Wednesday, January 27, 2010

Who is right…Paul Krugman or Ringo Starr?

Copyright 2010. Paul Mladjenovic. All rights reserved.
January 27, 2010

Ponder for a moment the following quotes:

“Everything government touches turns to crap”
Ringo Starr

“We need more government”
attributed to Paul Krugman (see below)

The first quote by Ringo Starr is an actual quote and you can easily find it on many quote sites on the internet.
The second quote is attributed by…me! You probably won’t find that quote (and maybe you will). You might even find that Paul Krugman may deny saying it but probably embracing the point. I attribute it to him as an “unofficial summary” of his writings over the years.

Why? Because if you are an avid Krugman reader (which I am) you will no doubt come to the same conclusion. In ways both overt and subtle, one of the biggest messages (maybe the biggest) from him is that he wants bigger government. He wants more spending and more debt because he sincerely believes that more government is better for the world. When someone points out how a government program is failing (such as medicare) he basic retort is that we can solve it with…more government. Yikes!

Look…I am sure that he is a nice guy and that he means well. I am sure that he knows something about economics although I am still scratching my head over why he got the Nobel Prize (I can name a dozen that I think deserve it). But, with all due respect, I wish that he knew more about economics! At the very least, I wish he had Ringo Starr’s insights. Why?

Think about the following points that you will find in Krugman’s latest writings…

“…a spending freeze is wrong…”
“…the federal government needs to spend more…”

Right now the government is spending trillions that our society can not possibly afford. Whatever government spends, we must pay for. Either we pay for it now (current taxes) or we pay for it later (future taxes). If we don’t have the money, then the government goes into greater debt. We will either pay for this massive debt in obvious ways (such as taxes) or in less obvious ways (such as inflation). No matter how you slice it, we will pay and it will be a very, very painful price. This is the lesson of history.

He has said in some columns that government spending helps to kick-start economic growth and job creation. This is both economically wrong and logically wrong. The year 2009 should be a clear lesson in this. During 2009, government spending went through the roof…yet…the unemployment rate went up drastically. He should understand that the ONLY way that government can “create a job” (such as a government job) is if it first takes resources that DESTROY private sector job(s).

When private sector jobs are eliminated, you shrink the pool of people that PAY taxes. Then…when you hire people for government jobs, you have to pay for them with taxes! In other words, you expand the burden on the private economy which in turn means less tax revenue which means sky-rocketing deficits (and more debt).

We must understand that our economy is like a “pack mule” and the government is “the cargo”. If the mule is on wobbly legs, you won’t help it move faster by adding more cargo. Why is this so hard to understand?

I can only hope that a rock star can help an economist figure this out.

Paul Mladjenovic, CFP is the author of Stock Investing for Dummies and Precious Metals Investing for Dummies. He is a national seminar leader and his current downloadable seminars are at and