Sign in to comment!

Menu
Home

Opinion

Why Paul Krugman is Wrong -- More Government Spending Won’t Boost Economy

Liberals, we are told, are becoming anxious. They have seen their champion crossed and double crossed; oil rig explosions, Greek tragedies, bank failures, Israeli intransigence, military arrogance, coal mine cave-ins -- all have conspired to throw President Obama’s agenda – the liberal agenda – off center stage. 

Massive health care and financial industry overhauls are just the headers on the to-do list – yet to come are card-check, cap-and-trade, and a host of other programs. Time may be running out. Opportunities like this – a majority in Congress, a pliant president and a populace wanting change – don’t pop up often.

Left off the list of frustrations is this: the liberal program is not working. We have spent more than one trillion dollars now, an amount so vast most people can’t even remember how many zeros are involved, and unemployment is still ravaging the economy. 

We have 15 million people out of work and another 8.8 million not able to find full-time jobs. So – 23.8 million people without proper employment – it is a horror. There is even talk that we might sink into a depression – this from economist (and New York Times columnist) Paul Krugman who urges new government programs with the constancy of the sunrise. 

Despite the absolute, positive assurance of Mr. Krugman that the country’s salvation lies in more government spending, people are beginning to wonder if another $100 billion (a rounding error, by comparison) spent extending unemployment benefits or propping up state budgets will really help the United States grow.

It is unlikely. I have a theory, and like any economist worth her salt, I am putting a name on it -- the Debt/Stimulus/Confidence Frontier. The concept is simple: while deficit spending is sometimes necessary in the early stages of a recession to jolt the economy and especially to provide the consumer with some extra buying power, there comes a point at which increased indebtedness has a negative effect – on confidence, and then on GDP. 

An increasingly educated population and the visible evidence of the harm done to debt-laden countries like Greece have made people wary of weakening our country’s balance sheet. Thus, piling on borrowings now will dampen consumer and investor confidence and boost the savings rate, thwarting the stimulus impact.

Some evidence of this chain reaction surfaced today with the announcement that consumer confidence had taken a significant and unexpected plunge in June. The Conference Board’s index tumbled 10 points – from 62.7 in May to 52.9. Most economists had been forecasting 62.8.

There is no precise amount of debt or deficit spending relative to GDP that undermines optimism. It depends on the resources of the country in question, the size of the economy, the convertibility of the currency and other factors. It’s like pornography: we know it when we see it. 

Clearly, in this cycle, we crossed the Debt/Stimulus/Confidence Frontier last year. The rise of the Tea Partiers was only one symptom of popular hostility to increased borrowings. 

President Obama’s slipping approval ratings were another. Polls confirm the grumpiness of all those middle-aged middle Americans. They were incensed that future generations were being saddled with unpayable debts, and they knew that taxes would have to rise to cover the cost. They also doubted that further government spending would provide a real boost to jobs or to growth.

They were right, because as anxieties grew over the country’s balance sheet, the consumer hunkered down and increased her savings rate. In the most recent month, consumer spending slipped from the level of the first quarter, and the savings rate rose to 4 percent -- three times the pre-recession level. 

This is the mechanism behind my theory. A naturally cautious response on the part of the consumer begins to thwart ever-higher outlays by the government. 

Liberals often fail to take into account human nature. Just as socialist economies like East Germany or Russia ultimately fail because they ignore the self-interest that stimulates a market economy – the liberal notion of all-purpose government sustenance is irreconcilable with the very human instinct of self-protection.

This is not to argue against all government intervention. The initial monies spent to shore up the banks steadied our financial markets in the nick of time. The frantic passage of TARP and other backstops provided to our biggest banks reassured investors and savers who had at the depth pulled half a trillion dollars out of money market funds. We were well on our way to stashing the nation’s cash under a mattress.

The $800 billion stimulus program also gave the economy a lift. Though the disbursement of funds was in some cases hare-brained and certainly did not make our national chest swell with pride – no Hoover Dams or Cape Cod Canals this time around – Americans regained their confidence that the black hole was closing, not spreading, and that normal life would soon resume.

But, more recent efforts to jump start the economy – for instance the cash for clunkers, and the homebuyer credit -- have been less effective. First-quarter growth has been revised downward twice, from the original estimate of 3.2 percent to 3 percent and more recently to 2.7 percent -- quite a slump from the fourth quarter, when the economy advanced at 5.6 percent. 

What changed? Consumer spending was up less robustly than previously thought -- only 3 percent, not 3.5 percent. Final sales for the economy overall rose only 0.8 percent, rather than the 1.4 percent previously cited. Indeed, almost all the growth came from inventory restocking. This deceleration followed the much-publicized fiscal problems in Greece, which threatened to take down the EU. Americans quickly imported anxiety from abroad and cut back spending.

In upcoming elections, President Obama’s champions will take credit for the turnaround in the economy, which he will ascribe to massive stimulus spending. In fact, as the Obama team continues to promote unsafe levels of debt and deficits, they will be slowing our recovery.

Liz Peek is a financial, social and political columnist. For more, visit LizPeek.com.

Fox Forum is on Twitter. Follow us @fxnopinion.

Liz Peek is a writer who contributes frequently to FoxNews.com. She is a financial columnist who also writes for The Fiscal Times. For more visit LizPeek.com. Follow her on Twitter@LizPeek.