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Both Krugman and Wesbury Get It Wrong

Recently, Paul Krugman and Brian Wesbury have both regaled us with their views of the world. Krugman urges policymakers to double down on an obviously failed Keynesian reaction to the fiscal/financial/economic crisis by throwing the “kitchen sink” at the problem. In stark contrast, Wesbury adopts a “what, me worry?” stance, arguing that the current situation bears no resemblance to 1932 and is actually pretty darn good.  

To Krugman, I’d admonish , “hey man, the game’s over. You lost. Give it up.” Keynesian fiscal policy, such as recent government spending has been labeled, has failed as miserably this time as it did in the 1930’s.  The temporary stimuli from tax rebates, cash for clunkers, cash for appliances and homebuyers’ rebates have proven just that - temporary.  As former-secretary of Labor Robert Reich recently lamented, “The economy is still in the gravitational pull of the Great Recession. All the booster rockets for getting us beyond it are failing." Unfortunately, the booster rockets of Keynesian policy always eventually fail, as the government always reaches a limit on how much of the private citizens’ wealth it can spend. Furthermore, the Keynesian booster rockets always fail to ignite the engines of private entrepreneurialism, precisely because they suck the oxygen, or capital, necessary for those engines to ignite. Such is the plight of Amity Shlaes’ “forgotten man.”  Finally, Krugman fails to consider the reality that barring Fed buying of US Treasuries, as during WWII, or confiscatory policies mandating that 401k monies be invested in US Treasuries, we have very little room to issue additional debt. The key legacies of the New Deal and the Great Society, along with reckless Congressional spending, have saddled the US with a fiscal trajectory that the CBO admits is already “unsustainable”.

To Wesbury, I’d concede only that the current situation is not like 1932, but I’d quickly add that we’re certainly in a situation, a Great Deleveraging, akin to the 1930’s. Beyond that, I’d suggest that he leave his office and talk to some of the 20+% unemployed US workers (see Yes 20+%. During the 1990’s, the definition of unemployed was altered to exclude those out of work over a year. Perhaps that was a reasonable move during reasonably healthy economic times, but during this period of pernicious, structural unemployment, it woefully understates the trouble a significant portion of American citizens are in.  Any robustness in data derives from the false signals provided by government “booster rockets”, which we argued above are temporary and vain.  A look at the uncertainty facing business due to government intrusion, the fiscal cliff confronting state and local governments, and the leading indicators index, which includes the collapsing equity market and bull flattening yield curve, suggests anything but a rosy picture for the economy.   

If forced to pick one year in the 1930’s that we might most closely compare to the present situation, I’d pick 1936 or 1937. That was the period when FDR finally overreached and the public began to distrust the New Deal.  Various developments during that period also ring eerily familiar. Nationalized healthcare was talked about. Taxes went up. The federal government, realizing the limits of its spending capacity, cut back on stimulus. And the Fed, spooked by the specter of inflation, increased the reserve requirements for banks. Not surprisingly, the economy tanked and the stock market collapsed - again.

Do I have a policy alternative I could suggest that would undo the damage? In a word, no. Have you ever tried to console someone riding the “porcelain bus” after a long, drunken bout? There’s really nothing to offer. US policymakers have spent the last 70 years squandering the benefits reaped by the industrial revolution and the successful prosecution of WWII, which left the US as the only undamaged major power.  There is a heavy price to pay for such neglect.  The sins of the father are visited upon the children.  About the only thing policymakers can do is responsibly enact laws that set the stage and provide the environment for the free society unfettered by central government planning that the founding fathers envisioned.

Disclosure: No Positions