A MANIFESTO FOR ECONOMIC SENSE: KRUGMAN / LAYARD MANIFESTOMore than four years after the financial crisis began, the world’s major advancedeconomies remain deeply depressed, in a scene all too reminiscent of the 1930s. And the reasonis simple: we are relying on the same ideas that governed policy in the 1930s. These ideas, longsince disproved, involve profound errors both about the causes of the crisis, its nature, and theappropriate response.We applaud the “Manifesto” title. Perhaps Paul Krugman’s latest pleading for more debt and moremoney printing will be read for the “Manifesto” that it truly is.Krugman somehow believes that more debt and printing more money somehow replace humanproductivity. That the “money of the people” belongs to the government who can print as much as theyplease, making us all feel so much better, owing them so much more in taxes...These errors have taken deep root in public consciousness and provide the public supportfor the excessive austerity of current fiscal policies in many countries. So the time is ripe for aManifesto in which mainstream economists offer the public a more evidence-based analysis ofour problems.Government policy of “free cheese for all” that espouses more financial leverage and lower interestrates (and effectively less work) as the way to solve problems would seem fundamentally flawed unlessyour name is Paul Krugman. How governments subsidize poor behavior for the “betterment of allpeople” is in fact the “root cause” of any welfare state in history. Europe is a glaring example of thatfailure. Without a central bank (willing) to manipulate the price of bonds, the market reflects theABILITY TO PAY which is the market as it should be. This is a human law, a natural law, a historic truth,repeated over and over throughout history. Manipulation of such laws has demonstrated a much worselong term outcome.The causes. Many policy makers insist that the crisis was caused by irresponsiblepublic borrowing. With very few exceptions – other than Greece – this is false. Instead, theconditions for crisis were created by excessive private sector borrowing and lending, includingby over-leveraged banks. The collapse of this bubble led to massive falls in output and thus intax revenue. So the large government deficits we see today are a consequence of the crisis, not itscause.
Government, not consumers, is responsible for effectively “subsidizing” the poor behavior of consumers.Banks are nothing more than recipients of the Federal Reserve Policy and then at the local level,community reinvestment (lend to the underprivileged) and in fact, these policies created a self-reinforcing policy response at the state and local level to where tax policies favoring the trend in risinghome prices, rising home equity, lowered borrowing costs, thus much higher retail sales (and then at thestate level higher state and local taxes hell bent on receiving more of the same) which policymakers*knew* was poor policy, but now, having bitten the apple, could not resist the temptation to throttlethe market with more leveraged products.The Federal Government also began to rely heavily on this “real estate” largess as well, as its capitalgains tax and related taxes, industry, were falsely buoyed by the same Federal Policies. After all,leveraged transactions have the capacity to CREATE FAKE GDP NUMBERS. Much, much worse…. thenwe see Fannie Mae and Freddie Mac who were again, set up in the “Great Depression” as a lender oflast resort, yet these same entities became the dumping ground for everything toxic during an economicBOOM instead. Federal policy drove these failures. Local politics was fed from the same table, andembraced it. Krugman wants is to believe that this is a “consumer problem” and not a failure ofgovernment policy creates EXCLUSIVELY be academics such as himself.With spending now in a complete tailspin, there is no equity to create this phantom spending capital,and Krugman would have us believe that the government must now BUY WHAT CONSUMERS REFUSE TOBUY and worse….. if the TAXPAYERS WONT BUY IT THE GOVERNMENT WILL BUY IT. It is actually muchworse under the “Krugman Doctrine” since IF THE GOVERNMENT DOESN’T HAVE THE TAX REVENUE TOBUY IT, THEY WILL SELL BONDS TO THE CHINESE AND USE “THAT” CASH TO BUY IT INSTEAD!The nature of the crisis. When real estate bubbles on both sides of the Atlantic burst,many parts of the private sector slashed spending in an attempt to pay down past debts. This wasa rational response on the part of individuals, but – just like the similar response of debtors in the1930s – it has proved collectively