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Austerity vs. Stimulus: Has Krugman Won the Debate?

Austerity vs. Stimulus: Has Krugman Won the Debate?

“The evidence has gradually piled up that, however well-intentioned they might be, the ‘Austerians’ were wrong.”

– Henry Blodget, Business Insider

Last week, Henry Blodget, CEO and editor of the Business Insider website, proudly announced that in the long-standing debate of austerity vs. stimulus, the Keynesian Paul Krugman has won. “The empirical evidence increasingly favored the Nobel Prize-winning Paul Krugman and the other economists and politicians arguing that governments could continue to spend aggressively until economic health was restored.”

Krugman advocates that the U.S. government needs to double, maybe even triple, the deficit up to $3 trillion to get the economy back on track.

That’s called a victory?

What is Blodget’s evidence? He states, “Japan, for example, has continued to increase its debt-to-GDP ratio well beyond the supposed collapse threshold, and its interest rates have remained stubbornly low. More notably, in Europe, countries that embraced (or were forced to adopt) austerity, like the U.K. and Greece, have endured multiple recessions (and, in the case of Greece, a depression). Moreover, because smaller economies produced less tax revenue, the countries’ deficits also remained strikingly high.”

I suspect that the writer has spoken too soon. The jury is still out. After announcing plans to double the money supply of yen, Japan’s stock market has rallied, but there’s no evidence that easy money will cause a robust recovery in the real economy. And despite constant talk of austerity, the United Kingdom — and Europe in general — has failed to cut spending at all. In fact, the United Kingdom actually has increased spending and taxation recently, just the opposite of what the “Austerians” (Austrians) recommend. See http://cei.org/web-memo/separating-european-austerity-fact-and-fiction.

Not surprisingly, there is no evidence of a U.K. or European recovery.

Blodget also notes in his write-up that a famous paper by two Harvard economists, Carmen Reinhart and Kenneth Rogoff, which shows that countries with high government debt grow slower was found to use some erroneous data. True enough, but funny thing, once the missing data are included, the results are pretty much the same: higher government debt, as a percentage of gross domestic product (GDP), leads to slower economic growth.

Moreover, as economist Matthew Melchiorre of the Competitive Enterprise Institute shows, Estonia in Eastern Europe actually has cut government spending and tax rates (the Austrian solution) and the economy is booming (7% plus growth rate).

Henry Blodget spoke too soon.

You Blew It! Economics Profession Gets an F?

It is hard to believe, but according to Cornell University economics professor Robert Frank, taking a college course in economics is useless. In the Sunday New York Times (May 12, 2013, “How Can They Charge That?”), Frank reports a recent survey that makes the “distressing finding that six months after having completed a standard introductory economics course, students are no better able to answer questions about basic economic principles than others who have never ever taken economics.”

Wow, that’s an incredible admission. One wonders if it’s worth it to take economics in college — or to teach it.

But in some ways, it doesn’t surprise me. I’ve felt for some time that economics needs to be taught differently by economists who actually have had experience making a payroll or investing on Wall Street. When economics is taught by pure academics, watch out. As one popular textbook writer admits, “There are so many complicated bits and pieces, and they are so hard for students to grasp.” And another one writes, “You may find yourself unlearning more than you learn, or operating in a fog of confusion.”

Oh, my!

I was so turned off by most economics textbooks that I decided to take a stab at it myself with my textbook “Economic Logic” (Capital Press, 2010, 3rd ed.). I take a brand-new, practical approach by starting with the profit-and-loss (P&L) income statement, not Supply and Demand, or GDP, etc…. and students seem to really like this dynamic business method. I also think it’s a big mistake to leave out intermediate stages of production in GDP. To my way of thinking, GDP leaves out the guts of the economy.

For more information on my textbook, go to http://www.mskousen.com/economics-books/economic-logic/.

“Economic Logic” normally retails for $49.95, but you can get it for only $34.95, plus $5 for shipping and handling, by calling Eagle Publishing at 1-800/211-7661. To receive the special price, mention code ECONL6.

To read my e-letter from last week’s Eagle Daily Investor, please click here. I also invite you to comment about my column in the space provided below my Eagle Daily Investor commentary.

In liberty, AEIOU,

Mark Skousen
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