Photo: Wikimedia Commons
Paul Krugman is getting flak over a comment he made this weekend on TV.From HuffPo:
“If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months,” he said. “And then if we discovered, oops, we made a mistake, there aren’t any aliens, we’d be better–“
Eric Falkenstein voices the natural objection, which boils down to: Krazy Keynesians are so eager to spend your money on anything, that they argue a false Alien scare would somehow be a good thing.
Now here’s the defence of Krugman.
The primary facing the economy is damaged private sector balance sheets. Due to the collapse of the housing bubble, people are still too deep in debt, and it’s this high debt service/desire to pay down debt that’s sapping cash from other areas (spending, investment, etc.).
If this fear of an alien invasion prompted the government to spend, say, $1 trillion on telescopes and lasers, then if nothing else, that would be $1 trillion more in private sector income, and thus $1 trillion spent towards private balance sheet repair. There’s no exception to this. If the government spends money it becomes desperately needed private sector income.
Now unfortunately you’re left with $1 trillion in lasers and telescopes that were never needed, so obviously that’s a tragic waste.
It would be much better if that $1 trillion were spent fixing clogged airports, heavily used bridges, and ageing train stations. Then you’d get the $1 trillion in balance sheet repair AND you’d wind up with usable assets afterwords. But that would take political will that we don’t have. That kind of political will only arises at a time of extreme existential crisis, like an alien invasion threatening all mankind.