self-defeating, because one person’s spending is anotherperson’s income. The result of the spending collapse has been an economic depression that hasworsened the public debt.Krugman is again “pleading for sanity” that policymakers should “”wake up” and borrow more money,GIVE AWAY MORE UNEMPLOYMENT BENEFITS, GOVEERNMENT HIRE MORE PEOPLE, CREATE PETPROJECTS, GIVE AWAY MORE FREE GOVERNMENT CHEESE. Letting TAXPAYERS earn their own money,and keeping it for a rainy day doesn’t generate credit-inflated-fake-GAP-numbers but it does build ahuge, broad base on wealth that eventually is recycled into the economy. Krugman believes thatgovernment, not TAXPAYERS should guide the people. A fundamental difference of opinion of whygovernment exists in the first place.The appropriate response. At a time when the private sector is engaged in a
collective effort to spend less, public policy should act as a stabilizing force, attempting tosustain spending. At the very least we should not be making things worse by big cuts ingovernment spending or big increases in tax rates on ordinary people. Unfortunately, that’sexactly what many governments are now doing.Question: If “public spending” is declining when why would “public policy” spend more of what itdoesn’t have?Krugman continues begging government to give away money, soak up all excess capacity, and stabilizethe bloated system by borrowing against the same taxpayers who will be harmed for many futuregenerations with debts that he would have us collect in his “honor” and in order to provide appropriatesolutions to what is clearly a CRISIS OF TOO MUCH DEBT. Only an “ivory tower” economist wouldsuggest that the way I become fiscally healthy is to give someone else my credit card, have them buy abunch of things I don’t need, and give them back to me, thus making me “feel wealthier” while stickingme with the bill in the end.EXPENSE….KRUGMAN WANTS TO HELP YOU GO DEEPER INTO DEBT AND HE FEELS GOOD ABOUT GIVINGYOU THE FREE CHEESE, EVEN WHEN YOU’RE GOING TO BE STUCK WITH MORE BILLS YOU CANT PAY.WHERE DO I FIND FRIENDS LIKE PAUL KRUGMAN? CONSIDER A JOB IN POLITICS.The big mistake. After responding well in the first, acute phase of the economic crisis,conventional policy wisdom took a wrong turn – focusing on government deficits, which aremainly the result of a crisis-induced plunge in revenue, and arguing that the public sector shouldattempt to reduce its debts in tandem with the private sector. As a result, instead of playing astabilizing role, fiscal policy has ended up reinforcing the dampening effects of private-sectorspending cuts.Krugman again says “it’s not the fault of government and no one could have seen this coming” and againasks….begs….that we understand only the private sector should reduce its spending….. since the publicsector (the great hand of Paul Krugman on a print button) should be in charge of borrowing on behalf ofall taxpayers instead of removing government expenditures and returning the sovereignty of the nationto its citizens vs handing them to the feeding trough of free government cheese. Mr. Krugman’szealousness in pursuing “pro-free-cheese” policy is truly frightening. Only in government does theemployee have a guaranty of annual salary increases, only in government free healthcare, only ingovernment, guaranteed life pension after 20 years with inflation escalation clauses. 100 backed by thetaxpayers who put them in the job in the first place. Government jobs are overhead and producenothing. Since when did government not need to apply rules of economic common sense, reducing
sending in absolute terms when revenue doesn’t support expenditures? When did the laws ofeconomics bear an exemption clause for the United States of America?In the face of a less severe shock, monetary policy could take up the slack. But withinterest rates close to zero, monetary policy – while it should do all it can – cannot do the wholejob. There must of course be a medium-term plan for reducing the government deficit. But if thisis too front-loaded it can easily be self-defeating by aborting the recovery. A key priority now isto reduce unemployment, before it becomes endemic, making recovery and future deficitreduction even more difficult.Paul Krugman remains deeply buried in DECADES of policy that he cannot extract himself from, so betterto point the finger at something else. The truth is far easier to explain. When the government goesdeeper and deeper in debt, TAXES GO HIGHER AND HIGHER since TAXPAYERS PAY FOR EVERYTHINGGOVERNMENT DOES. Krugman would have us believe that when we go deeper into debt, we recoverfaster. This