Green Retirement

Nobel Prize winning economist Paul Krugman, and many other liberal economists believe the first stimulus was not large enough, and that the U.S. needs a second  stimulus to get the economy going again.  President Obama argues that the first stimulus will work,  the U.S. economy does not need a second stimulus, what it needs is to learn patience.  Republicans say the first stimulus did not work, a second will not work, and what the U.S. economy needs are tax and spending cuts.

The stimulus debate is on. Who is right? Krugman, Obama, or Republicans?  Answer: They’re all wrong.  First of all, scratch the Republicans from the debate.  Their economic philosophy of reducing spending and cutting taxes on the rich, so that the masses can feed from the crumbs of their consumption and the benevolence of their philanthropy, has been tried by Herbert Hoover, Ronald Reagan, George Bush, and all failed.  The true stimulus debate is between Krugman and Obama.

Krugman is a classical Keynsian, calling for massive government spending to pump money into the economy, creating greater consumption which will lead to greater employment and economic recovery.  Krugman’s solution ignores the effect government debt has on the value of the dollar, interest rates, and inflation.  He assumes that the U.S. Treasury can indefinitely print money and sell bonds at low interest rates, without creating inflation, as long as the economy is deflating.  Krugman is wrong.

Deflation is only occurring in assets Americans own, their house, stocks, and wages. Inflation and interest rates are already rising.  The yield on the 10 year U.S. Treasury has almost doubled in the last six months.  Treasury Secretary Timothy Geithner is racking up frequent flier miles, flying between China and Dubai, begging nervous foreign investors to continue purchasing U.S. Treasury Bonds.  The price of oil has also doubled in the last six months, as investors place their money into commodities and raw materials, to protect themselves from a falling dollar.  Inflation (rising prices) due to the rise in oil prices, will be felt beyond the pump by consumers over the next year, even as their wages continue to decline.

A second stimulus will only cause the dollar to fall, and interest rates and inflation to rise, negating any positive impact from government spending.

Obama says one stimulus is enough to get the economy going, we don’t need a second stimulus, and instead we are going to start cutting spending.  Obama is wrong.  He should look up “Recession of 1937″ to see what happens when the Keynsian money pump is turned off.  In the recession of 1937, the government cut srpending and the Treasury rasied interest rates, which wiped out all the “New Deal” gains of the previous four years.  Unemployment doubled and  Republicans re-took Congress.  The truth is that Obama’s first stimulus was not much of a stimulus.  Most of the money went to tax cuts instead of job creating infrastructure projects.  It was enough to stabilize the economy, but not enough to create growth, and it is already losing it’s impact.

The truth is that both Krugman and Obama are wrong - Keynes will not save the U.S. economy.  Keynes did not work in the 1930’s and Keynes will not work today.   Keynsian economics only works for short and shallow recessions, such as the recession of 2000, not for a full blown economic collapse like we are experiencing right now.

What the U.S. economy needs is neither a second stimulus, nor a cut in spending, but a more productive re-allocation of current spending.  Here is an easy example:  Right now the U.S. government spends $100 billion per year, employing 200,000 Americans, to kill people in Iraq and Afghanistan. War is economically wasteful.  Instead, the U.S. government could take the same $100 billion, and create 2 million Green jobs paying $50,000 each.  Turn swords into ploughshares.  Jobs that will reduce our dependence on foreign oil, reduce our trade deficit, strengthen the dollar, reduce interest rates, and create a healthier economy and environment.

The stimulus debate misses the point, and only serves to deflect attention, away from the real choices we need to make.  Krugman, Obama, Republicans - all wrong.  The Republican argument for cutting taxes on the rich, Krugman’s argument that Keynes is God and we can spend forever, Obama’s argument that we can increase spending then cut spending, all are economically bankrupt.

What does the stimulus debate have to do with your retirement? No matter who wins the stimulus debate, Krugman, Obama, or the Republicans - you lose.  They all plan to come after your retirement, by increasing payroll taxes, increasing eligibility ages,  and reducing benefits.