Bad Faith Economics

New York Times ^ | Jan 25 2009 | Paul Krugman (doing his best to argue against stimulus critics)(facepalm)

[chevydude26]

Article Tools Sponsored By By PAUL KRUGMAN Published: January 25, 2009 As the debate over President Obama’s economic stimulus plan gets under way, one thing is certain: many of the plan’s opponents aren’t arguing in good faith. Conservatives really, really don’t want to see a second New Deal, and they certainly don’t want to see government activism vindicated. So they are reaching for any stick they can find with which to beat proposals for increased government spending. Some of these arguments are obvious cheap shots. John Boehner, the House minority leader, has already made headlines with one such shot: looking at an $825 billion plan to rebuild infrastructure, sustain essential services and more, he derided a minor provision that would expand Medicaid family-planning services — and called it a plan to “spend hundreds of millions of dollars on contraceptives.”

[chevydude26]

When has this guy ever been right about anything???

[NavVet]

I remember seeing him say we had to find a way to keep gas at four bucks a gallon, then they gave him the Nobel prize for stupidity.

[Need4Truth]

Let’s see, 825 billion creates 4 million jobs: $206,250 per job. I can’t figure out how he gets “only” $60,000 per job. I must me un-enlightened.

[youngidiot]

Conservatives really, really don’t want to see a second New Deal, and they certainly don’t want to see government activism vindicated.

What a fool. Anyone that cares to can quickly study the results of the New Deal. (Hint: wasn't good) And this idiot is advocating it.

Here's another gem:
Next, write off anyone who asserts that it’s always better to cut taxes than to increase government spending because taxpayers, not bureaucrats, are the best judges of how to spend their money.

Here’s how to think about this argument: it implies that we should shut down the air traffic control system. After all, that system is paid for with fees on air tickets — and surely it would be better to let the flying public keep its money rather than hand it over to government bureaucrats. If that would mean lots of midair collisions, hey, stuff happens.

The point is that nobody really believes that a dollar of tax cuts is always better than a dollar of public spending. Meanwhile, it’s clear that when it comes to economic stimulus, public spending provides much more bang for the buck than tax cuts — and therefore costs less per job created (see the previous fraudulent argument) — because a large fraction of any tax cut will simply be saved.

This suggests that public spending rather than tax cuts should be the core of any stimulus plan. But rather than accept that implication, conservatives take refuge in a nonsensical argument against public spending in general.

I guess that was a rather long post. Maybe it'll help those that don't care to click the link.

[Patrick1]

Using Krugman logic would not the collapse of the Soviet Union show how effective government activism is?

His air traffic control argument is absurd considering that if government didn't run it a private company certainly would.

[BookmanTheJanitor]

Why doesn’t Krugman help the NY Times out of their financial situation? (snicker)

[castlebrew]

that’s the net to “worker” before taxes, after the gov’t bureacracy takes its vig...

[MirandaRietz]

I guess he left out that they were given a budget for public spending. They left out that each state’s governor and senate is responsible for their states budget and spending. They also left out they are only spending this to make them good for a little while. Because the left has no policies other than spending and welfare programs and amorals rendering regulatory actions for the ones who are responsible.

[Sidebar Moderator]

Please follow posting guidelines: Original title, credit author and correct name of paper (no matter how strongly you feel about the Old Grey 'Lady').

Thanks for excerpting properly, though, and giving a good link!

-SM

[chevydude26]

“Please follow posting guidelines: Original title, credit author and correct name of paper (no matter how strongly you feel about the Old Grey ‘Lady’).

Thanks for excerpting properly, though, and giving a good link!

-SM”

I’m sorry i’m kind of new...but now i know and will follow the rules

[HwyChile]

If spending is such a great stimulus, then why not spend 10 trillion and we will be rich. I bet if you cut taxes by 10 trillion over several years (real tax cuts not wealth redistribution tax credits to those who don't pay taxes), my bet is that our economy really expand and we would all be rich.

