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Paul Krugman "I Told You So" Keynesian Stimulus Economic Nonsense

Economics / Economic Theory Oct 12, 2010 - 04:49 AM GMT

By: Mike_Shedlock


Best Financial Markets Analysis ArticleAs predicted on numerous occasions, Paul Krugman is once again pleading for still more Keynesian stimulus. Please consider Hey, Small Spender

Here’s the narrative you hear everywhere: President Obama has presided over a huge expansion of government, but unemployment has remained high. And this proves that government spending can’t create jobs.

Here’s what you need to know: The whole story is a myth. There never was a big expansion of government spending. In fact, that has been the key problem with economic policy in the Obama years: we never had the kind of fiscal expansion that might have created the millions of jobs we need.

And a side consequence of this awkward positioning is that officials can’t easily offer the obvious rebuttal to claims that big spending failed to fix the economy — namely, that thanks to the inadequate scale of the Recovery Act, big spending never happened in the first place.

But if they won’t say it, I will: if job-creating government spending has failed to bring down unemployment in the Obama era, it’s not because it doesn’t work; it’s because it wasn’t tried.

Never Enough

No matter how much money Government spends it will never be enough because government cannot create lasting jobs. As soon as the stimulus spending stops so do the jobs. No matter how many times Austrians insist Krugman look down the road to what happens to his Fantasyland model when the stimulus stops he refuses to discuss this simple point.

It is impossible to debate Keynesian clowns because no matter how much money they blow building bridges to nowhere like Japan did, the answer will always be "It wasn't enough".

I Told You So

The easiest prediction in the world to make was that Krugan would whine "I Told You So".

I discussed the prediction in Are we "Trending Towards Deflation" or in It?

Actually, we have seen a never ending parade of "I Told You So's" from Krugman but this one tops them all.

Indeed, he has taken his whining to a new level by claiming "If job-creating government spending has failed to bring down unemployment in the Obama era, it’s not because it doesn’t work; it’s because it wasn’t tried."

No Paul, it's because it doesn't work, no matter how hard you try.

Cheering the Loss of Government Jobs

Krugman whines about the loss of government jobs.

"Consider, in particular, one fact that might surprise you: The total number of government workers in America has been falling, not rising, under Mr. Obama. A small increase in federal employment was swamped by sharp declines at the state and local level — most notably, by layoffs of schoolteachers. Total government payrolls have fallen by more than 350,000 since January 2009. "

I openly cheer the loss of government jobs, and did so recently in Economic Nonsense from Ezra Klein at the Washington Post

The only genuinely good news in Friday's jobs report was the much needed shedding of 159,000 government workers of which only 77,000 were temporary census workers.

Shed another million government workers and you have a small start as to what needs to happen. Some don't see it that way, including Erza Klein at the Washington Post. ...

No Better Time than the Present to Kill Government Jobs and Benefits

Giving states free money just to keep public workers employed delays a much needed realignment of government wages and benefits with that of the private sector. Some might argue this is not the time for it. However, such thinking is foolish.

States are in this mess because of unsustainable spending, and pension promises. Pensions alone are a $3 trillion problem. Please see Interactive Map of Public Pension Plans; How Badly Underfunded are the Plans in Your State? for details.

It is axiomatic that the cure and the disease cannot possibly be the same, so throwing money at the problem cannot possibly be the solution.

There is no better time than the present to get rid of government workers and lower pension benefits. Kicking the can down the road solves nothing.

Greece and Spain put off tackling the issue of public sector wages and benefits, and look what happened to them. Ultimately the bond market imposed its own (badly needed) solution. We can either take care of this mess now, or suffer a similar fate later.

Deficit Spending Unsustainable

Deficit spending is unsustainable. Unfortunately it is rising because Keynesian clowns who have learned nothing about the lessons of Japan or Greece, insist it is not a problem. Yes, Japan has not blown up yet, but it will. We just do not know when.

Japan has squandered all of its surplus building bridges to nowhere and other nonsensical things. It now has a debt to GDP of 200%, highest in the G-20.

All it takes for this to be a major, major problem is for interest rates in Japan to rise a few percent. When that happens, (and it will), it will take all of Japan's tax revenue, just to pay interest on the national debt.

