Stimulus to the Rescue!

I was listening to Paul Krugman on the radio (or some left-wing blog podcast, I don’t know what the kids call it today). The host of the show asked ridiculously penetrating questions (for being left leaning and all) and Paul Krugman gave his usual establishment answers. For this wonderful post, I’ll include my gentlemanly rebuttals.

1) Paul, isn’t the US national debt already so huge, and the budget deficit so big, that borrowing more money would be like throwing fuel on the fire?

Paul: It’s not something to worry about (btw, he sounds like a little girl on the radio), as during all national crises the government must borrow huge sums of money without worrying about deficits of debt. Furthermore, the US government is looking for short term financing and will scale back spending after they have healed us through their benevolent spending orgy.

Erik: It’s always something to worry about. Pretending to be dyslexic with numbers is as stupid in the real world as it is on Pennsylvania Avenue. If governments can borrow lots in bad times to make the economy better, then why can’t they borrow during good times? Hells if it feels good why not do it all the time? The reason is because political spending is volatile, unreliable, and not even based on elementary school finance. Bush ran the largest peacetime budget deficit in US history (as a % of GDP), during mainly prosperous years. It’s common knowledge that spending is a lot easier than saving.

Paul: Government spending is the only way to close the output gap and Keynesian Nobel prize winning economists like me have decided to put this fundamental law of the universe along side with gravity.

Erik: Government spending feels like magic, but the grownups know it’s not real. The US government owns literally NO PRODUCTIVE ENTERPRISES! and therefore nearly every penny spent has to come from either taking the money from taxpayers, or draining the capital markets through government borrowing. When the government borrows money, a new dollar isn’t pulled out of Krugman’s magic money pot, instead it means that someone in the private sector won’t spend it, and some pencil-scribbling bureaucrat will.

Dr. Krugman: But building infrastructure will make the US economy strong in the long run with better healthcare, roads, and utilities.

Erik: Of course it will Paul. Having better of anything always leads to better results. But wait! You have to pay for it! Of course we would all love a cheap futuristic transportation network, but if you can’t afford it, you’re simply draining the economy from one place, to prop up a bridge in the other place (where most likely no one will ride over it as it sits in the middle of Maine [where no one lives]).

The idea violates common sense. You could look to a poor country for proof. If I really believed that deficit financing could cause miraculous growth through infrastructure spending, then why doesn’t’ the Congo, Cambodia, or Zambia become a first world country through infrastructure spending? It’s because wealth comes first, then luxuries come later. You need to have the excess capital in the first place to build infrastructure, not the other way around.

Or again, look at it from the perspective of an unemployed auto worker. If he goes to his financial advisor and asks what to do (assuming Krugman is a personal finance advisor), Paul would tell him to remodel his kitchen, buy a new TV, get a new mortgage, and this will help stimulate his personal economy.

2) If the US government is broke, where is it getting all this money to finance bailouts, asset guarantees, interest rate swaps, nationalizations, and stimuli?

Paul: The US government has the best credit on the planet. Our treasuries sell for lower than any corporate security or bond, and we even pay lower interest rates than European or Canadian government debt.

Erik: I completely agree! The US government does actually pay the lowest cost of debt on the face of the planet. This is factually undeniable. But I seem to remember another sector of the economy that did that once. Interest only loans, 0% down payment, teaser rates and adjustable rate debt. Oh the US mortgage industry! Well that went down well. In my next article I’ll explain why the US is temporarily paying low rates, why this is, and why it will change.

Paul: Also, the US government has the whole US economy to tax, which means we can pay back our creditors at any time.

Erik: True enough Paul. If you start ransacking cities, stealing hay and corn, the US government could collect on its debts. But the citizens of America won’t let their hard earned income and assets be looted to pay foreigners so that politicians could bail out failing banks.

Viva la stimulus!