Paul Krugman, New York Times columnist, Nobel Prize winner, and Keynesian economist extraordinaire is about to have his new book released entitled, End this Depression Now. In it, the Duke of Deficit Spending argues that a speedy, robust recovery from the Great Recession which started in 2008 is just a quick policy decision away. If only our leaders can muster the “intellectual clarity and political will” needed to raise federal spending further, Americans will begin consuming again, businesses hiring, and the current depression will be over in a flash. Once again Krugman is being true to his economic philosophy – namely that increasing aggregate demand through loose fiscal and monetary policy is a cure-all for what’s ailing the economy. Let it be said that there is not a more consistent deflationist than Paul Krugman in all of the economic profession.
Now, why anybody would still listen to Krugman is a mystery to me. After all, he entirely missed calling the financial crisis of 2008 while Austrian economists were spot on with their prognostications. I suppose most laymen don’t know the difference and most economists and academics are as Milton Friedman proclaimed so long ago “All Keynesians now”. Thus ignorance of and loyalty to a failed philosophy are powerful forces to make people do irrational things.
In the first place, Krugman shows his ignorance with the title of his book, End this Depression Now. The statistics indicate that we are not currently in a depression. Secondly, current numbers indicate that the deflationary spiral that Krugman has been predicting and fears the most is not happening. On the contrary, while he continues to fret over falling prices leading to a double-dip recession, long-term trends point strongly toward oncoming double digit price inflation.
What it all boils down to is that Krugman and other Keynesian economists are about to miss the next economic crisis. Austrians have been arguing all along that we can’t solve our economic problems by doing the same things that got us into the mess in the first place. Deficit spending and a ridiculously loose monetary policy will not cleanse the market of all the mal-investments made during the preceding artificial boom (housing bubble). It will only put us deeper into trouble. What was needed was a drastic cut in government spending, a cut in taxes, and the setting of interest rates by the market not the monetary oligarchs at the Federal Reserve.
So because policy makers in Washington listened to Krugman and his ilk over the voices of reason, we are about to enter the next cycle of boom and bust. It will consist of phony growth, rising prices, and rising interest rates which will ultimately pop the bubble and send the economy into another tailspin. The proof is in current trends.
In spite of Krugman’s ill-timed book, we are not in the middle of a depression. Consumer spending is way up. In the fourth quarter of last year balances on credit cards rose 9.27 percent. In February, retail sales in the U.S. improved in 11 of 13 industry categories and marked the biggest gain in five months according to Commerce Department figures.
Then there is job growth. 400,000 private sector jobs have been created just in the first two months of this year. More workers mean more spenders and more spenders mean more jobs, right?
Oh, and let’s not forget how well the financial markets are doing. The Dow is up 7 percent YTD, the S&P 500 is up 11 percent YTD, the Homebuilders Index is up 23 percent YTD, and the S&P Financials are up 21 percent YTD. These are not numbers indicative of a depression.
But, all of this good news is coming at a cost, literally. We are approaching the place this commentator wrote about on October 16, 2009. Bernanke and the Federal Open Market Committee are going to have a big decision to make in the near future – raise rates and burst the Fed induced bubble or leave rates low and watch prices skyrocket.
Price inflation is already heating up. It was only a matter of time before all the stimulus, low interest rates, and money printing kicked in to produce higher prices. The money supply has increased by 14.6 percent year over year ending in February. That makes 39 consecutive months of double digit year over year rates of monetary inflation.
The result has been higher gasoline and food prices. College and healthcare costs continue to rise. And the Manufacturing ISM Report On Business® for the 4th straight month shows the number of industries experiencing higher raw material costs on the rise and the number of industries experiencing lower raw material costs on the decline. It will be just a matter of time before those higher raw material costs find their way into higher prices on the merchant’s shelf.
So while Krugman and other Keynesians clamor for more federal spending and easy money to produce a speedy, robust recovery from the Great Recession, they are missing that the next boom and bust cycle has already begun. But, that’s okay because Austrians have been predicting it for some time. In the words of Yogi Berra, “It’s déjà vu all over again”.
Article first published as Keynesians Are Clueless on Blogcritics.
The View from Abroad
- June 03
- Kenn Jacobine is an international educator currently teaching History and Economics for the American School of Doha, Qatar. He has also taught at international schools in Ecuador, Mali, and Zambia.
His political transformation took place over the course of many years. Starting out naively as a big state liberal, he became a Reagan Republican in 1982. Disillusionment set in with the realization that small government rhetoric rarely translated into limited government actions.
On Christmas day 1992, he became a libertarian. In 1994, Kenn ran for the State Senate in Pennsylvania on the Libertarian Party ticket garnering 5 percent of the vote. He has been active in freedom causes ever since.
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