I believe 7th graders can easily understand the problem of deficit spending even if Nobel Prize willing economists and other clowns can't.

Scrap Davis-Bacon, It's a Real Porker

Without a doubt states need to get a grip on finances. The correct solution is to reduce pay and benefit levels of government workers, privatize anything and everything that can be privatized, and scrap the Davis-Bacon Act along with all prevailing wage laws.

Davis-Bacon ensures that taxpayers pay the most for the least amount of work. The goal should be to get projects completed at the least cost to taxpayers.

For more on prevailing wage laws and the enormous inefficiencies they create, please see Thoughts on the Davis Bacon Act

Tunnel of Idiocy

Krugman calls the possible cancellation of a second tunnel connecting New Jersey and New York by governor Chris Christie a Tunnel of Idiocy.

The merits of the project can be debated all day, but what is not debatable is large cost overruns on every such project on top of huge initial cost estimates in the first place.

The reason for these high cost estimates and the inevitable overruns has everything to do with union salaries and prevailing wages.

Want that tunnel? It's simple. Scrap Davis-Bacon. There would be a line 20 miles long for those construction jobs if you did, and the job would come in on-time and under-budget.

Seen and Unseen

The problem with Keynesian clowns is they simply cannot look at the seen and the unseen consequences of their economic models.

To be sure, government can create jobs by paying everyone to spit at the moon. But the spending comes at a cost. That cost is a cheaper dollar, and rising interest on the national debt that at some point will consume all federal revenues.

What then?

Well Keynesian clowns never discuss "what then?" because in their fairy tale world everyone lives happily ever after if only government spends enough money.

Frankly, 7th graders can see the asininity of such free lunch proposals, even if Nobel Prize winning economists cannot.

Firing Public Union Workers Creates Jobs

This might sound strange until you think it through, but Firing Public Union Workers Creates Jobs.

Public unions in New Haven, Connecticut have not yet gotten the message that business-as-usual no longer flies. I am quite happy with that because the city responded by dumping public workers and privatizing services, and that is exactly what needs to happen.

Rebuttal to Union Complaints

Public union custodians argue that privatization would lead to lower wages, lost jobs, and wasted taxpayer money on costly management contracts.

Lower Wages: Let's hope so. The union workers are overpaid even if they cleaned the schools like they are supposed to do.

Wasted Taxpayer Money: No, that is a blatant self-serving union lie given the district saves at least two-thirds of the cost of using union-only labor, “and the work gets done.”

Lost Jobs: Not a chance. There will actually be more jobs as a result of getting rid of the unions.

How so? For starters, there will be an equivalent number of private jobs to replace the union jobs. Moreover, given the district saves 67% on cleaning costs, some of the saved money will be used on other school district needs, creating more jobs. Finally, some of the savings can be used to cut back on tax increases putting more money in the pockets of taxpayers who will spend it. That too creates jobs.

Every fired public union worker creates more jobs elsewhere, faster than most can imagine possible, quite possibly immediately.

Thus, a good way to deal with rising unemployment is to fire public union workers.

Getting Rid of Government Workers is a Winning Proposal

Getting work done for lower prices puts more money in the pockets of taxpayers who will make far better use of it than politicians who use taxpayer money to buy union votes. It also makes projects more affordable so more of them can be done for the same amount of money.

If pay scales are cut to match the private sector, the jobs can actually stay (or be privatized), AND taxes lowered at the same time.

Thus getting rid of government jobs is a win-win for everyone but the overpaid, ungrateful public union workers who always want tax increases to support their undeserved pay and benefit scales.

Who's Responsible for the Loss of Government Jobs?

The ultimate irony in Paul Krugman's and Erza Klein's posts is that public unions are responsible for all the government job losses they are whining about.

In every state worker cutback instance that I have read about (dozens if not hundreds), public unions have resisted modest cuts in pay and benefits and instead have voted to cut jobs.

Thus, public unions themselves are responsible for that modest loss in jobs.

Policies That Support Growth

The correct way to spur growth is by fostering an economy that supports economic growth.

For details, please see Bleak Outlook for Small Businesses and Job Creation; Where Obama Went Wrong, and What to do About It.

