The Classic Liberal Blog

Obama is calling "Bluff" on those complaining about "deficits and debt," and New York Times columnist and Keynesian economist Paul Krugman says we're heading for "The Third Depression" because we didn't spend enough.

Strike one. Strike two.

Smitty at The Other McCain does a terrific job explaining why they're both wrong. About spending that is.

Krugman: If We Halt Policy That Causes Pain, The Situation Will Really Hurt

If you look at a generator, the real work occurs at the rotor/stator level. There is a governor, but what does it do? It governs the rotor to deliver the product at a desired frequency. If you ask an engineer how he’s going to tweak the governor so that the governor can produce more electricity, he’s going to look at you like you’re totally new, or an Eclownomist.

Say the rotor is rotating too slowly. The governor needs to detect that, and open the throttle on the engine which turns the rotor. Engine output increases, rotor speeds up, governor eases off the throttle. This is a closed-loop system. Useful systems are usually closed-loop, because that implies stability.

What is dawning upon citizens around the world, who are neither stupid nor instinctively political, is that the world is governed by thieves and morons that are stupid and all too political. No good can come of this open loop system of debt and more debt. Like an idiot savant dope fiend on a bender, the best result of Krugmanism might be a slightly lengthened euphoria before an even more devastating crash.

Not everyone is keen on these delaying tactics, Mr. Krugman. One of the hallmarks of maturity is a desire to front-load the bad news. We all know it will be bad. We knew the promises of the politicians were bogus at campaign-time.  The governor has swamped the generator in debt.  Things have to change, or the system will overheat, and the smoke will come out of the windings.  We know that the depth and severity of the brownout will be decreased if it comes sooner rather than later.

We're heading into a deep depression because of Krugman's Keynesian prescriptions, not due to a lack of them. In fact, Keynes lunatic theories have only made things worse. At least Krugman's 'fessing up about the depression, I guess.

One year on, Krugman concedes

Krugman is wrong about the historical use of the term depression, of course, (depression was synonymous with recession until after the Great Depression ended), just as he is wrong about the reason the global economy is sliding further into contraction. Fame and credentials are no substitute for the knowledge of history combined with a reliable theoretical model. Longtime readers who are investors may recall that my 2002 recommendation to buy gold and avoid real estate has worked out just a little better than Krugman's 2002 recommendation to buy real estate and avoid gold.

Unfortunately, Krugman may still get his wish when the Federal Reserve is forced into 'monster' money printing ... at the expense of us all.

The Unemployment Depression

We have been investing very heavily in the healthcare sector, a sector which creates fewer jobs per dollar than most others, without being willing to control costs there. The “doctor fix” making its way through the Congress as we speak is the latest example of that lack of willingness.

We have persisted in subsidizing things, e.g. housing construction, oil consumption, that are not in our long-term interests. The long-term eventually arrives.

We subsidize the incomes of people who don’t need subsidies.

We undertake too much with our military and spend too much on it.

We have imposed an increasing administrative burden on businesses in the form of regulations, especially the execrable Sarbanes-Oxley. I know of no business that has improved its actual accountability by implementing it. But I know of lots that are bearing substantial costs by doing so.

Government at all levels is mired in the 1950’s in business methods, personnel policies and procedures, and, most of all, costs.

The policies of the Fed, contributing to asset inflation, made us think we were better off than we were.

Printing money got us into this economic mess, and printing more money is going to make things a lot worse. The Austrian economists have been right all along. Isn't it about time more people started listening to them?