Novel economic logic from an (Ig)Nobel Laureate: Paul Krugman’s dubious grasp of reality

“When we save a schoolteacher’s job, that unambiguously aids employment; when we give millionaires more money instead, there’s a good chance that most of that money will just sit idle.”
~Paul Krugman~ “America Goes Dark.” New York Times, 8 August 2010.

Comments such as this surely bring into question how anyone could win a Nobel Prize in economic sciences yet be so ignorant of how or why markets work.

Let’s start with the latter claim. Given the diverse & vibrant capital market in the US, it is bizarre to claim that allowing millionaires to keep more of what they earn increases “idle” balances, whatever those might be.

Next, saving jobs of schoolteachers requires higher taxes, increased government borrowing or in the case of the federal government with the connivance of the Fed, more money to be printed.

None of these actions “aids” employment. In the first instance, higher taxes reduce spending by households & businesses that will almost certainly lead to less job creation by the private sector.

And increased public-sector borrowing to create or save public-sector jobs with massive deficits tends to suck the oxygen out of the economy with fewer resources left to the private sector. As it is, the Congressional Budget Office (CBO) estimates that America’s public-sector debt is projected to hit 62% of GDP, up from 40% in 2008 & almost twice its historical average. And the CBO projected that this ratio will rise to 146% of by 2030.

In all events, adding or protecting jobs in the public sector are the worst possible solution to reducing the unemployment rate.

As it is, unions represent around 37% of public sector workers, compared to 7% of private sector workers. Since their governments paymasters do not consider profits & losses, public-sector workers can demand & receive settlements that bear no connection with productivity or value for money.

As such, public-sector employees receive more generous benefits & pensions than those that make net contributions to the pool of tax revenues. Since public-sector employees earn from this pool, tax payments by them do nothing to enlarge it.

The US is experiencing a growing numbers of citizens in households that pay no income taxes. This along with a growing public-sector labor force means that the proportion of workers that actually pay into the tax pool is shrinking.

It seems that the US is moving towards a “tipping point” that will stifle long-term economic growth prospects just as happened in Japan after its bubble economy collapsed in the late 1980s.

Note the similarities in the policy responses. Japan’s leaders refused to allow over-inflated assets to deflate completely while embarking on endless rounds of “stimulus” spending. Now the ratio of Japan’s public-sector debt to GDP is moving towards 200% with no sign yet of full economic recovery for 2 decades.

It seems that professor Krugman is as ignorant of history as he is of market processes.

This entry was posted in Uncategorized by christopher. Bookmark the permalink.

About christopher

Content of "Natural Order" attempts to reflect the commitment of Universidad Francisco Marroquin to support the development of a society of free & responsible individuals. The principal commentator for this blog is Christopher Lingle.

Leave a Reply

Your email address will not be published. Required fields are marked *