There are many economists and on the left, and the right for that matter, who seem to believe a very old and exposed economic theory; the idea that government can and should spend its way out of recession. Paul Krugman, an award winning economist and New York Times writer began the New Year with a ringing endorsement of the philosophy.
He says, as Keynes insisted, monetary policy is ineffective under periods of depression and that fiscal policy– deficit spending by the government– is needed to address unemployment. Krugman is hoping that Congress will pass another stimulus package and soon. He uses words like “terrifying,” says the US economy is in a free fall and warns about “deflation setting in.”
Krugman is worried Congress may deliberate too long while politicians demand proof that the benefits of the stimulus outweigh the cost. He calls it a burden of proof that is never imposed on proposals of tax cuts. Imagine that, there is actually a different process of analysis between stealing money from people and deciding to just let them keep it.
Unfortunately for the American people, the Keynesians and their commitment to using an inflationary monetary policy and deficit spending, or their so-called “stabilization policies,” in order to manipulate the economy has entrenched in our lives the boom and bust business cycle.
To say that a government, unlike every other person, family or firm, can spend its way out of a recession with public works projects and military build-up is a theory who’s very own equations and basic principles prove itself wrong. Graphically a tax cut is identical to the effect of an increase in government spending; stabilizing output and putting the economy back into equilibrium. The Keynesian theory says it doesn’t work the same because the consumer’s ‘marginal propensity’ to spend, is less than that of the government and the stabilization is likely to be long-term, with better risk calculation and distribution of resources. Sounds good to me.
Krugman and Obama offer no solution to the problem of a persistent, massive federal deficit. Neither has commented on the negative effects of government spending and tax programs such as negating incentive and deterring private spending and investment; potential output or supply. Short term stabilization not only prolongs the inevitable downturn to a later date, but it also enslaves the country’s children to insurmountable debt and government control of financial and natural resources. Though seemingly abstract things like freedom and liberty may be unquantifiable and unable to be charted, they are still nonetheless the fundamental aspects of American prosperity and way of life.
Currently this theory has denied the citizens of this country their economic liberties to the point where it is not even considered as possibly being incorrect by mainstream economists, the media or the majority of the people. The theory has succeeded in diluting the definition of words like freedom and liberty from the language of its people. Short tem stabilization and an inflationary monetary policy have dangerously meshed this country’s two major political parties into offering more of the tired and exposed problems and posing them as the solution.