The insufferable Paul Krugman is having a field day with a new batch of research that allegedly refutes the claim—that a 90+% debt to GDP ratio makes for a slow economy—made by Harvard economists Carmen Reinhardt and Ken Rogoff in their paper Growth in a Time of Debt and their popular book This Time It’s Different. I happened to have read the book, and while I found it to be an interesting read, I wasn’t all that taken by the data. Not that I doubted it, but simply because, whether we’re talking 90%, 120% or 200+% (Japan) debt to GDP, the fact that a government having to borrow to meet its obligations will, while not necessarily now (the act of borrowing at record low interest rates does not itself a recession make), one day suffer the economic consequences of having to take from future generations (the act of paying it back) to pay for its excesses. I mean duh! Who needs the data?
Well, alas, genius economists need the data. For they seem to believe that commonsense won’t get ya (save for the likes of F.A. Hayek) a Nobel Prize. That said, while I never looked at the work that won my protagonist his, I did hear one legitimate (meaning un-politically-captive) economist suggest that Krugman’s work on international trade patterns was indeed respectable. Why, by the way, haven’t I read his work? Because, for me (should be for you as well), the phenomenal benefits of international trade are the ultimate no-brainer.
The problem with applying economic commonsense is that—along with keeping economists off the map—it offers little opportunity for political exploitation. I mean what are your odds of getting elected if you confess your commonsense belief that corporate subsidies—the taking from taxpayers and the giving to campaign sponsors—are economically destructive misallocations of resources? Or that as the gap between government assistance payments and a working wage narrows so goes the incentive to work? Or that by forcing up the cost of labor, as with any other commodity, you sell less labor? Or that when you extend the length of government assistance payments you extend the period of high unemployment? Well, you’d have a devil of a time raising funds, or votes, while you cater to no special interests, thus, your odds of political success would be very slim indeed.
As for Krugman’s charge that austerity brings economic pain; sure, cutting government spending brings economic pain, in the short-run, to the recipient of that largess. But as Henry Hazlitt pointed out perfectly in Economics in One Lesson:
It is often complained that demagogues can be more plausible in putting forward economic nonsense from the platform than the honest men who try to show what is wrong with it. But the basic reason for this ought not to be mysterious. The reason is that the demagogues and bad economists are presenting half-truths. They are speaking only of the immediate effect of a proposed policy or its effect upon a single group. As far as they go they may often be right. In these cases the answer consists in showing that the proposed policy would also have longer and less desirable effects, or that it could benefit one group only at the expense of all other groups.
My point being that the “showing” need only be the applying of commonsense: of course the policy that would target government spending toward one group comes at the expense of all other groups (and future generations). Can you refute that? Well, if you’re Krugman, you’ll try. He would have us believe that government can, by some miracle, allocate other people’s resources more productively than they can themselves. Please tell me I don’t have to try and convince you what an utterly nonsensical notion that is!