PhD Economics Versus Common Sense

Investing Strategies, Strategies, U.S Investments

Nobel Prize winner Paul Krugman is at it again. He recently wrote, “US needs a really, really big relief package to keep its economy afloat.”

Mr. Krugman’s opinions vary, depending on the political landscape.

In late October 2016, anticipating the election of Hillary Clinton, he wrote, “Debt, Diversion, Distraction”.

“Are debt scolds demanding that we slash spending and raise taxes right away? Actually, no: the economy is still weak, interest rates still low … and as a matter of macroeconomic prudence we should probably be running bigger, not smaller deficits in the medium term. (Emphasis mine)

… So my message to the deficit scolds is this: yes, we may face some hard choices a couple of decades from now. But we might not, and in any case there aren’t any choices that must be made now.”

When Hillary Clinton lost, Mr. Krugman writes, “Deficits Matter Again”.

“… Eight years ago, with the economy in free fall, I wrote that we had entered an era of “depression economics,” in which the usual rules of economic policy no longer applied … deficit spending was essential to support the economy, and attempts to balance the budget would be destructive.

… But these predictions were always conditional, applying only to an economy far from full employment. That was the kind of economy President Obama inherited; but the Trump-Putin administration will, instead, come into power at a time when full employment has been more or less restored.” (Emphasis mine)

In less than 80 days the economy magically changed and now deficits matter? Gimme a break!

I don’t care if he has a PhD from MIT, Nobel Prize in economics and is referred to as a “distinguished professor”. We have our own “distinguished professor” in Chuck Butler. He has tons of experience and a PhD in common sense. Time for him to weigh in.

DENNIS: Chuck, thanks for taking the time for our benefit.

The COVID-19 bailout bill contained billions for banks, money for extended unemployment benefits and small business. Krugman wants more, and true to form, says, “Republicans view those benefits and rewarding people for not working. That was far more effective than anything else in the package, but we’ve seen very, very little…on the part of Senate Republicans to resume enhanced employment benefits.”

He disregards the fact the president begged congress to send him a “clean bill”, not loaded with a ton of money for banks and political cronies and he would gladly sign it.

While I agree with helping the unemployed, he is ignoring the reality of what happens with “emergency” congressional spending bills. The bulk of the bailouts since 2008 have benefitted the banks, not the little guy.

Should anyone take him seriously?

“The only function of economic forecasting is to make astrology look respectable.” — John Kenneth Galbraith

CHUCK: Thanks again Dennis… I love opining here… I’ve often wondered who would take him seriously, too! I used to have a saying when I was wrong about something… “He’s so wrong about most things he talks about, he’s almost right” …. (imagine a circular image of right being the top and wrong being the bottom, and he’s so wrong, that the needle moved almost 360 degrees.)

All this division between parties drives me crazy, and to have an economist so entrenched in party politics; it just isn’t right. He writes negatively about what one party does, until his party is in the driver’s seat, and then all will be forgotten.

DENNIS: Keynesian Economics is based on government economists controlling the economic universe. In an interview on NPR discussing the proposed 2008 bailout, his Keynesian leanings became very clear.

“The most effective thing you can do is to actually go and spend the money right. The tax cuts, which are often the proposal, there’s this problem, which is people may just sit on them. So, if the government actually goes out and spends money and better still, if it spends money on things that are good to have anyway, like repairing infrastructure, that’s good.”

God forbid citizens have a tax reduction and pay off debts or save it. Chuck, when did the “little people” get so dumb?

CHUCK: Well, to Krugman, we’re all dumb… Tax cuts and tax rebates are the ways to put money into the hands of Joe six pack, and his brothers.

“The free market punishes irresponsibility.
Government rewards it.”
— Harry Browne

I used to have an economics professor that would visit us in the office. She would explain how when the economy slows down, the government needs to step in and provide the economic growth that’s missing. I asked her, “What’s wrong with a recession? We need to clean out the excesses of the current boom, so we can start over again.”

She never gave me a straight answer; it was like I was talking to Paul Krugman!

And one more note…. We used to at least have a discussion about the debt ceiling, right? But not any longer…. There is no debt ceiling, the mental giants in D.C. decided that it is no longer relevant…

DENNIS: Keynes also believed in reduced spending and higher taxes, etc. to slow down an overheating economy. Great theory, but asking politicians to cut spending is asking them to perform an unnatural act.

In that same NPR interview, when asked about the debt, he said,

“Well, the deficit is big, but it’s not enormous as a share of GDP. …. If it was structural…we’d worry about it a lot. But a lot of what we’re talking about right now is temporary measures, and, you know, it’s an emergency.

…. So now, this is the time when the economy needs support. After things have come back, after business investment is strong, and the economy really doesn’t need this kind of support, that’s when you say, OK, let’s look at some belt-tightening, but not now.”

Since then, our debt has doubled and we have gone from around 65% of GDP to 100%.

Temporary? Not structural? We’re up to our eyeballs in temporary! <scratch my head in disbelief…>

CHUCK: The Gov’t uses the word “temporary” differently than we do Dennis. You may recall that President Nixon said the removal of Gold from backing the dollar was only “temporary”. That was August 1971, I would say he stretched the meaning of the word….

History shows us that once the Gov’t takes control of something, they never give it back.

This can be applied to their deficit spending… They were given the keys to deficit spending in 1971. It took them about 10 years to figure out how to use it for political advantage …. But once they figured it out…. There’s been no turning back as your chart shows.

And Krugman knows that… But what’s he going to do? He pontificates that deficit spending measures are only temporary. He knows darn good and well that what the Gov’t spends is not temporary, and in fact will grow with time! Shame on you Paul Krugman!

I don’t have a PhD in economics but I learned this lesson a very long time ago; it’s not new to academia!

DENNIS: One final question. In an interview Pundit William F. Buckley Jr. said the average American was “above average”, concluding:

“I Would Rather Be Governed By the First 2,000 People in the Telephone Directory than by the Harvard University Faculty.”

He was making the distinction between “elites” and “common sense Americans”.

Krugman also mentioned that Fed Chairman Ben Bernanke was, “my former department chairman at Princeton.” He adds, “The big – everybody running things seems to be from Goldman Sachs, but in the secondary positions, it’s all people from Princeton.”

The “academic elites” believe in deficit spending every time there is an emergency, but ignore the fact congress will not raise taxes and cut spending when times are good.

It reminds me of a person with appendicitis taking an injection of Novocain to cure it. It might temporarily relieve the pain, but it’s gonna burst, and might kill the patient.

CHUCK: Yes, or the definition of insane… Doing something over and over again, expecting a different result…

You should hear his thoughts about the minimum wage rising to $15. Of course he was all for it. But did he ever stop to think like a shop owner? Oh, that’s right, he’s never been one! If he had, he would realize that raising the min. wage causes the shop owner to reduce the hours that were being worked. In the end, his/her wage costs will be within budget – while raising prices to the consumer.

Thanks Dennis for this little trip down memory lane with the famous economist that I’ve argued with for years! For those of you who want to know more about how wrong Mr. “I’m from Princeton, so that makes me smarter than you,” I suggest a book from Robert P. Murphy (also a PhD) titled; “Contra Krugman.” When I saw it, I knew in an instant that I had to buy it!

Dennis here. I sat next to a senior, prominent senator at a breakfast. He showed me a Bureau of Labor Statistics graph indicating that every time the time minimum wage increased, so did unemployment.

That hurts the people that need help. All politicos know that; they prefer to pander to their base; it helps them get reelected.

No economist who pushes a political agenda should be taken seriously! Just present the facts; Joe six-pack has a lot more common sense than you realize.

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