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No, Mr. Krugman, You're Eating America Alive

Economics / Economic Theory Dec 23, 2010 - 06:20 AM GMT

By: Neeraj_Chaudhary

Economics Best Financial Markets Analysis ArticleHere we go again. This week, Paul Krugman, the 2008 Nobel Prize winner in economics and the go-to guy for progressives who need a morale boost, launched another misguided attack on Austrian School economists. From his New York Times soapbox, he referred to the free-market Austrian "hard money" philosophy as a "zombie idea" that is inexplicably eating the brains of the voting public.

The attack would hardly be worth a reaction if it weren't for the fact that column did create a buzz. In the piece, he repeated a refrain that has become common for the empirically defeated Keynesians. Said Krugman, "many economists, myself included, warned from the beginning that [President Obama's original stimulus plan] was grossly inadequate." He continued, "[a] policy under which government employment actually fell, under which government spending on goods and services grew more slowly than during the Bush years, hardly constitutes a test of Keynesian economics."

When looking for zombies, the first place Mr. Krugman should look is in the mirror. He has one answer to every problem: eat more taxpayers. He isn't even a true Keynesian. Mr. Krugman is the guardian of a system that died a long time ago. He is the walking undead of the New Deal era.

What Keynes actually said about government spending is that during recessions, governments should run budget deficits to boost aggregate demand, and during expansions, governments should run budget surpluses in order to save up for the inevitable recession years.

Now, whether you agree with this or not - and I happen to disagree with this approach - what we have actually done is run deficits, year-in, year-out, almost every single year for 40 years! And, as a result, we have accumulated a national debt approaching 100% of our annual gross domestic product.

This level of indebtedness has been shown to reduce the level of growth in an economy, no matter how advanced. Yet, Mr. Krugman argues that we should spend more money and run even higher deficits. So, who are the real zombies: those economists who mindlessly favor more and more government deficits in perpetuity, or those who have struggled to warn their fellow man that we are approaching a point of no return?

In the 1990s, the Austrians warned of a tech bubble. The Krugmanites urged lower interest rates and more government spending. In the 2000s, the Austrians warned of a housing bubble. The Krugmanites urged lower interest rates and more government spending. Today, the Austrians warn of a bond bubble that will lead to potential sovereign default. And, with the terrifying zeal of a flesh-eating corpse, Krugman urges lower interest rates and more government spending.

To me, it's very clear: just as a family or a business cannot continuously spend more than it earns, governments must live within their means as well. The US government has had special privileges since 1944 because our currency serves as the international reserve. But we are not behaving as good stewards of this responsibility, and, if we are not careful, the world is going to dump the dollar. If that happens, the trillions of dollars that are held by foreign central banks could come flooding back into the US economy, causing an inflationary period that dwarfs the stagflation era of the 1970s. It certainly won't help that our nation is more dependent than ever on foreign oil. [For those looking to gain investment exposure to the North American energy market, be sure to read Euro Pacific's new special report, "What's Ahead for Canadian Energy Trusts?" Click Here to download.]

Austrians believe foremost in sound money - the idea that the amount of currency in the economy should be relatively stable, so that its purchasing power is maintained over time. This minimizes inflation, and allows consumers, businesses, and lenders to make efficient financial decisions. It also keeps government in check, because the Treasury cannot run perpetual deficits and simply print new money when the bills come due. It is no coincidence that our nation's descent into near-constant annual deficits took place right around the same time as President Nixon took us off the gold standard.

Austrians believe that free markets are largely self-regulating. This means that people will tend to make choices in what they perceive to be their own best interest. Government interventions are almost always meant to override individual choice because politicians think they know better. This is not only personally offensive, but leaves us with an economy that can provide less of what people actually want and too much of what they don't want. Look at the housing bubble. Government incentives caused miles and miles of McMansions to be built across the country - houses that most people could not actually afford. In the meantime, productivity was diverted from producing things people actually need and can afford. The result is an economic depression and heart-breaking dislocation for millions of Americans.

Austrian School economists are not zombies. Our philosophy promotes life, liberty, and prosperity - last time I checked these are not the goals which get zombies up in the morning. Meanwhile, economists such as Mr. Krugman continue to argue for lower interest rates, more intervention, more spending, and larger deficits. He advocates for an economic system that feeds off the productive strata of society to support the unproductive. Now there's a philosophy that any self-respecting zombie could support!

Where does it end, Mr. Krugman? At what point do we stop running our deficits and start to pay back the money that we have borrowed? At what point will enough wealth be extracted from producers to support your voracious appetite for spending? Perhaps you think we should we mindlessly devour the purchasing power of our fellow nations until there is nothing left, but what happens when they take a shotgun to our heads?

For in-depth analysis of this and other investment topics, subscribe to Peter Schiff's Global Investor Newsletter. Click here for your free subscription.

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Neeraj Chaudhary is an Investment Consultant in the Los Angeles branch of Euro Pacific Capital. He shares Peter Schiff's views on the US dollar, the importance of the gold standard, and the rise of Asia as an economic power. He holds a B.A. in Economics from the University of California at Berkeley.

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