Correct Solution Takes Time

Will there be pain to make the necessary adjustments? Of course there will. Look at Greece and Spain. But the longer we delay tackling the structural problem of too much government spending, the greater the overall pain.

Keynesian clowns pretend there is some sort of free lunch, that we can spend our way to prosperity.

Well it cannot be done. Numerous countries have tried and all have failed.

Final End of Bretton Woods 2?

Tim Duy is discussing the Final End of Bretton Woods 2?

In essence, a nasty surprise awaited US policymakers - after two years of scrambling to find the right mix of policies, including an all out effort to prevent a devastating collapse of financial markets and a what Administration officials believed to be a substantial fiscal stimulus, the US economy remains mired at a suboptimal level as stimulus flows out beyond US borders. The opportunity for a smooth transition out of Bretton Woods 2 was lost.

Consider the enormity of the situation at hand. The Federal Reserve is poised to crank up the printing press for the sake of satisfying their domestic mandate. One mechanism, perhaps the only mechanism, by which we can expect meaningful, sustained reversal from the current set of imbalances is via a significant depreciation of the dollar. The rest of the world appears prepared to fight the Fed because they know no other path.

Dual Mandate Idiocy

Consider the idiocy of a dual mandate. Monetary policies cannot create jobs. The reason should be easy to spot. The Fed can create liquidity, but it cannot determine where it goes, or indeed if it goes anywhere at all.

Fed Has Two Options

1: The Fed can defend an interest rate target but will then have no control over money supply

2: The Fed can defend a money supply target but it will then have no control over interest rates

Notice that nowhere in the picture is there an option for the Fed to create jobs. It cannot be done.

Tim Duy: Bad things happen when you fight the Fed. You find yourself on the wrong side of a whole bunch of trades. In this case, I suspect it means that Bretton Woods 2 finally collapses in a disorderly mess. There may really be no other way for it to end, because its end yields clear winners and losers. And the losers, in this case largely emerging markets, [are] not prepared to accept their fate.

Arrogant Claptrap

The "Bad things happen when you fight the Fed" comment from Duy is quite arrogant.

After all, the Fed's policies under Greenspan and Bernanke fueled the biggest housing and credit bubbles the world has ever seen.

Bernanke, failed to see the recession coming, failed to see the housing bubble, failed to see the unemployment rate rising above 8.5%, and just plain failed at damn near everything.

For Christ's sake we would not be in this big of a mess were it not for the Fed and its idiotic manipulation of interest rates, trying to meet some asinine (as well as physically impossible) dual mandate.

No Tim! Bad things happen when the Fed does not know what is doing, which by the way is always.

Indeed that is corollary number 1 of 4 of the Fed Uncertainty Principle.

Fed Uncertainty Principle:

The fed, by its very existence, has completely distorted the market via self reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market is to blame for the Fed's actions. There would not be a Fed in a free market, and by implication there would not be observer/participant feedback loops either.

Corollary Number One:

The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn't know (much more than it wants to admit), particularly in times of economic stress.

Tim Duy: Well, thank the Heavens above, the IMF stands ready to produce a report. Now I can sleep easy.

On that score I happen to agree with Duy's sarcasm and said so in PBoC Researcher says China Should "Set Red Line for Yuan Appreciation at 3%"; IMF Participants Pledge to "Create Reports"

Tim Duy: Bottom Line: The time may finally be at hand when the imbalances created by Bretton Woods 2 now tear the system asunder. The collapse is coming via an unexpected channel; rather than originating from abroad, the shock that sets it in motion comes from the inside, a blast of stimulus from the US Federal Reserve. And at the moment, the collapse looks likely to turn disorderly quickly. If the Federal Reserve is committed to quantitative easing, there is no way for the rest of the world to stop to flow of dollars that is already emanating from the US. Yet much of the world does not want to accept the inevitable, and there appears to be no agreement on what comes next. Call me pessimistic, but right now I don't see how this situation gets anything but more ugly.

