"Most people are in arrested development and cannot use logic." Jacob.
"Competition and capitalism are hated to-day because of their tendency to destroy poverty and privilege." William Hutt
"America is unique in that our economy is totally dependent on global charity." Peter Schiff

Thursday, August 11, 2011

Krugman on the debt ceiling deal

Quick analysis of the Krugman article:
He just makes assertions with no backing until he says this:

The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further

The question is, where does the govt get the money it is spending? It has three sources of money. 

The first is taxes. Even if we grant Krugman's [absurd] notion that what the economy needs is spending, taking money away from the taxpayer means that he will now be spending less. So there is nothing to be gained by taxing.

Nowadays the argument you see in reply to this is that the tax will be on the rich, who do not spend their money, but instead hoard it.
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 Which is of course ridiculous. Rich people invest their money, meaning try to find ways to make more money from the money they have. this involves ultimately lending it to someone who needs it to expand his business, or to spend it on something or other. Or they may buy stocks, which means they will become partners in a business in exchange for giving it money. What do you think the business will do with the money? Spend it, of course. In short, rich people do not hide their money under a mattress. They circulate it right back into the economy, hoping to make money. So it gets spent.

Of course, an Austrian would say that letting rich people keep their money is very important for the economy. Because ultimately, what makes a country wealthier is increased production. The rich we are talking about here have more money than they need to just get by. They have money left over to invest, meaning to find ways to make themselves richer by owning something that produces, or lending the money to someone who produces. Thus, the rich are important for making us all richer.

The second way the govt can have money is to print it. This is just a disguised way of taxing, and has all the disadvantages of taxing, and more. Because by the simple law of supply and demand, the more money there is, the less it is worth. The govt has new money to spend, and the new money we have will be unable to buy as much. So the govt can spend more because we can spend less. Note that it is a tax on everyone, not just the rich.

Imagine a small town having a market day. It turns out that it was a bad year, and there is not enough food to go round. Will that problem be solved by printing more money? The point is, wealth does not come from money. And so anyone who thinks that printing money can solve any problem is mistaken.

The third way the govt can have money is by borrowing it. Which is what Obama is going to to do. But what is borrowed has to be paid back, with interest. So that eventually the govt will have to find even more money by one of the three methods. In other words, borrowing will lead to more taxes, or more inflation [a result of printing money], or to more borrowing.

The plan seems to be to borrow more when the time comes. In theory, this can go on forever. You borrow this year, and pay back next year by borrowing even more. But though it's nice in theory, what happens is that the persons lending you the money will one day say, "Hold it right there. You are too deeply in debt, and therefore lending you more is risky. So if you want to borrow this time, you will have to pay a much higher rate of interest." This is exactly what happened to Greece, and has started to happen to us. S&P has declared to all the world that the US govt is riskier to lend to than it used to be. This is like the first tiny crack the iceberg made in the Titanic. More will follow.

When the lending stops, the govt will have no choice but to take away our money to repay its debts, just like Greece with its austerity program. Which refutes Krugman's notion that borrowing money now is good for the future.

But there is a deeper mistake in all he writes that we have not addressed until now. So far we have been granting him that more spending can help the economy, and contented ourselves with showing the problems with govt spending. If its more spending you want, you wont get it by the govt taking away our spending money, and borrowing just means they will take it away in the future. 

The real mistake, though, is thinking that an economy gets better by spending. Spending means to consume, to destroy. When you eat a hot dog, that hot dog is no longer there. It is gone forever. Same thing with anything you consume. Consumption is an act of destruction. How can you get richer by consuming more?

Of course, consumption has a place in every economy. It is the reward. After you work hard to produce, you reward yourself by consuming. The economy as a whole is not worse off, because you have first made the country wealthier by producing before you take some back by consuming. But how absurd to think that a countries problems can be solved by destruction!

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