It is really pretty simple. The more money that is left in the private sector economy via low taxes and small government the more our economy thrives. The democrats are going in the wrong direction with all the government spending and taxing. Government spending is taxing, by the way, because all that spending has to be paid for eventually with taxes.

[Uncle Miltie]

In response to a Fidelity report today:

There are a couple of excellent points in today’s article, among which are particularly the Money Supply and Velocity of Money. Milton Friedman would be proud.

However, I am not aware of any proof that Keynesianism pump-priming has ever worked. Particularly, see the Great Depression in the U.S. and Japan in the 1990s of examples where massive Keynesianism prolonged recessions for over a decade, rather than shortening them from their usual ~ 18 months.

Your article is quite correct when it points to private investments in productivity as the key mechanism for growing out of a recession. Unfortunately, the redirection of cash from competitively directed private investment in productivity to politically directed government expenditures for unproductive pork has an extremely high opportunity cost. Classical economists consider public spending as squeezing out private investment in productivity, which is why Keynesianism delays recovery from recession.

So, what is a prescription that works to recover from recessions? Permanent marginal tax cuts on income and capital have been shown to work by the Kennedy, Reagan, Bush, Thatcher, Eastern Europe, Chilean, and other Administrations and economies. In fact, I believe economic history shows that permanent marginal tax cuts have worked to resolve recessions every single time they are tried. Why do tax cuts work? Because they increase the rate of return on productive investment. With tax cuts, many additional investments “pencil” (have a Marginal Rate of Return higher than the Marginal Cost of Capital) because the government takes less of the return. It is that simple. So, the productive sector of the economy picks itself up and invests and gets back to work.

Given the respective historic proof in the ineffectiveness of Keynesianism and the historic proof of the effectiveness of tax cuts, why does the Administration and Congress insist on pursuing Keynesianism? Answer: Because it allows them an intellectual basis (albeit a demonstrably failed one) to do what they always want to do: Spend More.

So what conclusions should wise investors draw from the Obama stimulus, and what actions should they take?

1) That the stimulus will be relatively ineffective, prolong the recession, and squeeze out private investment. So, while the Administration’s “stimulus” proceeds, investors should avoid additional investments in the private sector: they will fail to realize the gains of recovery until the bad Keynesian policies are recognized as having failed, and are expected to be replaced with policies that work (read: tax cuts). Message: Avoid Stocks.
2) Monetary expansion will continue unabated. This will be an ever escalating effort by the fed to overcome the Velocity decrease, which may accelerate as government spending crowds out private investment. The Fed has an infinite ability (and apparently willingness) to print dollars. They can be expected to do so until THEY PRINT TOO MANY. The Fed and investors will realize the Fed has printed too many dollars over time, and only AFTER they print too many. So we can expect at some future unknowable point for the monetary situation to see-saw from our current deflationary environment to an inflationary one. Deflation is easily cured by printing dollars. Inflation is not easily cured, and is usually cured by the Volcker method: Interest rate increases. Message: Avoid Bonds.
3) Conclusion: Stick with Cash.
4) At the moment permanent marginal tax cuts are likely, invest the cash in stocks.
5) At the moment the Fed stops raising interest rates to combat inflation (caused by printing too many USD), invest in long bonds. The next recession may be around the corner, but you will have captured the highest interest rates available in some time. In the mean time, your cash walked up the short term interest rate increase slope, and then you will lock long at an interest rate peak.
6) If you really have an appetite for risk, find the bubble caused by the Fed printing too many dollars (see Internet stocks ca. 1996, Housing ca. 2003) get in early, and sell before the bubble bursts.

None of this is meant to particularly dump on the Obama Administration. They appear prepared to fail in their own way, as the Bush Administration was failing in their own particular way.

Unfortunately, we must wait for improper Keynesianism to fail before proper tax cuts will be implemented and work. But we can make lots of money the day it appears tax cuts are likely. Focus investors’ attention on that, and they can win BIG.

[Sidebar Moderator]

No problem! Everybody was new at some point . . . .

< g >

-SM