Monetarist Nonsense

Here are a few stats from my friend "BC"

Since Q1 '07:

  • Increase in total reported gov't spending: $926B or 6%/yr.
  • Total gov't receipts: -$300B
  • Increase in the Fed's balance sheet: $1.3 trillion or 28-29%/yr.
  • Increase in banks' Treasury, agency, MBS, and cash assets: $1.3 trillion or 14-15%/yr.
  • Increase in nominal GDP: $789 billion or 1.7%/yr., of which gov't spending was 117%
  • Increase in private nominal GDP: -$135 billion or -0.44%/yr.
  • Total stock market capitalization: -$4.7 trillion
  • Total US residential unreal estate equity: -$4.8 trillion

Will QE II, III, etc., work any better?

Bernanke Incapable of Learning Anything

Bernanke is completely inept, failing to learn anything from history. Yet, Ironically he is given great acclaim as being a student of the Great Depression.

Here are a few snips from Lessons Not Learned - No Failure Too Great to Admit It

No Failure Too Great to Admit It

Japan is in debt to the tune of 200% of GDP, which is all it has to show for all its Keynesian and Monetarist stimuli over the past decade. So what does Japan do but toss another $61 billion into the fire, fresh on the heels of an $11 billion stimulus plan.

$72 billion total may not sound like much these days, but it is a sizable chunk of money for Japan's economy. Supposedly these stimuli will "boost employment, help small and medium sized businesses, and support regional economies".

It will do no such thing. If these stimulus efforts worked, there would be results to show for it.

Yet the only conclusion of the Keynesian and Monetarist clowns is that Japan did not do enough!

This should be a lesson for the US, but it won't.

Sharing the Blame

When this mess collapses, the monetarist clowns at the Fed and the Keynesian clowns in Congress will share the blame.

In a final twist of fate, the Keynesian clowns will blame the Monetarist Clowns and vice versa.

I discussed this likelihood in Bernanke says Lawmakers Should Consider Rules on Fiscal Limits; Expect Hissy Fit from Krugman; Bernanke Pisses in the Wind

Proving that he far more of a Monetarist clown than a Keynesian clown, Bernanke Calls on Lawmakers to Consider Rules on Fiscal Limits

Expect Hissy Fit From Krugman

Paul Krugman, flag bearer for the Keynesian clowns, is without a doubt having a hissy fit at the thought of any step, no matter how small, regarding Bernanke's statement “It is crucially important that we put U.S. fiscal policy on a sustainable path.”

Monetarist Nonsense

Bernanke claims Quantitative Easing will "ease financial conditions.” Forgive me for asking the obvious, but what the hell needs easing?

Mortgage rates are at all time lows in spite of the fact that housing itself is in the gutter and risk of default is high, junk bonds are back to par, and the ability for corporations to get financing for total garbage is at or near historic highs.

If anything, Bernanke has ignited a bubble in junk bonds. The one thing Bernanke has not done is ignite bank lending.

Why Now?

In regards to Bernanke's new-found fiscal conservativeness, Calculated Risk asks "I wonder why? Well, he missed the housing bubble completely - but what about the structural deficit?"

The answer should be pretty easy to spot.

Bernanke, knows full well Congress is unlikely to act in any meaningful way. When they don't, and when a global currency crisis is well underway, Bernanke will point his finger and blame Congress.

Thus, Bernanke's statements are not about fiscal prudence, but rather all about absolving the Fed in general, and Bernanke in particular for the upcoming global financial collapse.

Bernanke Poised to Blame Keynesians

So there you have it. Bernanke is all poised to blame the Keynesians. Meanwhile the Keynesians are already pointing the finger at the monetarists and everyone else who does not want more government spending.

The real threat is not of deflation, but of absurd Keynesian and Monetarist attempts to prevent it. The Greenspan-Bernanke housing bubble (and subsequent crash), and decades of futility in Japan should be proof enough.

Tim Duy worries that "Bretton Woods 2 will finally collapse in a disorderly mess." Compared to the Keynesian and Monetarist alternatives, and because at this point a currency crisis is inevitable, I suggest the sooner the better. Indeed a strong case can be made that the worry ought to be that we don't quickly collapse in a disorderly mess.

We really do need to start over. Bretton Woods 2 has had it.

By Mike "Mish" Shedlock

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at .

© 2010 Mike Shedlock, All Rights Reserved.

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