Krugman is wrong

May 12, 2013

Krugman theoretically right, but still wrong!

New York Times Columnist, Paul Krugman has superb academic qualifications. After all, he is currently Professor of Economics and International Affairs at Princeton, and Centenary Professor at the London School of Economics. On top of all of that he won a Nobel prize in Economics in 2008.

While not coming close to being as academically qualified as the good professor, I did have a 38-year career mainly in executive positions in five different industries. Thus, I spent my career implementing theories in "the real world". I often observed the ideas of some very smart people failing miserably because, while theoretically sound, they simply didn't work. After all, isn't a theory by definition an idea waiting to be tested?I

On April 28, Krugman had an article in the opinion section of the New York Times advocating increased borrowing and spending, as stimulus to spend our nation out of its current economic malaise. Having heard the "would any reasonable family do this" question, he goes to great efforts to point out differences between a family continuing to borrow when deeply in debt, and a government doing the same.

The two biggest differences I see between a family and a nation's government with too much debt are: 1. A family's debts are usually discharged at the death of those who created them. A government, on the other hand, can always pass debt on to future generations. 2. While families cannot print more money, or borrow almost unlimited amounts, a government can. These government options though do not come without potentially negative side effects.

I somewhat agree with his beliefs our government should not risk reducing borrowing and spending as long as our economy remains so fragile. However, I would like to see reductions in wasteful government spending which is so prevalent. But, not reducing borrowing and spending is far different from his suggestions to massively increase both. As the old saying goes: When you find your self deep in a hole, the first rule is to stop digging...not dig even deeper!

I believe Krugman's advocacy for expanding government borrowing and spending is based on two flawed fundamental beliefs.

First, he believes our government will actually spend additional borrowed money on things which will create jobs. Has he forgotten the hundreds of billions spent to bail out financial institutions, the very organizations which caused the housing bubble in the first place? Has he forgotten the billions in executive bonuses handed out in these same organizations afterwards? While almost every financial organization benefited, how many homeowners did? How much borrowed money was wasted on "green" businesses? Has anyone forgotten Solyndra? How many billions are we still wasting on ethanol? How many billions of dollars are we still spending on wars?

Second, as he often has written, "we need to borrow and spend until the economy recovers". My question is, what if it doesn't recover? What if the side-effects of globalization are shifting America into a new economic reality in which our nation's piece of the world's economic pie keeps shrinking, resulting in fewer jobs, continuing stagnant wages, and reduced American living standards?

In my experience, many economists tend to be so focused on models and theories, they ignore the potential for failures caused by flawed implementation. The main reasons for such failure is often because those who must implement theories are humans with all of mankind's potential weaknesses. And, when unlimited greed combines with a corrupted system of governance, and then comes into conflict with the greater good for a nation's people...guess which usually wins?

During the past decade, the national debt, driven by borrowing and spending, has steadily and massively expanded. Yet, since the recession began, even with increased borrowing, our nation has barely managed to create enough new jobs to even keep up with population growth. Millions of Americans remain without work and increasing numbers of them have given up looking.

He also misses or ignores another critical point; it isn't just a lack of jobs which has reduced spending by American consumers. It is the combination of insufficient new jobs, exhausted savings, stagnant wages, and reduced home equity which have collectively reduced consumer spending. Just as it took decades for our leaders to dig the deep hole we stand in today, it will take a very long time to recover.

Since our leaders did not spent our money effectively in the past few decades, why would we believe they will now? Do you see any possibility of the two parties unifying anytime soon to begin wisely spending our future generations' money. After all, if our leaders didn't invest previously borrowed money for badly needed infrastructure to create jobs in the past few decades...why believe they would do it now?

Professor Krugman, I admire your intellect. However, I really don't trust the implementors! Looking at the incredible corruption and dysfunction in Washington...do you not see the greater likelihood of additional borrowed money once again ending up lining the pockets of the wealthy special interests?

Like you, I wish additional borrowing and spending, and passing on the additional debt to our future citizens, would somehow magically get our nation out of its current depression. Sadly, with our long failed leadership in both parties...not a chance in hell!

These are my opinions. What do you think?

Mike