A recent Paul Krugman blog invoked Keynes theory of the Marginal Propensity to Consume, and the metaphor of government burying wads of cash in bottles deep in America’s coal mines, in order to stimulate economic activity, when gently criticising Obama for coming in under-budget thus far in his stimulus plan’s projects. This provoked a strongly worded attack by Mish ShedlockFrom Mish’s blog –
In reality, the mine digging proposal is nothing more than another variation on the idea of paying people to do nothing (i.e paying people to dig holes and paying more people to fill the holes back in). Yes, if someone was stupid enough to propose that, and apparently Krugman is, we can indeed have 100% employment (until the economy totally blows up of course). The only real difference that I can tell is the mine digging idea only rewards those who find the money while ditch digging rewards everyone.
I use rewards loosely. With either idea, one must ask “What is the cost?” Krugman and the rest of the Keynesian clowns never address that part of the equation. Where does the money come from to pay for such ridiculousness?
Given that the US is already up to it’s neck in debt, after G.W. Bush’s flirtation with Keynesian stimuli, the money must be borrowed – possibly even printed. In all fairness to Paul Krugman, he is not actually advocating burying bottles of cash in order to employ people to simply dig them back up. Rather he is arguing that Obama should spend the money saved, on other projects that the state deems useful. The problem with that, of course, is that the upper limit on the stimulus appears to be completely arbitrary. It’s not linked to an expected return on investment. As the expected return diminishes, and projects become more madcap, the effect may be to ever more closely mimic the behaviour of Keynes’ cash burying government. Too much of the wrong type of stimulus will undoubtedly to lead to malinvestments, loss of competitiveness and other large scale problems in the future (potentially bubbles a la post-dot.com property bubble, commodities bubble, currency debasement etc).
So far Ireland has resisted taking the Keynesian route which as we can see is not without it’s detractors. Despite this there was good news on the job front with todays announcement by semi-state ESB of a plan to create almost 4,000 new jobs preparing Ireland for electric cars.
Hat tip thepropertypin
No bio, some books worth reading – The Rational Optimist: How Prosperity Evolves – Matt Ridley .
Crisis Economics: A Crash Course in the Future of Finance -Nouriel Roubini, Stephen Mihm