Sunday, July 18, 2010

Why Krugman and Roubini Are Wrong About Slow Growth

Calculated Risk has a post today titled Double Dip Discussion which double quotes two academics of the gloomy persuasion, Drs. Krugman and Roubini. These doctors decry slow growth as follows. First the Krugman quote:

Let’s be clear: a recovery that involves growth so slow that unemployment and excess capacity rise, not fall, isn’t really a recovery. If we have only have 1 1/2 percent growth, that will amount to a double dip in all the senses that matter.

Next, the Roubini quote(s, from his article on Project Syndicate titled Double-Dip Days:

The likely scenario for advanced economies is a mediocre U-shaped recovery, even if we avoid a W-shaped double dip. In the US, annual growth was already below trend in the first half of 2010 (2.7% in the first quarter and estimated at a mediocre 2.2% in April-June). Growth is set to slow further, to 1.5% in the second half of this year and into 2011.

Whatever letter of the alphabet US economic performance ultimately resembles, what is coming will feel like a recession.

(The above Roubini quote is from the linked article found at CR's post, but is not from his excerpts from Roubini, but rather are my own for purposes of this post.)

The action point of the Krugman and Roubini arguments is for more stimulus, which I have always called "stimulus". There is a difference between stimulus and "stimulus". Repaving roads in decent repair is "stimulus". Rebuilding a closed bridge that when open allows useful commerce between nearby regions is stimulus. Maintenance of existing structures and infrastructures is not necessarily either stimulus or "stimulus". It is simply needed maintenance; it is a cost, and proper accounting shows it as a depreciation expense to be matched by capital expenditure, in general. Making ammunition is "stimulus". So is using it. The part of the 2009 ARRA "stimulus" bill that supported Medicaid was humanitarian expenditure and neither "stimulus" nor stimulus. It was, as the Wizard of Oz might have said, good deed-doing.

If population grows 1% per year and national output grows 1 1/2% per year, that's OK IF IF IF the output is useful. What happened in the last decade is that home construction far outstripped household creation; and house construction was larger and fancier than before. As it turned out, the economics behind that surge in homebuilding was faulty, and led to the fall of Fannie and Freddie. Further, the lending surge that supported all the homebuilding also supported other malinvestments.

When Drs. Krugman and Roubini say that slow growth equal to or above population growth will feel like a recession, of course it will in today's world, because no one I know feels that the recession/depression has really ended. In some parts of the country, it has lessened, but nationally everyone living in the real world knows that times remain (relatively) tough. In better times, growth slowdowns such as occurred in 1994 and many other times were correctly not perceived as feeling like recessions, because the economy acted healthy.

If the United States government is really of, by and for the people, then said government should come up with good new ideas for how it should allocate resources. More war in Asia? Okay, then pay for it. Yet more road paving? Okay, justify the need and pay for it; and account for the extra strain on oil prices caused by asphalt production (for example). More healthcare spending out of Washington? Okay, but pay for it, because that is an ongoing expense, not an extraordinary one. The idea of borrowing from China to pay medical expenses for American elderly or poor is bizarre, especially considering that per capita GDP is 10X here than there.

One point of accounting is to allocate costs and benefits, andto allow market forces to help people allocate resources. In a healthy economy where investments and expenditures have good reasons to be done, growth above per capita growth would not feel like a failure. The obvious solution is to limit the distortions and coercions caused by government-- the only legitimate economic actor in this country which acts with the barrel of a gun implied when it wants others to do something-- and allow a free society to work, spend and save as much or as little as it wants, with government respecting those choices within the rules society sets government to enforcing.

Drs. Roubini and Krugman are statists always arguing for more government regulation and control. They may claim to believe in limited government (at least, Roubini may so claim), but it is always in the future. In the meantime, they advocate pushing more debt onto this debt-addicted society and more central control onto a country that grew to be the world's largest creditor during a period when the Federal government had almost no debt and had limited interference in the workings of the economy.

Central planning only works if the planners are humble, hard-working public servants who present governmental finances and plans honestly, and regulate fairly and consistently.

It is the failure of government and its cronies in Big Finance and other "Bigs" to perform on behalf of society at large that have led to the extensive cynicism that abounds in America. The solution is not the Krugman/Roubini solution of more "stimulus" and more "growth" but a return to freedom and an of-by-for the people reordering of the economy. In other words, bottom-up beats top-down right now.

If that (unlikely for now) result occurs, there will be a new rebirth of economic growth.

For now, count me as dubious.

Growth slowdowns are not the important problem. The economy has arteriosclerosis and the Federal finances threaten to turn cancerous given the threat of accelerating money-printing. The Krugman/Roubini wailing over allegedly inadequate growth ignores these much more important problems.

Copyright (C) Long Lake LLC 2010

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