Monday, December 29, 2008

Enemies of the People

Keynesian columnists never tire of being a crowd of Ibsenian villagers, offering the same irrational solutions that have failed before.

Paul Krugman, in his latest bit of lunacy, chastises the governors of the 50 states for tightening their belts amid budget shortfalls. He calls them Herbert Hoovers, as if Hoover's most egregious error was attempting to balance the Federal budget. Instead, he proposes that now is exactly the time when they should spend, spend, spend.
These state-level cutbacks range from small acts of cruelty to giant acts of panic — from cuts in South Carolina’s juvenile justice program, which will force young offenders out of group homes and into prison, to the decision by a committee that manages California state spending to halt all construction outlays for six months.
California, not noted for fiscal conservatism, is facing a several billion dollar budget deficit already, despite having an economy to rival many European countries and some of the highest taxes in this one. If now is not the time for the profligate pols there to cut back, one wonders when it ever would be.

This foolish suggestion of Krugman's is bad enough when applied to the Federal Government, whose outrageous spending of the past eight years has outpaced even that of typical Democratic administrations. But at least, the Feds can print money and borrow on a huge scale, not to mention taxing everyone in the country. The state governments can do none of these things.

His justification for this absurd idea?
Think about it: is America — not state governments, but the nation as a whole — less able to afford help to troubled teens, medical care for families, or repairs to decaying roads and bridges than it was one or two years ago? Of course not. Our capacity hasn’t been diminished; our workers haven’t lost their skills; our technological know-how is intact. Why can’t we keep doing good things?
Er, maybe it's because over a trillion dollars in net worth has recently been wiped out? Maybe it's because inflation, thanks to ethanol subsidies and much more, have raised food prices 20% over the past year, leaving less disposable income? Maybe it's because unemployment has risen by 50% over the past year, creating a smaller tax revenue base? Maybe it's because all the things Krugman names — which the state government should not be doing in the first place — cost money?

You have to wonder where in the world — when states can't create it by fiat like the Feds and there are laws on the books requiring them to have balanced budgets (which, admittedly, they blithely ignore) — all that money to 'do good' is supposed to come from.

Martin Wolf of the Financial Times has an answer for Krugman. Adopting the same impractical Keynesian philosophy, despite proudly asserting his 'pragmatism', he cheerleads Obama's huge stimulus package proposal. (Variously pegged between $850 billion and $1 trillion.)

Reviewing three ambiguous lessons he claims the prophet Keynes left us, number two suggests:
[T]hat the economy cannot be analysed in the same way as an individual business. For an individual company, it makes sense to cut costs. If the world tries to do so, it will merely shrink demand. An individual may not spend all his income. But the world must do so.
So where, besides in all those individual companies (and personal) bank accounts is that wealth? If they don't spend it, will all those dollars simply wind up in millions of mattresses? Parked in a bank, as most people (and companies) do, those funds are available for investment. At the very least, even if the bank tapers off lending, as the Feds both insist and complain the banks do, it raises their capital ratio. I.e. their balance sheets grow stronger and they are less likely to fold in these tough times.

So, damned if you do, destitute if you don't. You can never win with a Keynesian. Ibsen would have a few wise words for these mad villagers.

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