When I read Paul Krugman’s latest defense of Keynesian economics a few days ago, I was shocked and amazed that even Krugman fans and devout Keynesians would swallow his latest strange and rambling defense of stimulus. It doesn’t take an economist to break down this particular hack job, though economist Russ Roberts does a particularly great job of it over at Cafe Hayek. Rather, one need only scroll down to the comments to find a few factual errors readers spotted in the picture Krugman paints of Europe, the US, and his claims that Greece and Ireland faced “savage austerity” in particular.

But even the basic argument at work here is nonsense. His defense of Keynes comes from the claim that if the US had only spent more, it would have worked, and that we have abandoned true Keynesianism, thus failing to save the economy. In the post linked above, Russ Roberts points out some calculations from 2009, courtesy of Alan Blinder, that show the size of the US stimulus to have been the “proper” Keynesian amount. Of course, the basic claim that the US and Europe have abandoned Keynesianism is ludicrous. After all, we did in fact try stimulus after stimulus. Our current economic policies are clearly based on Keynesian economic models, hence the political backlash mentioned by Krugman. Furthermore, the underlying claim that more spending means more success rests on a series of assumptions that both Keynes and Krugman share. The major assumption they make is that stimulus money and government spending in general is spent well. However, this is not always the case. The only reason this has failed in Greece, according to Krugman, is because the Greek government was poorly led and made bad investment decisions. He claims, however, that the US government will of course do much better.

The problem with this claim is twofold. First, the claim that governments know where the best investments are is, for the most part, inaccurate.  The financial crisis, for instance, is often blamed on bankers who pushed subprime mortgages by packaging them and selling without telling the buyers that these investments were worthless. Yet, this arose largely from the government encouraging such sort of behavior and backing the banks. With federal assurance ofsubprime mortgages, investors took a lot of risks with them. After all, the government had promised to bail them out if it failed.

Secondly, in his article Krugman assumes that government spending encourages private spending with the result being the so-called Keynesian multiplier. This means that more spending would have made investors and consumers feel safer and result in them spending the money they receive rather than saving most of it due to the boost in confidence. The issue here is that we live in a vastly different world than Keynes did. While spending may have encouraged more spending during Keynes day, in the current debt-on-top-of-debt situation, it mainly just ends up freaking people out. Just think about it: how do you feel when you hear we’re spending in deficient again? Probably like investing in the U.S. economy, right? While Krugman is correct that there is currently a negative interest rate on U.S. bonds (meaning they’re in demand), he forgets that since these bonds are inflation protected people are betting on inflation, This essentially means that they are not exactly confident about the future of the dollar, or the Euro for that matter.

Maybe if he shaved the bears it would grow back 1.3 times bushier too?

The major issue is that Keynes thought we could spend when we needed to (in the depths of a recession, in his opinion) and save when we had a surplus. However, we never seem to get to the austerity part. Keynes rested his plan on the assumption that during times of relative boom we would save, never getting into the situation of having the amount of debt we had going into this particular recession. I doubt any self-respecting economist would have supported the claim that in an already debt-ridden global financial system, more debt would be the answer to bum investments that never did and never will come to roost. Rather, Austrian economists claim we ought to let things realign. When we spend in deficient on top of debt, we lose sight of which investments are worthwhile and which are not. That is, if we ignore debt and expand it with no end, we have no way of knowing which investments are working and which are failing (producing debt). This is the most basic Austrian claim against government spending:  by assuming success, involving politics, and disturbing the feedback system inherent in markets, it serves to confuse us all. This malaligned credit then continues to spell economic downfall again and again until we deal with the underlying issues.

But since we assume success, our measurements for success beg the question and nothing ever gets fixed. We look to GDP numbers (which are generated with government spending as one of the factors) and the creation of “jobs.” This is one of the ugliest economic fallacies that still confuses all sorts of people.  We miss the point when we measure success in number of jobs. My response to the claim that we need to create work is that humans started out in poverty and destitution, and the work we do to make things better—the work to be done to get there—is infinite and endless. In my opinion, we never lack jobs because we never lack work. For every job that’s “created” someone is taken from their work in another industry.  The only issue is when resources are invested improperly, leading people to do work that doesn’t need to be done, or people are blocked from doing the work that needs to be done. This is called malinvestment.

Paying someone to do something doesn’t necessarily mean they’re being productive. For instance, if I could spend in deficit indefinitely like a government, I could pay you to smash windows of local businesses because I thought it was funny. You would be employed, but you’d be hard pressed to show that you’re doing something productive. In a free market, people only receive wages when they produce something of value like an iPod or a new medicine. However, when governments spend, they often pay people who aren’t producing things of value or pay them more than the value produced. This is then taken down in the books as economic gain on the assumption that the work being done is actually creating the value that the pay corresponds to when it may actually be c

reating far less value or actually destroying valuable property. This “success” is then used to justify further government action and we get more confused about the true value of our investments. A terrible cycle, and one that Dr. Krugman would have us continue to feed into. I would prefer to see the underlying problems addressed and the investment mistakes sorted out now rather than years down the road when we’re even less sure which way is up.