Paul Krugman And The Government Spending Panacea

I was looking for love in all the wrong places

Looking for love in too many faces

Searching their eyes, looking for traces of what I’m dreaming of

            —Waylon Jennings, Looking For Love


Dr. Keynes—er, Krugman—is at it again.

His latest piece “Looking to the iPhone for Economic Stimulus” focuses on a JPMorgan report predicting that Apple’s introduction of the iPhone 5 may provide a boost to GDP.  And there, Professor Krugman thinks he’s found a clever bit of intellectual judo.

Ah-ha,” he says.  “People spending money to buy iPhones means a boost to GDP.”  Krugman extrapolates from that that spending in the abstract equals growth.  And if you think that’s a good thing, he argues, then you should support increased government spending.

Gotcha, you small-government simpleton.

If only it were that easy.

To begin with, Krugman—as usual—plays it loose with the facts, complaining that government employment and public investment have “plunged,” and implying that this plunge is the culprit delaying any recovery.  In reality, the August jobs report showed total government employment dropped a whopping 7,000 jobs since July, a total of three hundredths of one percent (0.03%).  Not exactly “plunging.”  Federal government employment actually rose by 3,000.  Viewed a little longer term, total government employment has hovered between 22,000,000 and 21,900,000 over the last year, and it’s down a grand total of 0.75% since August 2011.  The notion that public sector employment is “plunging” is simply false.

Nor is it clear what “public investment” Krugman thinks is “plunging”; he must have missed the $800 billion “stimulus,” the nearly $500 billion in TARP bailouts and government takeovers, and the $2.5 billion in failed green energy startup loans to Solyndra and other Obama bundler ventures.  Unless, of course, what he means is that public spending has “plunged” since these massive projects, in which case he’s just engaging in the ancient Left fallback of “you didn’t spend enough.”  And isn’t it interesting that Krugman argues that government spending is needed now to prompt recovery from what he repeatedly refers to as a “depression,” when he has previously contended that “the stimulus worked.”

What is true is that neither government employment nor public investment have really done anything to pull the economy out of the now nearly four-year long recession.  That’s a fact that is more than a little inconvenient for Professor Krugman, so he does what he always does, which is ignore it and tell you a lie that supports his fetish for more government.

To his credit, Krugman correctly notes two critical factors in economic growth.  On the one hand, Apple’s launch of the iPhone 5 is predicted to have a significant positive impact.  Why?  Because it gets people out into the market spending money.  Krugman gets this.  On the other hand, Krugman also correctly observes that companies are sitting on a lot of cash and not making investments in their businesses, and the lack of jobs as a result means that consumers aren’t spending.  But Krugman fails to make the connection between the launch of the iPhone and business reinvestment, nor does he ask the critical question why businesses aren’t reinvesting.

The iPhone 5 represents an example of innovation; Apple has created a product people want, which is why they will line up to buy it, thus generating spending and positively impacting growth.  There would be more of that kind of thing if businesses were reinvesting their capital.  But they’re not, and the reason they’re not is that they’re uncertain about the future, particularly as it relates to how much of their cash the government is going to take, and how much of their cash they’re going to be forced to spend complying with additional government regulation.

And this is where Krugman fundamentally misses the boat.  Businesses and consumers aren’t spending, so his solution is for government to fill that spending void.  The problem with this kind of thinking is that all spending is not equal.  When businesses and consumers spend, they’re spending their own money; it is a true injection of activity into the marketplace.  Government, however, doesn’t have its own money to spend.  It can only spend what it takes from businesses and consumers (or, alternatively, what it borrows, another favorite remedy of Krugman).  Not only does government spending merely put back into the market capital that government took out of the market, but it’s this very threat that government will increase taxes in order to fund additional spending that makes businesses and consumers hesitant to spend in the first place.  Even if you accept Krugman’s core premise that government spending is just as good as private spending—which it’s not—by relying on government spending you’re perpetuating the underlying problem that private concerns have less and less to spend on their own.

Krugman admits the economy will recover on its own.  What he’s advocating is make-work; the artificial creation of jobs to do work that the market at present does not need (if it needed them, the jobs would already exist and be filled).  That is not a sustainable economic model.  Furthermore, by shifting spending from the private sector to government, you move from a model where the decisions that drive the economy are spread across millions of decision makers engaging in billions of small-scale transactions, to a model where the entire economy depends upon a few gigantic decisions made by a tiny handful of government masterminds.  This hyper-concentrates risk, while minimizing the number of opportunities for successful innovation.

Darwin would not approve.

Finally, it is apparent that Professor Krugman has never actually seen the Constitution.  There is no provision authorizing the federal government to take money from the citizens for the purpose of spending it in order to stimulate the economy artificially.  The regulation of interstate commerce was never meant to make the federal government the driver of the economy.  What it was meant to do is to get protectionist state governments out of the way so that private citizens could engage in that trade that best fit their individual needs and furthered their individual desires and ambitions.  That is what a free market economy is, and it is how we function best.

Professor, government is the problem, not the solution.

And I can think of about 16,000,000,000,000 additional reasons government does not need to spend more.


EDITOR’S NOTE: This marks the 150th installment of Chasing Jefferson.  Thanks for your continued support and encouragement–keep spreading the word, and keep the discussion going.



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