Correcting Liberal Mistakes

Paul Krugman, liberal economist/columnist, fears a big depression. One reason he fears it is the "paradox of thrift:" when people save money instead of borrowing and spending money, he says, it can cause a recession. In his words, "...if consumers cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession..." (I believe the words I quoted can stand by themselves; I think removing Krugman's context causes no distortion.) www.nytimes.com/2008/10/31/opinion/31krugman.html

But hey. If I don't spend my money, it goes to my bank, which loans it to someone else who spends it. So if two hundred million Americans reduce their spending, the money doesn't vanish; most of it remains available for someone to spend. So the "paradox of thrift" is no problem at all. Gordon Clark, my old philosophy professor, used to say "a paradox is a charlie-horse between the ears."

Well, OK, some money gets tucked under mattresses and not spent--but not enough to matter, as I imagine Krugman would agree. And he might argue that the slowdown between my not spending my money and the bank finding someone who wants to spend it, multiplied two hundred million times, could cause a recession--the money does get spent, but not fast enough; problem of slowdown rather than of thrift. And since he's a professional economist, and I work in a grocery store and have a wife and four kids (and a custody dispute), he can research that.

Liberal mistake: fearing "the paradox of thrift." Solution: fugiddaboudit; 'the only thing we have to fear is fear itself.'

And Krugman wants the US government to spend more money it does not have, in order to replace consumer spending and fend off the recession. But where is this money to come from? If the money is newly printed, we get inflation, as when the Continental Congress during the American Revolution, and the Confederacy during the Civil War, printed too much money. Nowadays they use computers instead of printing presses, but the result is the same: if there are more dollars without there being more stuff for the dollars to buy, then each dollar is worth less stuff than before. This is like a tax on every dollar in anyone's pocket. (And the dollars of the poor are taxed equally with the dollars of the rich, which Krugman might not like, if he wants to tax the rich more heavily.) Or if the money the government spends is taxed from the people who've earned it, then the people's spending goes down as the government's spending goes up. No net gain. Or if the money is borrowed, that's a tax on tomorrow; not just on the next generation, but literally on the day we start paying.

Furthermore, at the end of World War II, U.S. government spending fell by about half in a single year, yet the economy did OK. And President Harding (usually considered one of our worst Presidents), facing a recession, did nothing, and in a few months the recession went away. Presidents Hoover and FDR (FDR is often considered a great President), facing a recession, spent money the US government did not have, and the recession lasted from A.D. 1929 to A.D. 1941, becoming the "great depression." There's a book called "FDR's Folly" (I have NOT read it) which explains why various things FDR did hurt rather than helped the economy.

Liberal mistake: spending money the government does not have. Solution: cut government spending. (No Congress of Democrats has balanced the budget in 40 years and there is no sign Pelosi, Reid, and Obama will do so. GOP Congresses balanced four budgets ten years ago, though they have gone liberal since and spent money they didn't have.)

But how to cut government spending? One modest proposal: require that any increase in dollar amounts of spending, and any new program, be paid for by spending cuts of twice the amount, and that these spending cuts be actually implemented before the new spending begins. That way, each department that wants to enlarge its own budget has to find spending cuts elsewhere.