Someone should tell the Democrats John Maynard Keynes is dead

Paul Krugman, the New York Times’s Nobel Prize winning pet economist, has it dead wrong when he claims that the so-called stimulus spending package was too small to make a difference. Au contraire, the package was so big that it made a huge difference in slowing America’s economic recovery, as government soaked up all available capital and taxed, borrowed and spent on initiatives that did not improve the economy by one iota.

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Truth is, the stimulus has had the opposite effect, raising the unemployment numbers while increasing the tax burden. That’s an economics equation that Nobel Laureates like Krugman can’t seem to understand due to its extreme simplicity. But simple it is. Today government spending is so out of control that no matter where the government gets the money, it hurts the economy. If the government borrows the money from China, it can’t be repaid, as there will not be enough discretionary money available for us to buy cheap goods from China, the sale of which in the US would theoretically generate taxes the government could use to repay the loans. If the government decides to raise taxes, then economic growth is stymied, as businesses will seek to invest available capital in lower-taxed jurisdictions to raise their return on investment. Consequently no new jobs will be created, while many will be lost. If government simply decides to print more money to pay for its extravagances, then all that new money in the economy will have the effect of lowering the value of the money that’s already in circulation, which is known as inflation. If you are in debt, then inflation is not such a bad thing, as you will be repaying money that was worth more when borrowed with money that is now worth less. Inflation is very bad for the economy as it raises the cost of everything, including interest rates. For those too young to recall the Carter years, you will be surprised to hear that mortgage interest rates topped out at 21.5% (!) under his watch. The economy got so bad that Carter himself had to institute a “misery index”, which rated how badly people suffered. The Carter years were marked by very high deficits, which pitted the government against private business in competing for available cash. Needless to say the government won out and the people lost.

History is about to repeat itself, as Obama and the Democrats don’t seem to understand what’s happening in Europe

History is about to repeat itself, as Obama and the Democrats don’t seem to understand what’s happening in Europe, where a number of countries’ debts stand at over 100% of GDP due to unsustainable deficit spending. This means that the total debt countries like Greece and Portugal carry exceeds the value of all that country’s economic activity for an entire year. Just in case anyone thinks the US is immune from such a crisis, as of June 1 of this year America’s debt of $13 trillion represented 88.9% of GDP. Given that debt forecasts over the next decade sees the US add $1 trillion per year to its debt, the debt will be 96% of GDP next year and well over 100% of GDP in 2012. That’s just in time to turf Obama out of the White House along with what’s left of the Democratic Congress. While the country’s debt grows by between 7% and 8% per year, GDP is growing at a much lesser rate, somewhere on the order of 3-4%. Most of the G-20’s finance ministers are on side that government spending is likely not the best remedy to cure a severe recession. They didn’t arrive at this conclusion in the same manner most thinking people did. They saw what’s happening to Greece, which has been “stimulating” its economy through government largesse for years. So now the word is finally out that John Maynard Keynes’s idea that governments could spend themselves into prosperity may not be sound economic policy after all. Someone should tell Barack Obama and the Democrats.