Krugman's fractured fairy tales

My distinguished colleague Paul Krugman has obviously decided to turn all mainstream economics textbook analyses upside down. Starting with a preconceived conclusion, he demonstrates willingness to grab at any odd argument in an effort to justify the policies of waste that have exploded under the current administration. The latest concept that Krugman tries to revolutionize is the "crowding out" effect of government spending---redirecting resources from potential productive private uses to unproductive or destructive public uses.

Krugman's fractured fairy tale begins with an antiquated Keynesian formula: GDP (the largely useless concept of national output) = C (individual consumption) + I (private investment) + G (government purchases). Today's GDP is falling with the fall of C and I while "monetary policy---the usual line of defense against recession---is hard up against the zero-interest-rate bound." Thus the solution becomes self-evident.

Enters the Colossus: Big Government promises to revive the economy by increasing its purchases---as much as is necessary to bring the nation's output to its full employment level. Krugman starts with a truism derived from the above formula (higher G means higher GDP, if we keep C and I unchanged) and the correct observation that expectations are a more important determinant in private investment than interest rates. Unfortunately, he then jumps to the naïve conclusion that, just by boosting the GDP figure, the current fiscal expansion will create enough business and consumer confidence to produce the next economic boom.

But here is the catch---what we produce and how we produce it is just as, if not more, important than how much we produce. If we believe that the government is able to utilize our resources through planning better than we do it through the market, it is theoretically possible for Obama's stimulus to also increase private spending and investment---a veritable "crowding in" effect. In which case Krugman deserves a second Nobel Prize in economics. If, on the other hand, most of us are not blind to the abysmal record of government mismanagement of the economy during the last century, the current policy can only stimulate uncertainty, inflation, and another round of market collapses.