Sunday, December 16, 2012

Voodoo Economics

Paul Krugman is still using voodoo economics to explain why we should endlessly borrow money to operate the government at a deficit. I don’t know where he gets this stuff, but he certainly did not get it from John Maynard Keynes. In his blog yesterday he says that, “For starters, we need to be aware that we don’t need a balanced budget to have a stable fiscal situation; all we need is for debt to grow no faster than GDP.”

This is his theory that suggests that if your boss gives you a raise you should immediately go out and borrow more money, because the more money you make the more money you should owe. He’s not alone in this, many economists think the same, but everyone believes him because he’s from Princeton and he has a Nobel Prize. So does Barack Obama, for spreading peace around the world.

There might be a shred of validity to his theory if GDP measured wealth, but it doesn’t; it measures cash flow. If I’m paying you $10 to mow my lawn and you decide to charge $15 instead, then my contribution to the GDP has increased, but no capital has been accumulated and no wealth has been created by that change. There is merely half again as much money flowing.

So what Krugman is saying is that the more money you spend the more you should owe. There is some truth to that, because the more money you spend the more money you will owe unless your income goes up, which is sort of what budgets are all about. Who budgets with the intention of going ever deeper into debt? If I can’t afford to pay you $15 to mow my lawn then I should not agree to the increased charge unless I get a pay raise. What I should not do is borrow $5 every time you mow my damned lawn.

Not to mention that the GDP includes the deficit spending, so Krugman is including the increase in the deficit spending to justify the increase in borrowing, which is sort of a self licking ice cream cone. We are spending more borrowed money, therefor we should borrow more money. I just shot myself in the foot, therefor I need more bullets.

And just to burn the toast a little more, an increase in GDP can be and often is caused by nothing more than inflation, which John Maynard Keynes abhorred. In fact half of the GDP growth that Krugman illustrates is inflation, as he says, “estimates of long-run growth and inflation put them at a bit more than 2 and 2 respectively,” and then claims GDP growth of 4% annually in his argument. So if the economy is weakened by inflation, lets use that as justification to weaken it further by increasing the federal deficit. Or to put it another way, our borrowed money no longer buys as much so lets borrow more money.

He has not yet claimed that we should borrow more money because the Sun is still rising in the East, but I have no doubt he’ll get there soon.

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