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Obama's economic folly and Paul Krugman’s hypocrisy

Gerard Jackson
BrookesNews.Com

Monday 16 June 2008

Barrack Hussein Obama's economic policy is one of incredible stupidity. He plans to bludgeon the economy with massive tax increases while flooding it with astronomical spending. Is this bloke a genius or what. (The question, of course, is rhetorical). But how in heavens name does such economic idiocy become common currency, particularly in the politically corrupt media?

Paul Krugman provides the answer. This man is the Democrats' unofficial economic advisor and a sleazy example of an economist turned political activist. Until the Democrats regained control of Congress in 1996 this bigoted hypocrite wrote thousands of words condemning the Republicans for running a deficit. Yet the very same 'fiscally sound' Krugman now argues that

given a choice between cutting the deficit and spending more on good things like health care reform, they [Democrats] should choose the spending. (The New York Times, Democrats and the Deficit, 22 December 2006)

In his Orwellian world deficits are defined as good or bad according to which party controls Congress and the Oval Office. For the politically bigoted Krugman and the likes of Obama the truth is that which promotes the Democrat Party, not that there is anything really democratic about that band copperheads. But what concerns us here is not Krugman's particular brand of hatred but the Keynesian economics he uses to promote it and which the likes of Obama draw on for support.

Krugman's method of defending political abominations inadvertently reveals that Keynesianism has degenerated into an ideology with its own boring mantras . It is no surprise that Krugman asserted that the Bush tax cuts "wreaked havoc with the nation's long-run fiscal prospects". He then complained that the tax cuts would not provide the necessary stimulus that the country needs, though bigger tax cuts to the less affluent might help.

His solution? You guessed it. A huge temporary surge in government spending which would create jobs now "unlike tax cuts". (This is just the kind of economic garbage that Obama has latched on to). According to Krugman all the government had to do was expand military spending. Well Bush administered the Krugman medicine through the Fed and the result can be seen in a falling dollar and an exploding current account deficit. (No need to worry, the ever-so brilliant Obama still plans to bring about greater prosperity by slashing military spending and flooding the country with dollars. Incidentally, his tax proposals will not affect his super-rich supporters, Now ain't that a coincidence).

Krugman economic snake oil brings us to the real problem, which is not tax cuts or lack of revenue but government spending. And what the US government spends American taxpayers cannot save. But being a Keynesian means attacking savings, not encouraging them. To Keynesians what matters is spending, meaning government spending and consumer spending. These are what drive economic growth. And this bloke calls himself an economist. (Krugman's economic fallacies do not excuse Obama and McCain's economic illiteracy. The fundamental difference between the two is that Obama detests America while McCain still loves it).

I've pointed out numerous times that business spending as a proportion of total spending actually dwarfs consumer spending. Therefore it's business spending and not consumer spending that should be encouraged if people want economic growth. The distinction between the two is simple: business spends on production while consumers spend on consumption. But I guess it's a distinction that's lost on the brilliant Krugman and his adoring disciples in the media.

One might ask: "What type of spending does most to create jobs?" Wrong question. Any amount of consumer spending, even at the expense of business spending, can 'create' jobs providing there is sufficient land and capital to employ labour. The real question, therefore, is: "What type of spending raises the demand for labour and hence real wages by increasing productivity labour?" Any classical economist would have answered: "Spending on capital goods, of course", meaning plant and machinery.

It follows that any kind of policy that encourages consumption at the expense of investment will, at best, reduce the rate of grow or, at worst, cut real wages rates. This is something the classical economists fully understood. John Stuart Mill eloquently expressed the classical view on spending and real wages with the following statement:

The utility of a large government expenditure for the purpose of encouraging industry is no longer maintained. Taxes are not now esteemed to be like the dews of heaven, which return in prolific showers. It is no longer supposed that you benefit the producer by taking his money, provided that you give it to him again in exchange for his goods. There is nothing which impresses a person of reflection with a strong sense of the shallowness of the political reasoning of the last two centuries than the general reception so long given to a doctrine which, if it proves anything, proves that the more you take form the pockets of the people to spend on your own pleasures, the richer they grow: that the man who steals money out of a shop, provided that he expends it all again at the same shop, is a public benefactor to the tradesman whom he robs, and that the same operation, repeated sufficiently often, would make the tradesman a fortune. (Essays on Economics and Society, Routledge & Kegan Paul, 1967, pp. 262-263).

I think it's pretty clear that the economists of old had a vastly better understanding of economic growth than most of the current crop, including Krugman and his pals. It therefore follows that the costs of Obama's massive spending and taxing policy would have to be paid out of forgone growth. It's called opportunity cost, meaning that Obama's reckless 'economic' policy must come at the expense of investment and private consumption.

Krugman, like Obama, is also opposed to cuts in capital gains taxes, arguing that the Treasury would lose large sums in the long-run. Worst of all, not only were the Bush tax cuts of "dubious economic value" they benefited only 2 per cent of population*. Although I believe that this statement is a nasty piece of class-war rhetoric from a bloke who has never worked on a building site or as a factory hand, I have to point out that it does fit his primitive views on consumption, investment and government spending.

What is not understood by most economists — regardless of their politics — is that capital gains are economic profits while capital losses speak for themselves. Profits are maladjustments between supply and demand, a situation in which factors are under priced in relation to the value of their products. Where profits emerge so does the tendency to compete them away, if not impeded by political meddling.

This market process has the effect of raising factor incomes while lowering prices. Therefore anything that hinders this process keeps economic welfare lower than it would otherwise be. And that's what capital gains taxes do. When a company starts making economic profits its share prices rise. This encourages investors to abandon less profitable companies thus directing resources to the more profitable one, supplying it with additional savings that it can invest in expanding its output. On the other hand, this activity alerts potential competitors to the activities of the profitable firm and so they direct resources into the same line of production. So much for only 2 per cent of the population benefiting from cuts in capital gains taxes*.

Unfortunately the above process is disrupted by Keynesian policies that create booms which inflate share markets, sometimes sending share prices into the stratosphere. (Hmm, sounds familiar). This allows the likes of Krugman and Obama to rail against so-called market excesses, attacking as market failure the inevitable bust.

That Krugman is unable to comprehend the consequences if his own economic nostrums doesn’t say much for his critical faculties, though he is never short of criticism when it comes to Republicans. But maybe that’s because he abandoned economics in favour of malicious political grandstanding on behalf of the Democrats.


*How the Laffer curve really works

Gerard Jackson is Brookesnews' economics editor



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