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Paul Krugman was on CNBC yesterday calling for more stimulus. He wants to give Congress the ability to spend another $800B in an effort to get the economy going again. He says this is feasible because the bond market is allowing us to “fund” future spending via historically low rates. There are a lot of things wrong here, but I’ll keep my comments brief.

First of all, it’s clear that Krugman is still suffering from neo-classical bewilderment. Despite the operational evidence pointing to the contrary it’s clear that Krugman still believes we are living in a gold standard world where the USA’s deficits really are funded by taxes and bond markets. Unfortunately for Mr. Krugman, we now live in a non-convertible fiat monetatry system where the USA is the monopoly supplier of currency. Nonetheless, he still seems to make the connection that we can afford to spend even though it’s obviously not for the correct reasons.

Second, Mr. Krugman has no qualms about giving Congress the last call on where this money gets spent. This is astonishingly naive in my opinion. The efficiency of the original stimulus package was low to say the least and the latest CBO figures show that the impacts on the economy have been enough to keep us afloat, but far from enough to solve the actual problems. What we have here is a balance sheet recession due to a debt bubble and implosion. So, what we need is balance sheet repair. We don’t need more solutions that merely kick the can down the road. We don’t need to stimulate loan growth or to stimulate the banking sector. We don’t need to prop up the housing sector or to stimulate auto sales. If we’re going to let Congress pass a stimulus bill we should put money in the pockets of the people who need it. If we’re going to spend money on these plans we should actually target the problems as opposed to letting Congress chop up $800B so they can send 75% of it towards programs that will not even resolve the problem.

Mr. Krugman appears to be towing the political party line here by saying that tax cuts won’t help resolve the problem. As usual, he’s letting his politics get in the way of his thinking. I absolutely do not think we should allow a bunch of lawyers and economic nitwits decide how to divide another $800B plan amongst themselves. If we are going to spend even more money on this recession we might as well target the actual cause by putting money in the pockets of US citizens through tax cuts. Specifically, I would prefer a middle class and small business tax cut. If we’re going to bail someone out this time it should be the blue collar workers of America.

This white collar bailout has failed dramatically. Bernanke’s great monetarist bank bailout has failed dramatically. It’s time we stop rewarding the bankers for raping the average American, stop encouraging a debt based recovery and begin thinking of ways to help rebuild the middle class and incentivize small businesses who are the life and soul of this country and the great engine of innovation that has always driven it. Although I don’t think it will resolve the crisis it can help alleviate some of the pressures and we can at least guarantee that the economically incompetent Congress won’t misallocate the funds and spend it inefficiently again.

Update: Krugman is now saying that he was prescient. It’s not that the first stimulus failed, but that it wasn’t big enough…

No, Mr Kurgman, the first stimulus wasn’t only too small. It was too poorly targeted and I don’t seem to recall you having any big issues with letting Congress decide where the money would be spent. Had we put this money in the hands of small business or middle class Americans via tax cuts (perhaps even made the tax credits applicable only to household debt?) we would have done much more to help solve the current debt crisis. Instead, Congress went out and spent $800B on whatever they thought would get them reelected fastest.

Source: Krugman: Let the Lawyers in Congress Spend Another $800B