Paul Krugman's Boondoggle

Paul Krugman has been on a roll the last two weeks. After announcing that America is in its “Third Depression” last week, he provided an encore last weekend, by blaming U.S. Federal Reserve Chairman Ben Bernanke for his concerns about the evils of deficit spending for failing to increase economic stimulation of the economy. During the Great Depression President Franklin Roosevelt brushed away concerns regarding the wisdom of deficit spending by saying; “If we can boondoggle ourselves out of this depression, that word is going to be enshrined in the hearts of the American people for years to come.” Perhaps Professor Krugman is frustrated that so many Americans have not enshrined the boondoggle of deficit spending in their hearts the same way he has.

Our good Professor just won the Nobel Prize for economics in October 2008, for his theory, that to be economically dominant, industries must concentrate their producers and suppliers into a common metropolitan area near their customers to maximize economies of scale and transportation savings. His model perfectly explained the 1950’s and 1960’s success of the U.S. auto industry’s tight concentration of assembly plants, steel foundries and parts suppliers in and around the city of Detroit; and within one days delivery to the bulk of their big city customers.

But Krugman’s theory of economic dominance through concentration has been rendered meaningless by modern supply chain management revolution that interconnects competitive vendors from across the globe. China has a massive balance of payments surplus because they can competitively ship products 10,000 miles to Detroit and beat local parts manufacturers on price and quality. Just nine months after our Nobel Laureate picked up his $1.8 million check and Norwegian hardware, General Motors, the poster child of the Professor’s industrial policy, filed the largest bankruptcy in the U.S. history in September 2009 with only $82 billion in assets, but $172 billion in debt.

Professor Krugman now wants to talk about how the Fed must be more stimulating to help small business in our own backyard. Supporting small business does sound admirable, given that it represent 99.7 percent of all the nation’s employers and employs 51% of the 130 million Americans working today.

But as the chart above demonstrates, courtesy of the Heritage Foundation, our government has already gone all-in with deficit spending. Since Professor Krugman was bestowed Nobel credibility, the U.S. Federal Government has run a $3.2 trillion dollar spending deficit that is on track to grow to $5 trillion dollars by 2012. For that amount of money we, the taxpayers, could have avoided the cost of bailing out GM and bought a brand new Chevy Impala for every working person in America. If we had a little more patience, in two more years we could be handing every employed person in the country the keys to a fully equipped Cadillac CTS. If Congress had spent its trillions of stimulus dollars to buy all those new cars, it might have done wonders to rescue Mr. Krugman’s ailing economic theories, but most deficit spending was actually boondoggled away through political earmarks.

The American public is suspicious that eventually they will have to pay for all this dubious deficit spending. They have read the headlines about how the rich will be soaked with the largest tax increase in American history; including big increases in the top rates for income, capital gains, dividends, and revival of the “death tax”. But most Americans know that when tax rates go up, the rich have the flexibility to simply adjust their investments and spending to generate more tax free income and avoid paying taxes.

When the government’s smoke and mirrors come back into focus, middle class Americans believe they will be stuck with the bill to pay the for boondoggle deficit spending that so far seems to have only rescued the politically powerful, such as Goldman Sachs.

Americans have given government massive deficit spending a chance to work its magic, and they are dissatisfied with the results. Unemployment is near double-digit rates, homes are depreciating in value, healthcare costs are about to skyrocket and they lack savings and income security for their future. It is time for Professor Krugman to learn from history, deficit spending was a boondoggle in the 1930’s and it has been a boondoggle in this cycle.