Over the weekend, many newspapers picked up New York Times columnist Paul Krugman's article titled, "The Austerity Delusion."  In it he argues that because the economies across Europe are struggling and bond yields are rising following austerity measures that he was right -- massive stimulus is the way out of economic problems, not austerity measures.

He makes some valid points, which should be expected......he did win the Nobel Prize in economics in 2008.  Of course you have to consider three things:

1) He won the prize for his "analysis of trade patterns & location" research (not government policy)

2) He is a professor at the same institution (Princeton) where Fed Chairman Ben "It's Not a Lie if You Believe It" Bernanke taught before being appointed to destroy the value of the dollar run the Federal Reserve

3) President Obama won the Nobel Peace prize for his campaign promises....I'm guessing the Nobel committee may be regretting that decision since the world is not quite as peaceful as it was before he took office.  (I'm not saying that he is to blame, but a committee that awards prizes for thoughts versus actions has lost all credibility in my opinion.)

Most people will not question Professor Krugman's logic or look behind the reason Europe is struggling.  It was in all of these newspapers, so it must be true.  Besides, the man won a Nobel prize and he is a professor at Princeton.  There is a strong push from the liberal left to not only delay cutting government spending, but to increase it even more.  They follow the Keynesian school of economics where it is argued that during economic contractions it is the role of government to use deficit spending to bring the economy back from the recession.  The part that the Keynesians always seem to leave out is that during times of economic growth, the government is supposed to run a balanced deficit and pay back the debt so that when the next crisis occurs the government will have the ability to stimulate the economy.

It always seems that the Keynesians want to spend, but do not ever believe the economy is stable enough to reign in the spending.  The reason the austerity measures in Europe are not leading to economic growth and lower interest rates is because THEY WAITED TOO LONG and SPENT TOO MUCH MONEY during the good times.

So while Professor Krugman argues that we need more stimulus not austerity, I present the following charts illustrating where the stimulus has gotten us so far.  I used the combination of the growth in the public debt and the growth of the Fed's Balance Sheet to measure the amount of stimulus.  The reason is that if we had "austerity", which in the Keynesian camp means a balanced budget, our debt would not be growing.

Here are the results of the deficit spending Professor Krugman is arguing that we continue:

Like the European countries, we have now joined the club where we have more debt than GDP.  That means that we must grow our economy at a rate faster than the current interest rates in order to not go further into debt.  That is assuming that we have some sort of austerity where our country actually runs a balanced budget. 

The reason the deficit spending is not working is because the country ran a deficit during the good times.  Since 2000 our public debt outstanding has increased 144%.  How much growth did this deficit spending generate?  21%.

Worse yet, in the past two years our country added $4.8 Trillion of debt.  You can see how much economic growth that debt bought.

It has taken $369 of stimulus to generate $1 of economic growth.  How much more stimulus would Professor Krugman like us to use?

Here is how well the government stimulus has worked on the job market.  Since we have lost 7.7 million jobs at a time where we have spent $6.3 trillion we cannot put a cost per job.  The Obama administration likes to say that they created or saved 3 million jobs.  Assuming that is true, then it only took $2.1 million per job.  I guess at Princeton that is a good return on investment.

Yesterday the media was making a big deal about the increase in consumer spending.  Most articles failed to mention that the increase was caused by a spike in gasoline spending due to the rising prices.  Inside of the same release was personal income data.  Real Disposable Income actually declined last month.  Overall personal income growth has been lackluster despite all of the deficit spending.  It has taken $173 of stimulus to generate $1 of income growth.  

To be fair I thought I would look at the improvement of the economy since the Great Recession officially ended in July 2009.  Here is the change in public debt, the Fed Balance Sheet, GDP, Jobs, and Personal Income during the "recovery" stage.  As you can see our government continues to spend money yet the impact has been quite small.  How much longer will our government use deficit spending in the name of stimulating the economy. 

Besides the fact that the Keynesian followers never want to control spending during the good times, the other issue with Keynesian economics is that the government spending takes money from the private sector and distributes it via the public sector.  There is no such thing as free money.  Somebody has to pay for it, whether it is the taxpayers, small businesses, or future generations.  Spending all of this money now to avoid some short-term pain is hurting our long-term potential growth.  Over the short-term austerity may be hurting the growth in Europe, but at least they are doing something to reign in their out of control spending.  At least they have a plan.  Professor Krugman and his followers only plan is to spend more money and hope it eventually sticks.

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