May 01, 2009

Broken Windows, False Hope and the Road to Weimar America

Paul Krugman extolls the glorious prospects of a “green economy”—“green” as in environmentalist, rather than “green” as in prosperous. Krugman’s argument-by-assertion is debunked as a species of “Broken Windows” fallacy by Bill Anderson:

His call for “green investments” is like saying that the way to solve our transportation issues is for us to “invest” in more horses and buggies. Despite . . . Krugman’s statement that a “green economy” forced upon us by the state will help us because it won’t hurt us as badly as Newt Gingrich says it will is almost hilarious in its mangling of simple logic.

Hilarious mangling of logic, however, is the only basis for the “Hope” that explains President Obama’s high approval ratings. Given that Obama was elected amid an economic crisis, his strong poll numbers can only be explained as reflecting a widespread belief that his policies are effectively addressing the problems of the economy. However, even the most rudimentary knowledge of basic economics (and I claim little more than that) tells us that Obama’s policies are the exact opposite of what the economy needs:

Begin with the fact that the collapse of the “housing bubble” has left millions of Americans saddled with a huge debt load for illiquid assets (i.e., their homes) that cannot be sold for a profit or leveraged to acquire additional liquidity. Now, consider that the stock-market collapse (i.e., from a 14,000 Dow to an 8,000 Dow in less than three years) has severely depleted the 401Ks and IRAs of tens of millions more Americans.
Between the declining market value of their homes and the declining market value of their retirement accounts, these individual Americans who had positive net worths in 2005 are now in no position to make new investments that would create jobs. The total supply of American capital has thus been diminished by a sum of however many trillions.
The Obamanomics answer to this is for the government to borrow many trillions more, in order to fund an expansion of public-sector programs. And government must borrow this money from the same global credit pool already depleted by the loss of capital caused by the collapse of the bubble. . . .

Predictably, Obama resorts to inflationary monetary policy as the “answer” to this fiscal trap, which only accelerates the downward spiral toward Weimar America.

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