Another Devaluation of Paul Krugman's credibility
Paul Krugman plays a critical role in the left's drive for more government control over peoples' lives. After all, the emotional crusade is given a cloak of scientific credibility by Krugman's Nobel Prize.
Which is why it's so surprising that he's been beating that credibility like a rented mule. Some recent examples include Krugman arrogantly making claims about the benefits of financial regulation, only to contradict his own analysis in a separate article the very same day; so obviously cherry-picking data to suggest that public debt is equivalent to economic growth that he was debunked by a student; and, the case that received the most media attention, manipulating the axis of a graph to suggest that Estonia's economy has stagnated due to liberalization and reductions in government spending, when in reality the economy has been soring for over a decade.
Krugman's credibility is face-down in the mud, yet he continues to scream at it and whip it to help the left justify growing government even further. It's hard work: President Obama's trillion-dollar stimulus was a flop. To make things worse, the growing crisis in Europe (the left's role model for decades) is increasingly a symbol of the unsustainability of the entitlement state. So Krugman is building an argument that the crisis occurred because government wasn't big enough. And once again, the data shows that reality is the opposite of Krugman's World.
First, let's look at Krugman's recent claims, in order of irrationality.
In May, he wrote:
Claims that slashing [European] government spending would somehow encourage consumers and businesses to spend more have been overwhelmingly refuted by the experience of the past two years.
Then he claimed that European countries with lower taxes and government spending -- countries "love[d]" by conservatives -- did worse during the crisis. He wrote: "I suspect that you would have done rather well financially by shorting [at the start of the crisis] the Western economies the right exalted most."
Finally, this week, Krugman goes all in with the claim that Greece's financial problems were caused not primarily by government spending, but instead by the fact that there haven't been enough bailouts in Europe.
Ask yourself, why does the dollar area - also known as the United States of America - more or less work, without the kind of severe regional crises now afflicting Europe? The answer is that we have a strong central government, and the activities of this government in effect provide automatic bailouts to states that get in trouble.
He goes as far as to suggest that a history of bailing out reckless banks in the U.S. is part of the reason our economy is working so "well" (as opposed to explaining why financial crises are gaining in size and occurrence).
Now, let's look at the data.
The Heritage Institute produces an index for a country's level of government spending relative to GDP. I looked at the list for 2007 (the start of the crisis). First, countries Heritage ranked poorly in terms of government spending were hit the hardest by the financial crisis. In fact, all the countries that form the epicenter of the current euro crisis (Portugal, Italy, Greece, Spain, France) ranked towards the bottom of Heritage's list in 2007.
I separated all countries into 3 almost equal-sized groups based on the country's score for government spending in 2007. Specifically, I separated countries with scores above 80, between 60 and 80, and below 60. Countries with higher scores have lower government spending relative to GDP. Then I calculated the average growth in GDP for each group between 2007 and 2011. The figure clearly shows that countries with the lowest government spending in 2007 grew the most during the financial crisis.
Now let's look at the 30 economies Krugman referred to in his criticism of free enterprise. Some governments responded to the crisis by following Krugman's advice - increasing government spending between 2007 and 2011. Others reduced government spending. Increases in spending reduced the country's 2011 score by Heritage compared to 2007. Then I plotted the change in a country's score against the percent change in its GDP.
Countries that increased government spending, on average, grew more slowly than those that reduced spending.
Heritage also scores countries for their general economic freedom. It's the same index Krugman used to imply that being economically free was a liability during the financial crisis. Again, some countries responded to the crisis by increasing regulation and government, which reduced their economic-freedom score. To see if this helped them during the crisis, I plotted the change in a country's economic-freedom score between 2007 and 2011 against the change in the country's GDP. Clearly, countries that reduced economic freedom tended to get hit harder by the crisis.
In other words, countries that followed Krugman's advice did, by far, the worst. (You see the same patterns if you look at a country's tax burden.)
This has implications for economic security: Countries with high government spending and interference respond poorly to economic shocks. And that shouldn't be surprising: Participants in the private sector survive and prosper by being innovative and responsive to change. Participants in the public sector respond to change by digging in and attempting to fight it, as protests in places like Wisconsin, France, and Greece show.
By bleeding the private sector to feed big government, European governments disarmed their economies' ability to both respond to the financial crisis and overcome it. By exploding the size of the public sector in the U.S., the left and big-government republicans have already significantly disarmed the U.S. against future shocks. The left's newest publicity campaign to demonize free enterprise forewarns of a new push to disarm her even more.
James Eaves is an economist and associate professor of management at Laval University. He blogs and curates news at Practicalpolicy.jellyfields.com.