Misnomers and Keynesian Spending

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Unstimulating…

In his mistitled book, “End This Depression Now! “, liberal economist Paul Krugman writes that our economic situation today is no different to that of the Great Depression of the 1920s and 1930s.  According to Krugman, it follows that we should be following the same Keynesian spending policies that, he contends, worked in the past. Of course, this is music to those on the left who want to spend, spend, spend. 

But it’s not true.  A depression involves a large sustained fall in output and high unemployment and a recession is two consecutive quarters of negative growth in Gross Domestic Product.  The U.S. economy has grown in each of the last twelve quarters, albeit at rates trending well below the post-war average of 3.3 per cent.  By contrast, between 1929 and 1933, GDP fell for four consecutive years. 

Unemployment in the United States is higher than the post-war average of 5.8 per cent but it is much lower than the levels of 20-25 per cent that were sustained between 1932 and 1934. 

So we simply cannot say that America is in a depression, or recently has been in one.  The recession ended in 2009.  Liberals like to label our poor economy a “depression” because they think it helps them to sell their radical spending policies to the public.    And for Krugman, the dishonest title sells more books than, “End This Slow Economy Now!” 

While some parallels exist between now and then – such as low levels of private sector investment – they do not amount to a replication of the Great Depression and the stock market crash of 1929.  The  basic economic problem today is vastly different than that of the 1930s. 

When the stock market crashed in 1929, federal debt was running at around 20-25 per cent of GDP, compared to around 100 per cent today.  It was the same in the UK, which had paid for World War One largely by selling assets rather than by borrowing. 

Today, the U.S. government already has a $16 trillion debt and is adding to it with a deficit of over $1 trillion a year.  Federal indebtedness is getting worse because of entitlement programs growing at a much faster rate than the economy.  It is the same situation in Europe, where Greece, Italy and Spain, among others, have more debt than they can restructure and service. 

Moreover, structural problems remain in the United States housing sector as a result of so-called “affordable housing” policies, Congress has discouraged private investment (Sarbanes-Oxley, Dodd-Frank), and the Obama Administration has been overtly hostile to business.  

The idea that governments should expand unemployment and welfare entitlements to boost economic activity has been discredited.  While most of this money will indeed be spent, in economic terms it merely transfers money from productive to less productive uses, increases the tax burden and debt and discourages some recipients to seek work.   When Washington bails out Democrat-run debt-laden states and funds more entitlements it doesn’t stimulate the economy – and we all can see that it hasn’t created jobs. 

Not surprisingly, the so-called stimulus programs – that Democrats mislabel as “job creation plans” – have failed to do much more than expand federal indebtedness.   Democrats wanted to use the power of the federal purse to expand government and use Keynes’ writings as their excuse.  But Keynes would be alarmed that his writings justify today’s lax and uncontrolled federal spending.  In the 1930s a crisis of economic confidence had caused private investment to dry up and public spending was introduced to jolt the economy into greater activity.  Today public spending is suppressing – or crowding out – the private investment that really creates jobs. 

Krugman is equating today with completely different events that took place eighty years ago.  He wants more and bigger spending.  But the problem with the United States economy is structural and has a $16 trillion government price tag attached to it.  We are not in Depression.  We are in a sovereign debt squeeze.   Federal spending is the problem, not the solution. 

 

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