For five years now Dr. Krugman has argued that increasing U.S. government spending is vital to our nation's recovery. And for five years he's been dead wrong.
Since this crisis began, the United States has spent trillions...more money than any nation in history. In the process, it's gone from being the world's biggest creditor to the biggest debtor of all time.
Here's the thing. If Dr. Krugman's ideas and his understanding of modern finance were accurate, our economy would be screaming along at 6%-8% a year, and the debt we've accumulated already would have led to some sort of government-spending utopia.
Spending even more money now would be like giving an addict more drugs on the assumption that it will help him kick the habit later ..
Instead of spending more money on the assumption we'll deal with the problems for having done so later, as Dr. Krugman advocates, what we need to do is cut spending radically.
Our government needs to get out of the way and free up the true capital needed for growth. We need to let dead financial institutions die, including, if necessary, parts of our nanny state itself.
If the government seizes capital, which is effectively what it is doing by printing and diverting expenditures, it lowers both the return on investment and, not coincidentally, the incentive to invest in the first place.
The other flaw in Dr. Krugman's argument is that cheap capital and government spending does not constitute effective investment. In fact, it creates "malinvestment." .. pricing distortions caused by unstable money that actually causes businesses to invest in the wrong assets at the wrong time.
The housing bubble is perhaps the best example in modern times of what I am talking about in this instance. Fueled by an orgy of debt, unregulated derivatives and congressional leaders who determined that housing was a right not a privilege, billions in capital was diverted. For lack of a better term, it was "malinvested" and the results should not have been surprising in the least.