Krugman's Failed Analogy
By Tibor Machan - August 13, 2011

Ok, so I'll give him this: finally Dr. Paul Krugman put forth something akin to an argument instead of merely demonizing those with whom he disagrees! (See his column, "The Hijacked Crisis," The New York Times, August 11, 2011.) The argument, however, is an analogy and as with many analogies, it fails to be an apt one.

Krugman tells us that suggesting that what the US government should do is significantly cut back on spending is misguided because the economy is in need of immediate and drastic emergency treatment. Like a man who is bleeding profusely, this is not the time to counsel greater prudence and preventive treatment. What it needs is the infusion of massive doses of blood, as some patients require blood transfusions so as to save them from imminent death. We may assume, then, that once the infusion has done its job, the long term remedy of cutting spending can get under way. As he wrote recently, "For the fact is that right now the economy desperately needs a short-run fix. When you're bleeding profusely from an open wound, you want a doctor who binds that wound up, not a doctor who lectures you on the importance of maintaining a healthy lifestyle as you get older. When millions of willing and able workers are unemployed, and economic potential is going to waste to the tune of almost $1 trillion a year, you want policy makers who work on a fast recovery, not people who lecture you on the need for long-run fiscal sustainability. … What would a real response to our problems involve? First of all, it would involve more, not less, government spending."

Looks like a good piece of advice initially, but it misses the mark. The economy, first of all, isn't some biological system. (And Krugman has never ever conceded that spending cuts are needed, ever! Government must always spend and thus stimulate the economy.) As to the first point, the government's taking massive amounts of money from people so as to spend it on "public" works, as per the priorities of government officials and their advisers, doesn't constitute an emergency measure but only a change of who will do the stimulation. Instead of having the citizenry spend its labor and resources on what it chooses to spend it on, it will be government officials – politicians and bureaucrats – who will do so.

Even if the analogy had some promise, there is no reason to believe that these officials are going to spend our labor and funds on projects that will stimulate anything, certainly nothing that will do so better than were the citizens themselves to spend their own labor and resources as they see fit. If anything, when government takes over what by right we should be doing, they are far more likely to misspend than we would. You and I have some pretty good idea as to what we need to spend our funds on, whereas those in government are at best getting their priorities via the political process, which very likely distorts the feedback system that informs the economy about what is most important to invest in, to spend on. Worse than that, they actually get it from their own imagination and fantasy, as when they want to build huge dams or highways where they are not at all needed.

The radical remedy Krugman favors could well work in the case of a human individual, a biological entity whose medical needs can be ascertained by most physicians. But when it comes to an economy such as that of the USA, wherein the "demands" of the citizenry are inordinately diverse and can, thus, be best assessed locally, not by planners from Washington or even state capitols, doing the kind of stimulus Krugman favors is just impossible (a la F.A. Hayek's good teachings). Which is why the stimulus didn't work before and isn't working now.

So, yes we finally have something of an argument from Paul Krugman. But it involves a misguided analogy. Individual human organisms are one thing; economic systems of a huge country another entirely. So what he attempts to derive from his analogy is in fact a colossal non-sequitor. It doesn't follow and never has.