The Corner

That 2013 Feeling?

Paul Krugman, tireless advocate of Keynesian pump-priming, is at it again, arguing for more stimulus spending in the face of what he predicts will be a double-dip recession. Most of the recent economic upticks reflect stimulus spending of one sort or another — cash-for-clunkers, the new homebuyers’ tax credit, the open spigots at the Fed, the $40 billion or so that Obama’s stimulus package dumps at random into the economy from month to month, etc. Krugman argues that the fundamental drivers of growth — consumer spending, business investment, exports, etc. — are ”still grim,” and that the government must keep borrowing and stimulating to finish the job of “fighting the slump.”

There’s another phrase that more accurately describes the policy Krugman favors. It’s called “putting off the inevitable.” The title of Krugman’s column, “That 1937 Feeling,” alludes to the year that FDR’s government began to scale back spending and tighten monetary policy and the U.S. economy took another dive. But the decision to withdraw stimulus in 1937 followed three straight years of double-digit GDP growth and falling unemployment. For how many more years should the government have continued to prop up the economy? Five? Ten? Will Krugman still be wanting stimulus packages in 2013? Investor David Einhorn put it this way:

An alternative lesson from the double dip the economy took in 1938 is that the GDP created by massive fiscal stimulus is artificial.  So whenever it is eventually removed, there will be significant economic fall out.  Our choice may be either to maintain large annual deficits until our creditors refuse to finance them or tolerate another leg down in our economy by accepting some measure of fiscal discipline. 

Krugman’s underlying assumption is that fiscal and monetary stimulus keep the economy afloat without impeding the recovery of the private economy. I have my doubts. The government’s actions to “stabilize” the economy over the past year have created a great deal of uncertainty — about regulation, about the strength of the dollar, about the government’s power to pick winners in the marketplace – leaving investors wary and small businesses starved for capital. Krugman is right and wrong — right that the stimulus is propping up GDP and unemployment numbers, wrong that the private sector can adequately recover amid arbitrary government interventions and an ever-expanding state.

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