As fiscal policy, government “stimulus” schemes have a good reputation, but undeservedly so. Invariably they only undermine and delay recoveries. “The economy,” remember, is what remains today of our private system of production; it can’t be “stimulated” by government taking more of its precious resources (savings) through borrowing, and then spending the proceeds on those who don’t work (i.e., don’t produce wealth) or on those who exhibit a greater “propensity to consume” (i.e., to destroy wealth). In contrast, fiscal “austerity” plans tend to have a bad reputation, but also undeservedly. Invariably such plans entail additional taxation of the private sector but no real restraints on government spending. Austerity programs, in truth, are perfectly compatible with renewed prosperity, if by “austerity” is meant not additional tax burdens laid on a struggling, ailing economy but material reductions in the size, scope and cost of government.
According to Keynesian Paul Krugman, austerity plans are “self-defeating.”As he puts it, “there’s quite a good case to be made that austerity in the face of a depressed economy is, literally, a false economy – that it actually makes long-run budget problems worse.” Well, “yes,” if austerity means more taxes imposed on the economy’s producers, but “no,” if instead it means spending cuts imposed on the economy’s non-producers (politicians). Krugman denies this, because he opposes reductions in government spending, and wants higher taxes on the rich, even in today’s context, a context he describes as a “depression,” and which, he adds, has been caused not by vast stimulus spending, to date, but by too little of it. In the 1990s it was Krugman who most loudly championed Japan’s innumerable and reckless “stimulus” schemes, together with dozens of rounds of “quantitative easing” (fiat money printing). Japan followed his advice and ever since then has suffered a secular stagnation. Since 1990 Japan’s public debt has ballooned from 68% to 233% of GDP; its money supply is up 286%, while its industrial output is lower by 3.4% and its equity index is down by 73%. This is what Keynesians “stimulus” has done for Japan – and Krugman wants the same for the U.S.
Mr. Krugman repeatedly invokes the magic multiplier, the bogus claim that when we spend our own dollar we boost GDP by a dollar, but when the government takes it and spends it, GDP is boosted by $1.40. Wow. Fabulous. Government spending not only “pays for itself,” but more than pays for itself. On this view, were government to take everything we earned and spend it, the economy might well expand to the moon. Is it magic – or voodoo? Krugman used to ridicule supply-side economists from the 1980s for saying tax cuts “pay for themselves,” even though no supply-sider ever actually said that, but for decades he’s been pushing this myth that government spending more than pays for itself. Who’s really practicing voodoo here?
Given decades of Keynesian myth-telling, most people today still believe that if economic recoveries are weak it’s because of too little government spending. “What’s hurting the recovery,” Krugman said recently, is “cutbacks at the public sector” level. The Nobel Prize winner calls a 24% increase in federal spending a “cutback.” Huh? Was he citing state and local spending? That’s up 9% since 2008. Dubious math skills aside, Krugman’s undying belief in the ole’ magic multiplier of government spending makes him insist that the world economy would benefit from what he fantasizes to be a government spending spree to repel space aliens. As he told CNN last summer, “If we discovered that space aliens were planning to attack and we needed a massive buildup to counter the space alien threat, and inflation and budget deficits took secondary place to that, this slump would be over in eighteen months. And then if we discovered, oops, we made a mistake, there aren’t actually any aliens, we’d be better off.” This is what passes for “economic science” today: sheer quackery, posing as profundity. In the same voodoo vein, Krugman’s idol, Keynes, wrote in 1936 that only the biases of free-market economists prevented the world from grasping the plain truth that prosperity can be fostered by “pyramid-building, earthquakes, even wars.” Krugman agreed with George W. Bush only once, in 2008, when the president, echoing Keynes, insisted the Iraq war would boost GDP.