is absolutely false. One cannot INVEST AND SAVE MORE when one is CONTINUOUSLYPAYING OFF EVERR LARGER MOUNTAINS OF DEBT.Deficit reduction is a GOVERNMENT INDUCED PROBLEM and s is after decades of PROMOTING THEKEYENSIAN FREE CHEESE BRIGADE that Paul Krugman is again coming back and begging for theUNLIMITED CREDIT CARD OF THE US TAXPAYER.We would suggest that the laws of physics continue to apply in economics. If you want to see a fastergrowing economy in REAL TERMS the first rule is to SAVE AND INVEST more at the consumer level.Governments make a lot more money from taxes on borrowed money which is then FLUSHED THROUGHWAL-MART AND TAXED AGAIN WITH CORPORATE AND FEDERAL AND CONSUMER TAXES.When this system is reversing, and when the economy REMAINS 70% driven by CONSUMER SPENDINGPaul Krugman is desperate to maintain the status quo. These magical FREE CHEESE ECONOMICTHEORIES become false. A final nail in the Keynesian coffin. The free market must be allowed to run itscourse, or in fact, due to the EXCESSIVE DEBT AND NECESSARY TAXATION TO PAY IT OFF the consumerwill then remain suffocated for many more years into the future. Under Krugman we would then seegovernment payrolls rise materials in order to stoke the fires of “fake employment gains” while again,costing the TAXPAYER a lot more money for the every greater government who finally begins to crowdout the private sector. Should the government really “buy everything no one wants or really needs” inorder to “provide fake security” for the taxpayer?Krugman is actually much worse than that. Under the “Krugman Doctrine” we then see the propagandathat “employment is fixed” and “spending is up” except that debt is now at heretofore unimaginablelevels, and somehow Paul Krugman calls this success. Adding another 20% “VAT” onto consumerpurchases maybe? Increasing Social Security and Medicare/Medicaid exemptions to 15% of “pre federal
tax” income from 12% currently? Adding those to a “family” with two income earners at $50,000.00USD annually (total) makes for mighty fine company since adding 15%+20%+20% adds up to 55% tax…..and then adding another 19% for state and local sales tax if you happen to live in California….Weapproach 70% tax before the “opportunity for savings” can occur. This is Krugman and bog governmentat their best. When no one can “afford to save” they are taxed on every last dollar that they earn. Thisleaves government in the beautiful position of “giving away more free cheese” since by golly….not asingle TAXPAYER can afford it. We become GRATEFUL for free cheese, and we become dependent uponit.This is precisely why Paul Krugman’s borrowing machine has been so successful….until now. Peopledidn’t stop spending money…..until recently. Thank god that they did. More importantly, and in spite ofthe begging and pleading by Paul Krugman…..take away his FREE GOVERNMENT CHEESE CREDIT CARDand ask him to get a job somewhere on the street. Politely request that Mr. Krugman leave his IvoryTower post immediately. The damage has been great enough. Keynes is dead. His policies should havegone with him.How do those who support present policies answer the argument we have just made?They use two quite different arguments in support of their case.The confidence argument. Their first argument is that government deficits will raiseinterest rates and thus prevent recovery. By contrast, they argue, austerity will increaseconfidence and thus encourage recovery.Human nature doesn’t change. Humans for now centuries have fought for what they OWNED andGIVEN AWAY that which came easily. Austerity increases confidence because human beings continue toproduce at a rate of greater efficiency without the KRUGMAN CHEESE CREDIT CARD and without hiswanton spending on our behalf.But there is no evidence at all in favor of this argument. First, despite exceptionallyhigh deficits, interest rates today are unprecedentedly low in all major countries where there is anormally functioning central bank. This is true even in Japan where the government debt nowexceeds 200% of annual GDP; and past downgrades by the rating agencies here have had noeffect on Japanese interest rates. Interest rates are only high in some Euro countries, because theECB is not allowed to act as lender of last resort to the government. Elsewhere the central bankcan always, if needed, fund the deficit, leaving the bond market unaffected.Paul Krugman may have a retirement move coming with statements such as the above. “bond marketsare strong with a normally functioning central bank” is actually meant to say….. “Bond markets are
