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Krugman's Warning on Economy

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by Ben Cohen

Part of why I write this blog is to try and synthesize complicated ideas into understandable, compact posts so that busy people can keep up to date with the current events. It's part selfish as it helps me to clarify what I actually think about things (not always immediately evident), but overall, I like to think I provide a useful service.

When it comes to economics, most of the population has been walled off from the 'science' because it sounds far too complicated. As someone who isn't particularly gifted at math or economics (I dropped it at college as it almost put me to sleep), I can tell you that it actually isn't that hard to understand. Economics is called the 'junk science' for a reason: it isn't a science, and it doesn't require a scientist to understand it.

Paul Krugman is one of the rare economists able to translate the mountains of indecipherable jargon into understandable English (although even he is guilty of assuming his readers understand concepts like 'liquidity traps' and 'unconventional monetary policy'). And in his latest column, he spells out why we must, at all costs, not revert to conservative economics even though the economy seems to have gotten through the worst of the recession. By this, he means that we should not obsess over deficits (the debt built up by government through spending money it doesn't have), and should focus on spending more to create jobs and build infrastructure for long term growth. He writes:

Spending money now means a stronger economy, both in the short run
and in the long run. And a stronger economy means more revenues, which
offset a large fraction of the upfront cost. Back-of-the-envelope
calculations suggest that the offset falls short of 100 percent, so
that fiscal stimulus isn’t a complete free lunch. But it costs far less
than you’d think from listening to what passes for informed discussion.
Look, I know more stimulus is a hard sell politically. But it’s
urgently needed. The question shouldn’t be whether we can afford to do
more to promote recovery. It should be whether we can afford not to.
And the answer is no.

This argument between Keynesian economists (like Krugman) and Monetarists (conservatives) has been raging for years, and I still cannot understand how the Monetarist argument still hold weight in the national dialogue.

The historical evidence proves conclusively that large government spending during a recession wields very positive results, while cutting spending leads to disaster. The U.S economy only really started to improve once World War Two started due to the huge injection of government money into military spending. It was so successful that U.S planners designed a whole new system for the economy that used the Pentagon as a way of funneling tax payers money to corporations to build weapons and technology (most of which they didn't need).

So why the argument?

My first guess is that Monetarism (in principle, but not in practice) is popular with corporate America because it doesn't like the idea of government spending that bolsters working class sectors of the economy. It empowers them and makes them a bigger threat to giant corporations that have historically wanted to drive wages down and crush unions. Any time the government works to empower the poor, it has a direct effect on the bottom line of the rich, and they don't like it. Conversely, bailouts that help the rich are conveniently ignored and viewed as an unfortunate necessity in 'keeping capitalism alive'.

Just look at the way beltway commentators reacted to the different bailouts. Most were mute when the government funneled billions (if not trillions) of dollars into the banking system, but suddenly came to life when tax payers money was used to bail out blue collar auto workers. The contrast was shocking and a clear example of corporate America's priorities.

Krugman is well aware of these arguments, and is an advocate for the well being of average people rather than corporations. That is why his column is so important, and most likely why his advice won't be heeded.