Sunday, May 20, 2012

Krugman's Keynesian Stimulus Theory is Marred By Reality

The financial crisis ended the artificial boom in housing, when that happened, government revenue growth fell or stagnated, but government spending, which had risen in tandem with the bubble, did not. THIS is the cause of the Eurozone crisis, unsustainable government deficits and spending. Government spending, much like property prices, must return to more reasonable levels. Krugman's cyclical stimulus theory is deeply flawed due to real world problems. In theory, governments should fire workers and reduce its contribution to the economy in good times. The fired workers will easily find employment in the private sector and the reduction in spending will be more than countered by general economic prosperity. The opposite then should be done in recessions. Does this ever happen? Does government ever eliminate social programs and start laying off people in good times? No. What happens is that government grows and adds more permanent social programs and employees. When a deep recession occurs, the economy can no longer support such a bloated government. And with deficits and debt so high, there is simply no more room to expand government spending even more. The theory calls for temporary government spending that can be adjusted to counter cyclical economic trends. The reality is that the vast majority of government spending is permanent, in the form of social programs and promised benefits. With each economic cycle, government grows bigger and bigger until a crisis point is reached where it becomes evident that such spending cannot be supported or sustained. Europe has reached such a point and the United States is set to follow very soon. Krugman and his followers should have been rioting in the streets, calling for less government spending during the housing boom if they took his theories seriously. Instead, all I heard were calls for even more government and a greater growth in spending. This is why the theory is garbage. It seems that the only way to stop the growth of government is a reality check, which is exactly what is happening in Europe. This crisis is the equivalent of an intervention for a drug user. The drug user can throw a fit and "riot", but he has hit rock bottom and the drugs will be cut off no matter what.

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