*apparently* normal in every major economy who can print their own money because those marketscan then be MANIPULATED REGARDLESS of FUNDAMENTALS. Very simply put….when I have too muchdebt, and I cannot FAKE MY FINANCIAL RECORDS then I am charged an accordingly higher rate ofinterest. Krugman also fails to point out that German Bonds and US-Treasuries are out there withJapanese bonds with reasonable demand because there are being acquired by fund managers who areSHORT SELLING the applicable European Counterparty Debt with matched maturities. We will likely seelaws in the near future which disallow the short selling of EU debt which may alleviate the sellingpressure, but in current form, debt is priced where it SHOULD BE PRICED since it cannot be manipulatedas it can in economies with a “normally function central bank” which begs the question….. Does PauKrugman believe that what we have in America (currently no less) is a NORMALLY FUNCTIONING centralMoreover past experience includes no relevant case where budget cuts have actuallygenerated increased economic activity. The IMF has studied 173 cases of budget cuts inindividual countries and found that the consistent result is economic contraction. In the handfulof cases in which fiscal consolidation was followed by growth, the main channels were acurrency depreciation against a strong world market, not a current possibility. The lesson of theIMF’s study is clear – budget cuts retard recovery. And that is what is happening now – thecountries with the biggest budget cuts have experienced the biggest falls in output.Paul Krugman is highly accurate here. The IMF studies are most centered on EMERGING ECONOMIESand SMALLER COUNTRIES and using the same 173 case studies, Paul Krugman fails to ALSO ADMIT thatthese studies demonstrate the LARGEST DECLINE IN GDP resulting from absolute reduction ingovernment spending occurs in countries where government makes up a VERY LARGE PERCENTRAGE OFGDP so Paul Krugman is correct. Embrace big government, and then NEVER LET THEM STOP SPENDINGOR YOU GET A BIG DROP IN GDP. Except here again Paul Krugman would have to admit that this failureof his “print and defend:” policies are the basic problem in Europe today.Both Greece and Spain had approximately 7% unemployment before the financial crisis. The result of“austerity” aka “less government spending” was truly astonishing. 25% unemployment in just 36months. Did non-government demand drop off that much? NO. What was the cause of that rise inunemployment? Government sponsored businesses and government employees no longer receivedFREE KRUGMAN CREDIT CARD CHEESE. They were fired or the businesses, long sense without economicbenefit, disbanded for the epic failure of capitalism that they would have represented.For the truth is, as we can now see, that budget cuts do not inspire businessconfidence. Companies will only invest when they can foresee enough customers with enoughincome to spend. Austerity discourages investment.
Government incentives such as low taxes inspire investment and confidence. Why? Human nature.When I earn $100,000.00 and I get to keep it, I am confident. If I have a huge local government andsocial burden due to the government need for FREE CHEESE PRODUCTION AND GIVEAWAY then I havevery little incentive to generate new business, and in fact, the hurdle for new business creation is thenrelegated to THOSE LARGE ENOUGH TO PASS THE HURDLE OF BIG GOVERNMENT. Yes the problembegins and ends with bog government. Without that problem, people don’t need Mr. Krugman’s FREECHEESE CREDIT CARD to feel confident. This is the false promise of big government. Europe is seeingthe end-game in action. It isn’t pretty, and Paul Krugman wants America to accelerate toward the cliffof creasing debt so that he can go shopping, leaving America stuck with the bill.So there is massive evidence against the confidence argument; all the alleged evidencein favor of the doctrine has evaporated on closer examination.The structural argument. A second argument against expanding demand is thatoutput is in fact constrained on the supply side – by structural imbalances. If this theory wereright, however, at least some parts of our economies ought to be at full stretch, and so shouldsome occupations. But in most countries that is just not the case. Every major sector of oureconomies is struggling, and every occupation has higher unemployment than usual. So theproblem must be a general lack of spending and demand.Mr. Krugman would buy what we don’t want, call that government spending “real consumer demand”and then leave us with the bill.In the 1930s the same structural