However, in his Nov. 10 column entitled "Franklin Delano Obama," Krugman offers two historical lessons to the incoming Obama administration. The first, the political lesson, is entirely correct. Economic missteps can absolutely undermine an electoral mandate, and they will do so very rapidly indeed. The problem, however, is that Krugman's second lesson, the economic one, advocates precisely such a misstep, a failure of such proportions that it can only be described as epic. He writes:
My advice to the Obama people is to figure out how much help they think the economy needs, then add 50 percent. It's much better, in a depressed economy, to err on the side of too much stimulus than on the side of too little.
Krugman's incredible notion is that the failure of the New Deal to lift America out of the Great Depression was due to FDR's overly conservative approach to government spending. He admits that federal spending increased dramatically, but argues that this was overshadowed by the previous administration's tax hikes and a reduction in state and local spending. He quotes the conclusion of an M.I.T. study that he considers definitive, in which E. Cary Brown states that the Keynesian-prescribed fiscal stimulus failed "not because it does not work, but because it was not tried." And he draws the wrong conclusion from economic growth of the 1950s when he concludes that it was the "enormous public works project known as World War II" that "saved the economy."
Incredibly, the Austrian economist Murray Rothbard managed to accurately foretell Krugman's column 45 years ago in the introduction to the 1963 edition of his book "America's Great Depression":
Suppose a theory asserts that a certain policy will cure a depression. The government, obedient to the theory, puts the policy into effect. The depression is not cured. The critics and advocates of the theory now leap to the fore with interpretations. The critics say that failure proves the theory incorrect. The advocates say that the government erred in not pursuing the theory boldly enough, and that what is needed is stronger measures in the same direction."
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In fact, if the president-elect is to take Krugman's advice seriously, by the end of his first term he will have to spend more than the $5.605 trillion annually that would be the equivalent of FDR's spending. Even if state and local government spending remained flat, at $2.951 trillion, this would mean that government spending would account for 62 percent of the U.S. economy in 2007 without any economic contraction. If, however, the U.S. were to enter into a depression of similar proportions, an FDR-style spending increase would account for 115 percent of the entire economy!
Now it's obvious that Krugman's idea is that a massive spending shock would avert the greater part of the contraction; that's the whole idea of attempting to smooth out the business cycle in the first place. But the Nobel Prize winner is failing to account for two extremely important facts. The first is that in 1929, combined federal, state and local spending only accounted for 11.3 percent of GDP. In 2007, it accounted for 39.3 percent. Therefore, the massive spending shock has already been applied and even an increase to the historic 1945 level of 53.3 percent would be much smaller, in percentage terms, than the 98 percent increase that Krugman tells us was too small.
The reality is that Krugman's advice is incorrect because his Neo-Keynesian economic model is hopelessly flawed. Americans are witnessing, in real time, an unnecessary empirical test of John Maynard Keynes's failed theory. It is a real tragedy that Messrs, Bernanke and Krugman have studied the failures of the past only to reach precisely the wrong conclusions about the consequences of government attempts to manage the economy. For, if the Austrians are correct and these fiscal interventions only serve to exacerbate and prolong the depression, the famous students of economic history will not prevent a Great Depression, they will cause an even greater one.
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