Jobs, Growth And Government Spending: Krugman Makes Sense

by: YCharts

by Dee Gill

Economist Paul Krugman has long preached that our government's cost cutting measures and corporate tax breaks will lead straight to a 1930s-style economic depression, and this does not make him a popular man with Wall Street's fiscally conservative crowd. But with Europe's economies tanking despite austerity measures, and the U.S. jobs outlook suddenly looking darker, perhaps an objective look at the Nobel laureate's prophecies are in order. [Image Source]

^SPX Chart

^SPX data by YCharts

Krugman contends that government spending cuts, at a time when private companies aren't spending either, inevitably cause economies to contract now and in the future. People with no jobs and fewer benefits can ill afford to buy products, so companies don't have enough demand for their products to hire the people with no jobs. He sees it as a self-feeding cycle of doom any way you slice it, because cost-cutting governments and struggling companies don't buy stuff either.

U.S. governments at federal, state and local levels have been slashing budgets for more than a couple of years now, and for awhile, it looked like companies would eventually fill the void with new jobs. But the latest figures on hiring throw serious doubt on that expectation. Employers added half as many jobs in May as expected, and rosier reports of job additions from earlier months were revised down. The unemployment rate actually ticked up.

US Change in Nonfarm Payrolls Chart

US Change in Nonfarm Payrolls data by YCharts

Tax, regulatory or borrowing incentives for companies-- in the hope that they'll hire more-- has not and will not create more jobs, Krugman contends. He points out that in the U.S., company after company reports that it's lack of sales that keep it from hiring more workers now, period; not lack of access to capital or even uncertain regulation. No one wants to hire workers unnecessarily, tax break or not.

Krugman believes it's governments' role to create jobs – more teachers, public safety officers, construction workers for public works projects, for example -- when the private sector can't. If the government needs to borrow money – or print money, or whatever slur his opponents call it – so be it. Krugman's philosophy says that leaving our children to inherit an economy without jobs is a far worse sin than leaving them with a big debt to pay down. He notes that interest rates are so low that the government can get cash cheaper than ever, and inflation is hardly an imminent threat.

US Core Inflation Rate Chart

US Core Inflation Rate data by YCharts

To understand just how repugnant Krugman's opinions are to fiscal conservatives, listen to the disgust in the voices of a British venture capitalist and a conservative Member of Parliament who debated him over jobs creation economics on a recent episode of "BBC Newsnight." The 8 minute debate is a wonderful primer on the differences between liberal and conservative jobs plans these days.

Krugman points out that austerity measures in Europe have not been particularly successful in staunching the pain of struggling economies so far. He blames austerity measures in Ireland, Greece, Spain and Italy for aborting any recovery and leading to their current unemployment rates between 10% and 24%. Fiscal conservatives, including the Brits who called Krugman "reckless" and "really seriously wrong," blame inadequate austerity measures. They believe deeper government cuts would result in stronger private sector hiring.

U.S. market watchers of all stripes have grown increasingly alarmed by jobs data here, which seem to suggest that our current unemployment rate of 8.2% is either an illusion or unsustainably low. In his current book "End This Depression Now!" Krugman notes that about a million applicants lined up to fill roughly 50,000 new job openings at McDonald's (MCD) last year. The latest labor force participation data suggests that thousands of job seekers have given up looking for work, which removes them from the actual unemployment rate.

US Labor Force Participation Rate Chart

US Labor Force Participation Rate data by YCharts

Krugman accuses some fiscal hawks of pursuing spending cuts not for job creation purposes, but because they're exploiting the situation to attain an ideological goal of smaller government generally. He notes that Sweden, the world's poster child for big government, has survived the economic crises surrounding it quite nicely.

Sweden Unemployment Rate Chart

Sweden Unemployment Rate data by YCharts

It's standard procedure of politicians on both sides of any debate these days to find reasons to dismiss opposing views rather than to mine them for workable parts, and Krugman's Sweden comparison gives his critics a big one. They just write him off as a socialist to be justifiably ignored. He's not – he's all for budget cutting during prosperous times – but extolling the poster child for socialism just paints a big red bullseye on his back.

That's a shame, because unless the economic picture unexpectedly improves in coming months, the U.S. will be forced to face the fact that without government action of some sort, we could be stuck in this hole for a very long time. And when we get serious about doing something, we'll need all the data, all the experience, and all the ideas we can get.

Disclosure: No positions