argument was used against proactive spendingpolicies in the U.S. But as spending rose between 1940 and 1942, output rose by 20%. So theproblem in the 1930s, as now, was a shortage of demand not of supply.Paul Krugman forgets that between 1929 and 1942 consumer credit actually CONTRACTED for about 11years before bottoming ahead of World War II. Consumers had saved money, they had invested money,and it set the stage for a wonderful period of economic expansion in the United States. As we wouldexpect, Krugman explains this 20% rise in output as “government spending” and not actual TAXPAYERSworking and producing anything. Krugman must be adored by government policymakers. His viewclearly suggests that the policymakers and government effectively and faultlessly produce EVERYTHINGGOOD and that the local citizens exist for the benefit and receipt of FREE CHEESE POLICIES graciouslyfoisted upon the establishment via government spending! The lowly TAXPAYER is the recipient of thiswisdom.As a result of their mistaken ideas, many Western policy-makers are inflicting massive
suffering on their peoples. But the ideas they espouse about how to handle recessions wererejected by nearly all economists after the disasters of the 1930s, and for the following fortyyears or so the West enjoyed an unparalleled period of economic stability and lowunemployment. It is tragic that in recent years the old ideas have again taken root. But we can nolonger accept a situation where mistaken fears of higher interest rates weigh more highly withpolicy-makers than the horrors of mass unemployment.As previously mentioned… Krugman’s IMF study of “massive harm that comes from reduced GDP inausterity bound governments” his own self-interest here cannot be masked. It is amazing the blindnessthat otherwise states that government should continue to fund itself and borrow to fund anyone else atthe expense of the “fewer and fewer” natural taxpayers who are NON-GOVERNMENT-EMPLOYEES.When the system breaks, as it has in Spain and Greece, unemployment rises RAPIDLY becausegovernment must, in these circumstances, fire itself.What’s absolutely true is that in the entire recorded history of the world, there is not a SINGLE instanceof a government aggressively and naturally firing itself in order to save the citizens. What we haveample evidence of, is historical precedent demonstrating government after government, spending itselfinto oblivion, and imploding while the FREE CHEESE TRAIN while persons unknowing had sometimesexperienced several generations of FREE GOVERNMENT CHEESE in which case rioting and looting werethe social experience to follow. This isn’t because of reduced spending, it is because of BIG governmentand free cheese.Better policies will differ between countries and need detailed debate. But they mustbe based on a correct analysis of the problem. We therefore urge all economists and others whoagree with the broad thrust of this Manifesto to register their agreement atwww.manifestoforeconomicsense.org, and to publically argue the case for a sounder approach.The whole world suffers when men and women are silent about what they know is wrongThe original “Tea Party” in Boston Harbor was part of the “taxation without representation” argumentwhich has been a core part of American politics since the origin of the United States. While thecircumstances surrounding the dumping of tea are debatable, one piece of the equation is not.Americans, and in fact TAXPAYERS around the world, demand “no taxation without representation” andyet a far more insidious practice threatens to be far more damaging, and far more dangerous for theprosperity of all countries. “In Debt of Nation without Representation” happens far more quickly, isorchestrated between governments who support trade policy in exchange for debt purchases, and insome cases, with “Nobel” people like Paul Krugman, entre countries are encouraged to borrow andborrow and borrow until taxes are “mandated” higher in order to prevent economic collapse. This is
effectively “confiscated sovereignty” in the hands of Ivory Tower academics, and it must be seen for thedamaging, wealth destroying policy that it has become. For Europe, pretending it isn’t broke hasbecome a social pastime.ACCORDING TO THE KRUGMAN MANIFESTO…..ALL THESE GOVERNMENT “LEADERS” NEEDED WASMORE DEBT AND SPENDING CAPABILITY…..THEN THEY’D BE ERRR…..JUST FINE.IF GOVERNMENT BUREAUCRASY AND BLOATED SELF-INTERESTED NONSENSICAL PROJECTS DIDN’TOCCUPY THE GOVERNMENTS “UNLIMITED ABILITY TO PAY THEIR BUDDIES OFF” THEN THEUNEMPLOYMENT RATE WOULDN’T SKYROCKET WHEN YOU DOWNSIZED GOVERNMENT!