Wednesday, July 7, 2010

Krazed Konfusion from Krugman

Paul Krugman so badly wants the government to spend money that he is going into far off land to make his argument. It's  as if he is on a bad LSD trip. He writes:

There’s now a lot of talk about the fact that U.S. corporations are sitting on a lot of cash, but not spending it. I don’t find that particularly puzzling: with huge excess capacity, why invest in building even more capacity. But almost everyone seems to agree that if we could somehow get businesses to spend some of that cash, it would create jobs.

Which then raises the question: how can you believe that, and not also believe that if the U.S. government were to borrow some of the cash corporations aren’t spending, and spend it on, say, public works, this would also create jobs? (Brad DeLong has tried to make this argument repeatedly).

Which brings me to Lincoln and McClellan. General McClellan had raised a powerful army, but seemed disinclined to actually seek battle. So Lincoln sent him a letter: “My dear McClellan: If you don’t want to use the Army I should like to borrow it for a while.” (Yes, there are various versions of the quote).

So shouldn’t that be our response to all that idle corporate cash? We don’t literally have to borrow from the corporations; they’re parking their funds in the money market, and the feds would borrow from that market. But the end result would be to put some of that idle cash to work — and, ultimately, to give the corporations a reason to start investing, too, so that the deficit spending would crowd investment in, not out.
I have never seen a coherent objection to this line of argument.
Ah, let me try this as a coherent objection. If the money is in money markets, it's not "idle cash." Money market funds either loan it out by buying private sector paper or by buying government paper. In both cases, it is not "idle cash." It's not like the mutual funds have a bunch of $100 bills stacked up in the backroom, Paulie.


  1. We should also mention the other side of the coin that PK doesn't talk about: price. He is concerned about "hoarding"; the great and true Keynesian bugbear. I recall a Rothbard quote that chastised any economist who fretted about gluts or surpluses without discussing price. If the capital structure were allowed to adjust, there wouldn't be the desire to "hoard". The demand for cash that Keynesian's are so horrified by is a direct result of their prior inflationary policies.

  2. Companies such as Apple and Microsoft use billions of dollars of "idle cash" defensively as well as offensively.
    Cash is also great insurance to cover periods of negative cash flow (whether from increased costs/expansion or decreased revenue).
    HOAs "hoard" cash so they can pay with cash instead of loans.

    imho, Krugman's main miss here is that he assumes 5 things:
    1 Government is both more omnipotent and omnibenevolent than other entities. They all operate on human nature.
    2 Government spending will be more efficient than other other spending.
    3 the borrowing would be equitable.
    4 the borrowing would be legal.
    5 the money would be returned.

    As the government owes social security trillions of dollars, and according to IBD, has delayed reporting the annual social security report by two months, already. Even IF this Krugman Plan worked, the first money should go to Social Security which is probably billions of dollars in the red this year alone.

    Out of the pot and into the Ponzi.

  3. Someone that I know that is very good on anticipating the next political move thinks that we will start to see talk circulate on taxing capital to prevent this.....

    I agree and this seems to be one step away from that argument....