By Matthew Ricchiazzi Keynesian economics—while a convenient logic for liberals trying to increase the size and scope of the welfare state—it is far too simplistic a theoretical paradigm for the current geopolitical environment, and lessons learned in the context of the 1930s are not contextually relevant comparisons to contemporary economic challenges. Nobel laureate and New York Times columnist Paul Krugman argues that massive increases in federal spending will create jobs, and that austerity is a bad economic policy that will result in a “lost decade” similar to Japan’s economic malaise following the Asian Financial Crisis of 1997/98. But Krugman’s argument is flawed. First, he assumes that all federal spending leads to economic growth and job creation. That is a fallacy. As we have seen with the $800 billion economic stimulus package passed in the first week of President Obama’s administration, all federal spending is not equal. Most of that spending was for pork barrel projects, which are essentially investments that the government is making in projects that don’t have a return. In finance, that’s called wealth destruction. Government spending can only create sustained economic growth if it is invested in infrastructure that will generate future cash flows (or future savings) sufficient to compensate the cost of capital associated with the investment. Expanding the welfare state, social entitlement programs, and pork barrel projects—paid for on the backs of future generations—is a shockingly stupid and superficial analysis akin to generational theft. Second, Krugman assumes that the financial system of the 1930s is a contextually relevant comparison with the contemporary system. But the machinations of the global financial system are far more integrated than ever before. Capital has never before transcended political jurisdictions as fluidly or as immediately as it does today. In the contemporary context of almost instantaneous capital outflows and inflows, transcending central banking systems and political jurisdictions, the nation-state has become an irrelevant concept in meaningful economic analysis. Instead, the region has emerged as the relevant wealth generating unit of a globally competitive economy. The concept of the nation-state and the presumption of a relatively closed national economy is a fundamental assumption of Keynesian theory. We don’t have that anymore. Nations don’t compete. Regions compete in a globally integrated marketplace. And capital will instantaneously flow to the corners of the earth where it can be put to best use. Let me illustrate. Let’s say we do what Krugman says we should. We massively increase federal spending on the size and scope of the federal government. We spend money on investments that do not have a return to justify the cost of capital (i.e., wealth destruction) so that a larger pool of government employees or welfare beneficiaries that do not create value in our economy can spend taxpayer sponsored paychecks on goods manufactured in China and for oil imported from abroad. How does that help America and create sustained economic growth? It doesn't. It becomes a drain on the wealth generating private sector of the economy. Only now, your grandchildren will have to pay for the national debt that was incurred to pay for overconsumption of those Chinese goods and that imported oil (plus interest). Professor Krugman, you're a nice guy, but you're wrong. |