Recently, on CNBC’s Squawk Box, Paul Krugman ran into some surprisingly strong skepticism about his calls for more government spending. It was clear from the onset that no one was buying into the Keynesian philosophy that infinite government spending will save us all. It wasn’t easy, but the interviewers finally managed to tie him down as to how much spending is too much.
Attempt #1 (4:04)
“Is there a maximum amount of government spending as a percentage of GDP, below 100, that you would uh… what would it be then?”
“When I’m in Europe, when I’m in Germany, I will actually lecture them that they should keep their stores open on Sunday…”
Wow. What just happened there? It’s as if he just made up a different question in his head to respond to. He does go on to say that Sweden has sailed through the crisis and their government spending is around 50% of GDP. He also claims that Europe as a whole has been doing very well over that last 40-50 years and their only real mistake is a common currency. Translation: the whole debt crisis would be going a lot smoother if they just had the ability to steal from the savers at will.
Attempt #2 (7:30)
“How much do you think we can spend to… grow the economy – if you think that would work – before the bond vigilantes have a problem?”
“We have to look at history… Great Britain had debt levels as a share of GDP much higher than what we currently have for much of the 20th century – never a problem.”
That’s a pretty selective memory considering that the IMF actually had to bail out the UK in 1976. And still no answer to the question.
Attempt #3 (9:43)
“What is the maximum amount that the government should spend as a percentage of GDP? Do you have a number for me?”
“When it gets above 50 then I start wonder.”
So, we finally have a number. When the government spends half of the GDP, Mr. Krugman starts to get uncomfortable. But, what is so special about 50%? Why are spending levels of 25% and 40% okay but 60% is not?
The real problem here is that government spending as a percentage of GDP is not some fluctuating number that goes up and down and just has to be steered below some critical level. Under our fiat system of money, it is a steadily rising figure. The gap between government spending and GDP never closes as a result of more government spending. Government spending cannot stimulate the economy into creating offsetting tax revenue.
As long as the dollar holds out, we will reach spending levels of 50% in the US. But then what? Is Mr. Krugman admitting that even by his own philosophy the government will be out of options to spur the economy? Is then the only way back to a sustainable system a massive cut in government spending? If so, then that is fundamentally no different than the situation at our current spending level – the only way to avoid the ultimate cliff at 50% is to cut spending now.
So there you have it. If you believe that Washington DC has the power to rein itself in and self-limit its power, then we may be able to avert a catastrophe. Otherwise, it’s good luck to the dollar and the US economy.