Paul Krugman May Be the World’s Last Flat Earth Economist

Assumptions of the past need revision for the future

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Here’s How to Really Fix Our Problems

Instead of spending more money on the assumption we’ll deal with the problems for having done so later, as Dr. Krugman advocates, what we need to do is cut spending radically.

Our government needs to get out of the way and free up the true capital needed for growth. We need to let dead financial institutions die, including, if necessary, parts of our nanny state itself.

At the same time, we need desperately to return to a strong, fixed-value dollar. From 1790 to 1970 we had one, and the U.S. economy grew at an average annual rate of 3.94% according to Louis Woodhill, who noted as much in Forbes last August.

That stands in stark contrast to the 2.81% average annual growth rate for the “fiat” period of 1970 to the present, when our dollar has been allowed to float freely against other currencies and the Fed has been able to print money at will.

Krugman, like other classic Keynesians, has argued for a weak dollar on the assumption that it helps exports and thereby strengthens the economy.

Here, too, the data suggests otherwise. Woodhill noted that dating back to 1950 when the Bureau of Economic Analysis began tracking such things, presidential terms that coincide with strong rising dollar periods reflect average real GDP growth of 3.21% a year. Presidential terms when the dollar is stable produced average real GDP growth of 3.58% a year, while presidential terms when the dollar was falling chalked up a much lower 2.23% average real GDP growth.

And finally, Krugman has argued that the rising inequality of wealth and the irrationality of the markets are primary causal factors behind the mess we’re in. So, logically, he wants to spend more money as a means of equalizing both.

He should know better. Higher capital risks equal higher capital returns.

If the government seizes capital, which is effectively what it is doing by printing and diverting expenditures, it lowers both the return on investment and, not coincidentally, the incentive to invest in the first place.

This is why businesses are not spending money and the government cannot kick-start lending at the consumer level, no matter how hard it tries. People have been so badly scarred by the financial crisis that they don’t want more debt — even if it’s free.

The other flaw in Dr. Krugman’s argument is that cheap capital and government spending does not constitute effective investment. In fact, it creates “malinvestment.”

This is a term from the Austrian school of economics that refers to pricing distortions caused by unstable money that actually causes businesses to invest in the wrong assets at the wrong time.

The housing bubble is perhaps the best example in modern times of what I am talking about in this instance. Fueled by an orgy of debt, unregulated derivatives and congressional leaders who determined that housing was a right not a privilege, billions in capital was diverted. For lack of a better term, it was “malinvested” and the results should not have been surprising in the least.

Imagine what would have happened if that money had been appropriately invested in real manufacturing, with real products and real jobs?

The truth of the matter is that more spending would be tremendously counterproductive and our deficits are already a problem. The 10-year picture is not okay…it’s terrible. We crossed the point of marginal gain a long time ago.

Then again, there’s always the little green men.

As Dr. Krugman noted on CNN August 8, 2011, defense against space aliens via ditch digging and bulwark building would create a viable economic build-up that would end “this slump [in] 18 months.” If they never arrive, he posited, we’d still be better off economically for having prepared.

I’m not so sure


Article printed from InvestorPlace Media, http://investorplace.com/2013/02/paul-krugman-may-be-the-worlds-last-flat-earth-economist-nyt/.

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