers spend; consumers spend because economies grow [for a detailed explanation of how this works, read my latest book: How an Economy Grows]. Investment capital comes from savings, and when governments borrow, savings are diverted from private investment. While it is possible for governments to invest as well, it is much more likely that the money will be spent on entitlements or “invested” in projects that may be politically advantageous but economically useless.
Any money spent by governments is not available to the private sector to invest. The Stimulators don’t make this connection because they believe money grows on trees and that a printing press is a legitimate creator of wealth. However, printing money merely encourages people to spend their savings now rather than wait for it to lose value through inflation. This is okay to Stimulators, because stimulating “demand” by any means necessary is the only goal they can see.
What really grows an economy is not more demand, but more supply [also explained in my book]. The Austereian argument is that reductions in government spending will allow the private sector to generate the additional supply of goods and services. Europe seems to understand this; unfortunately, the US does not. Judging by the recent weakness of the dollar – not only against gold, but other fiat currencies, including the pound and the euro – the markets are coming to the same conclusion.
As sovereign-debt worries initially spread throughout Europe, the dollar benefitted. However, now that Europe has demonstrated a willingness to reduce its debts, while we have committed to make ours even larger, the sovereign-debt worries are moving west.
If Greenspan and the Austereians are correct, the stimulus will fail and leave us in a much deeper hole. As long as governments create bigger deficits, we will never have a sustainable recovery. Instead, we will be chasing our tail, and wearing ourselves out in the process. When we finally realize the folly of this approach, the austerity measures that we will then be forced to adopt will make those currently proposed by the Europeans seem relatively painless.
My guess is that before year-end, our stimulus-induced recovery will falter, prompting Obama and Congress to administer even more stimulus. After all, the Stimulators have no other answer. However, given the adverse reaction this will produce in the currency and debt markets, this next jolt will likely vindicate the Austereians, as the world witnesses its greatest power careen into inflationary depression.