On Krugman, Keynesianism, and Extraterrestrials
While bizarre comments made by left-leaning economists have become all too common over the last few months, the recent remarks made by Princeton economist Paul Krugman have taken this phenomenon to a whole new level of lunacy. In a recent interview with CNN anchor Fareed Zacharia on August 12th, the Nobel Prize winner claimed that the solution to our all of our economy’s problems may very well be space aliens. That’s right, space aliens. Krugman argued that, “If we discovered that space aliens were planning to attack, and we needed a massive buildup to counter the space alien threat, and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months. And then if we discovered, oops, we made a mistake, there aren’t any aliens, we’d be better.” His explanation for this remarkable statement was that “It’s very hard to get inflation in a depressed economy. But if you had a program of government spending plus an expansionary policy by the Fed, you could get that.”
While the bizarre notion that government spending on war can help the economy has long since been refuted by free market economists from Bastiat to Mises, it is still important to understand Krugman’s claims in the context of the current economic crisis in order to understand how truly absurd they are.
Krugman’s first justification for wanting to have a fake alien invasion is that it would force the Federal Reserve to adopt a more “expansionary policy,” with low interest rates and easier credit. The most glaringly obvious problem to this, however, is that the Fed’s has already adopted this policy for the last several years! Since the crisis began in late 2007 and early 2008, Ben Bernanke and the Fed have kept interest rates at historical lows near 0% while simultaneously engaging in rounds of massive money printing or “quantitative easing”. Clearly, it’s hard to be more “expansionary” or inflationary than this, and yet the economy has showed no signs of real improvement, but rather has only worsened.
The second problem with this idea is that it is in fact the Fed’s overly expansionary policy over the last decade that caused this economic crisis in the first place. As many prominent Austrian school thinkers such as Peter Schiff and Ron Paul have pointed out1, 2, The Fed’s artificially low interest rates from 2002-2007 led to an expansion of credit which fueled the mortgage and housing bubbles, and the current recession is a direct result of the bursting of such bubbles. Ironically, Krugman was a large proponent of these Fed policies at the time, even going as far as to explicitly state in 2002 that “Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.” Of course, we all know how that turned out. So essentially, Krugman is arguing once again that we should solve the problems of one asset bubble (housing) by creating a brand new one, this time one in Military equipment, global defense systems, and whatever else would be needed to fend off a perceived alien invasion. Clearly, draining resources from the productive parts of the economy and putting them into unneeded military equipment would represent a massive misallocation of resources, much worse than the housing bubble, and would only require an even more severe correction down the line.
The second justification for Krugman’s proposal turns out to be no better. Once again, in calling for massive government spending and fiscal stimulus, Krugman seems to be ignoring the fact that this is precisely the path that the government has been pursuing since the crisis began, and to no avail. Since the start of this financial crisis, the federal government has spent several trillion dollars on fiscal “stimulus,” as well as bank bailouts, automotive bailouts, and various other gimmicks. Yet, as of September 2011, the unemployment rate is still over 9%, and the economy is slipping farther back into recession. While Paul Krugman may think that trying the same thing over again and expecting different results is the smart thing to do, most people (like Albert Einstein) consider that the very definition of insanity.
Based on this analysis, it seems that the only way space aliens could possibly benefit our economy would be if they were to come and abduct Krugman, Bernanke and the rest of their gang, thereby preventing them from providing any more advice to the folks in Washington. Maybe then Congress and the Fed would finally abandon their misguided policies of government spending and inflation. Maybe then the government would take its hands off the economy, get out of the way of the free market, and finally allow our country to return to prosperity. Of course, absent the arrival of any space aliens, this outcome does not seem very likely, but one can certainly hope.
Found in “Crashproof: How to profit from the Coming Economic Collapse” by Peter Schiff
Found in “End the Fed” by Ron Paul