Paul Krugman is a controversial economist to say the least. In recent years he has become famous for anti-austerity pleas, insisting that governments need to keep up deficit spending to ward off an intensifying of the global recession. I would agree that governments can ideally help ease downturns where possible through stimulative spending in things like infrastructure. My point would be, not all government spending is equal in this. It matters what governments direct taxpayer dollars into, if they are to be helpful in moderating the extreme highs and lows of the business cycle.
The trouble is that governments have been notoriously bad at moderating the upswing in risk and credit. Indeed politicians tend to follow not lead, jumping onto status quo bandwagons accelerating risk to the upside. And as we have seen in the past few years, when the inevitable downside hits, where governments could have had a moderating effect on pain in the real economy, they have foolishly squandered finite, precious resources by trying to resist needed changes and bail out undeserving institutions and their leaders in sectors like banks and car companies. So much revenue and deficit spending was misdirected to wrong headed moves at the start of the financial crisis, that there is much less available now to help moderate the next phase of contraction.
In this interview, Krugman makes some very insightful points on money, cognitive dissonance in wealth and power, and the general human desire to be liked and respected. Here is the direct link.
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I’ve seen numerous interviews of Mr. Paul Krugman. I call his approach to fiscal policy “Free Lunch Economics.” Krugman seems to believe that governments can simply create as much money as necessary and pretend that economic contractions should not exist.
What he consistently fails to address (or simply ignores) is the inconvenient fact that the money the government creates comes directly from the savings of hardworking individuals. The result is a transfer of wealth from prudent savers to people living beyond their means. This is the quintessential definition of moral hazard. It is patently unfair, and it is not the way to build a sustainable economy, or a sustainable society.
The government should encourage savings and investment, and strongly discourage the use of non self-liquidating debt. This would make consumables funded more from savings and debt ban be put to more productive use. The problem is, both the government and banks thrive on inflation. So while they pretend to encourage savings via incentives like retirement tax shelters, in reality they want people to take on more and more debt for everything from two-storeys to tvs. This debt comes from money created mostly out of thin air. Anyone who has ever doubted this just needs to survey both fiscal and monetary policy actions taken since the start of the GFC.
You cannot address reckless spending with more reckless spending. Money must be collateralized by real wealth. Otherwise, creating more of it just debases the money already in existence. But Krugman simply never addresses this fact. His solution is to simply keep spending until… what? Actually, as far as I can tell, his end point can only be the actual collapse of the currency, because it would only be at that point that we would know that further spending won’t work. I can’t believe a nobel-winning economist either doesn’t understand inflation or simply chooses to pretend it does not matter. He is extremely dangerous to the US and world economies.
I agree with Krugman’s point about bailing out the elites. But he rather perniciously uses that argument to justify across the board reckless spending, which will only hurt savers even more that the financial bailouts already have. Also, I don’t believe that the rich should pay any more taxes than the rest of us. I think that, beyond a certain tax-free base income, everyone should pay the same flat rate, and that the tax code needs to be greatly cleaned up and simplified.