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Deficit spending a bad move for U.S.

July 24, 2010|By Chriss W. Street

Economist Paul Krugman has been on a roll lately. After announcing that America is in its "Third Depression", the New York Times columnist provided an encore by blaming U.S. Federal Reserve Chairman Ben Bernanke for his concerns about the evils of deficit spending for failing to increase economic stimulation of the economy.

During the Great Depression, President Franklin Roosevelt brushed away concerns regarding the wisdom of deficit spending by saying, "If we can boondoggle ourselves out of this Depression, that word is going to be enshrined in the hearts of the American people for years to come."

Perhaps Professor Krugman is frustrated that so many Americans have not enshrined the boondoggle of deficit spending in their hearts the same way he has.

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Our good professor won the Nobel Prize for economics in October 2008 for his theory, that to be economically dominant, industries must concentrate their producers and suppliers into a common metropolitan area near their customers to maximize economies of scale and transportation savings. His model perfectly explained the 1950s and 1960s success of the U.S. auto industry's tight concentration of assembly plants, steel foundries and parts suppliers in and around the city of Detroit — within one day's delivery to the bulk of their big city customers.

But Krugman's theory of economic dominance through concentration has been rendered meaningless by modern supply chain management revolution that interconnects competitive vendors from across the globe. China has a massive balance of payments surplus because it can competitively ship products 10,000 miles to Detroit and beat local parts manufacturers on price and quality.

Just nine months after our Nobel Laureate picked up his $1.8 million check and Norwegian hardware, General Motors, the poster child of the professor's industrial policy, filed the largest bankruptcy in the U.S. history in September 2009 with only $82 billion in assets, but $172 billion in debt.

Krugman now wants to talk about how the Fed must be more stimulating to help small business in our own backyard. Supporting small business does sound admirable, given that it represents 99.7 percent of all the nation's employers and employs 51% of the 130 million Americans working today, according to the Small Business Adminisration.

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