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Krugman in Need of Remedial Economics Education

Economics / Economic Theory Apr 14, 2009 - 04:43 PM GMT

By: Mike_Shedlock

Economics Best Financial Markets Analysis ArticlePaul Krugman is back in his usual form of preaching sheer idiocy with his piece Time for bottles in coal mines.

Krugman is upset that Obama says stimulus projects under budget.


"By the end of next year our investment in highway projects alone will create or save 150,000 jobs, most of them in the private sector," Obama said during an appearance at the Transportation Department to plug his plan.

"What is most remarkable about this effort ... isn't just the size of our investment or the number of projects we're investing in. It is how quickly, efficiently and responsibly those investments have been made," Obama said.

"This government effort is coming in ahead of schedule and under budget," he said.

Obama said fierce competition for the projects had led to bids coming in under budget in many states around the country. The White House said bids have been 15 to 20 percent lower than expected on average.

"Because these projects are proceeding so efficiently, we now have more recovery dollars to go around, and that means we can fund more projects, revitalize more of our infrastructure, put more people back to work," he said.

Logic would dictate that getting more work done for less cost and employing more people to do it would be a good thing. But Noooooooo! Krugman says "Seriously: if the projects really are coming in cheaper than expected, that doesn’t mean we should bank the savings; it means that we need more projects."

Here's the deal. If a road needs patching then patch it. If a bridge needs fixing then fix it. The least amount of money spent the better. That is pain common sense that any eighth grader could easily understand.

Somehow Krugman believes the more money is wasted on projects the better off we will be. Krugman even cites Keynes' Marginal Propensity To Consume absurdity that burying money in coal mines will stimulate the economy.

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again, there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

What that would do (assuming it could be carried out on a marco scale) is promote malinvestments in digging equipment, and cheapen the dollar while doing so. The stimulus would wear of as soon as the notes were retrieved and the digging tools business would crash. Those who were lucky enough to retrieve the cash might be marginally better off, but at the overall expense of everyone else. Those who borrowed money for digging equipment only to come up empty handed would be back out of work and in worse shape than before. Those who sat on the sidelines uninvolved had to fund this mad proposal with their tax dollars or the dollars had to be conjured up out of thin air causing either inflation now or some massive problem down the road (such as paying interest on the national debt).

In reality, the mine digging proposal is nothing more than another variation on the idea of paying people to do nothing (i.e paying people to dig holes and paying more people to fill the holes back in). Yes, if someone was stupid enough to propose that, and apparently Krugman is, we can indeed have 100% employment (until the economy totally blows up of course). The only real difference that I can tell is the mine digging idea only rewards those who find the money while ditch digging rewards everyone.

I use rewards loosely. With either idea, one must ask "What is the cost?" Krugman and the rest of the Keynesian clowns never address that part of the equation. Where does the money come from to pay for such ridiculousness?

The only way to fund such insanity would be some combination of the following

  • Increase taxes on productive businesses
  • Increase taxes on goods and services
  • Print money and ignore the consequences
The Keynesian solution is invariably the latter: Print money and ignore the consequences.

Once again any eighth grader would understand the folly of paying people to do useless work. Those same eighth graders would understand the idea that if reckless spending got us into this mess, then reckless spending cannot possibly get us out of this mess.

Yet amazingly GDP will rise with such stimulus efforts because by definition all government spending is deemed to be productive no matter how unproductive it is. So take any improvements in GDP later this year as a result of these Obama's stimulus programs with a grain of salt it not a bushel of salt.

I have advice for Krugman: Throw away your years of high-level academic training and the nonsensical equations in Keynes' Marginal Propensity To Consume and take a course in 8th grade math. You seriously need remedial education.

For more on Krugman please see

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2009 Mike Shedlock, All Rights Reserved

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