Τρίτη, 7 Σεπτεμβρίου 2010

A Case for More Stimulus Spending. Again. Wrong. Again.

Once again, Nobel laureate Paul Krugman, in a New York Times Op-ed, makes the case for more stimulus spending and tries to draw historic analogies with the FDR administration and World War II. His case, in a nutshell:

Premise: 5 years of deficit spending (1933-1938) did not produce growth. Conclusion: 5 years of deficit spending is not enough and can show only few results; the government must borrow and spend even more.

Premise: World War II necessitated a very large amount of borrowing and, following its conclusion, the U.S. economy boomed. Conclusion: deficit spending of an enormous scale leads to prosperity.

That he fails to point out any causal connection between what he wants us to understand as cause and effect should be an initial indication that, perhaps, something is amiss in Krugman's reasoning. If what he proposes is correct and can be generalized, then it would apply equally to other economies - so, why don't we see the course of the economy of another victorious power of the Second World War, which also had to resort to massive borrowing to sustain the war effort: Great Britain.

1939-1945: great deficit spending to fund the war effort
1945-1950: post-war consensus, nationalizations, National Health Service
1954: end of all food rationing
1950s-1960s: growth rate smaller than that of most Western European countries; large debts still looming
1967: devaluation of the pound sterling
1976: $4 billion loan from the International Monetary Fund

This period ends with the election, in 1979, of the Conservatives under Margaret Thatcher, who completely reversed the policies followed up until then and turned the United Kingdom from the sick man of Europe to the strongest European economy. If Krugman's reasoning were correct, Great Britain would not have had to face such financial difficulties; all the more so, since the post-war consensus was very close the economic policies Krugman supports. Instead, it is the very debts Britain inherited from the war that proved to be a constant burden on its development. This means that either there was some other factor disqualifying deficit-spending Britain from growth (which I cannot imagine), or that it was not deficit spending (or, at least, not deficit spending per se) that led to the expansion of the U.S. economy following the war; and that Krugman's reasoning is flawed.

Let me finish by copying a quote by Ludwig von Mises from my friend, and excellent essayist, Tilemachos Chormovitis - according to von Mises, "War prosperity is like the prosperity that an earthquake or a plague brings. The earthquake means good business for construction workers, and cholera improves the business of physicians, pharmacists, and undertakers; but no one has for that reason yet sought to celebrate earthquakes and cholera as stimulators of the productive forces in the general interest."

To that, let me add that a disease does not mean good business for a physician, if it is he or she who has it; the destruction of one's home by earthquake does not mean that that person will thrive, even if he or she is in the construction business. This is a hint as to the explanation I will try to offer for America's post-World War II economic boom in a subsequent post.

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