Krugman’s recipe for economic prosperity: Print more food stamps.

If you are ever in need of an example of economic fallacy in print, Paul Krugman’s blog is a great place to start. His recent offering on the economic benefits of food stamps is no exception:

“Indeed, estimates from the consulting firm Moody’s Analytics suggest that each dollar spent on food stamps in a depressed economy raises G.D.P. by about $1.70 — which means, by the way, that much of the money laid out to help families in need actually comes right back to the government in the form of higher revenue.”

This is just a slight variation on the printing money will make us prosperous theme but with a populist spin. In the Krugman economy, free lunches are everywhere. What I never understand is why the Keynesians never seem to take their policy prescriptions to their logical conclusion. If food stamps produce a net positive gain for the economy and government revenue, then why not issue them to everyone? Why do any Americans pay for any food at all?

The difficulty in attempting to derive any sort of conclusion from a system as large and complex as the US economy is that there are billions of uncontrolled variables. It’s the same reason that so many medical studies produce conclusions that are either erroneous or contradictory. Without any knowledge of underlying mechanisms, it would be fairly easy to look at just correlations and conclude that wet sidewalks do indeed cause rain. So just what is the mechanism by which food stamps lead to economic growth? Krugman gives us a clue:

“…food stamps (help) families living on the edge and let them spend more on other necessities…”

It’s ironic that in an attempt to justify his fallacy, Krugman almost trips over an actual economic principle. Essentially he says that for families who receive food stamps, less of their income would be devoted to buying food, freeing the remainder for other purchases which would expand the general economy.

In the isolated case of the family, this is true, their standard of living is improved by reducing the resources required to obtain food. But this only represents a net gain for the economy as a whole if the relative cost of food is lowered for everyone. Clearly this is not the case. Lowering the cost for everyone requires improvements in the efficiencies of production – the real means by which economic growth occurs. Money (or food stamps) is merely a means of exchange. If more money is created out of thin air, a corresponding amount of additional goods and services do not magically materialize.

Consider the economy of an isolated island inhabited by ten people who produce a total of 100 coconuts per week. If we create more money and give it to three of the ten inhabitants, have we increased their standard of living? Yes. Has their additional ability to spend increased the total island economy? No. Total island production remains at 100 coconuts per week. We have only succeeded in changing how the coconuts are distributed.

Now consider what happens to the island economy when planting and harvesting methods are improved such that the total production is increased to 200 coconuts per week. The relative cost of coconuts goes down for everyone. The total time required to produce a sufficient amount of coconuts for the island is reduced, which frees up time that can be used to produce other goods and services which did not exist before. Increased output per time is the basis of real economic growth. 

Remember, free lunches are only available for individuals at the expense of other individuals, not for the net economy as a whole. Beware of economists promising free food, generally they are just looking for a meal at your expense.