Krugman makes his latest argument with nothing but a few words and a lonely chart which shows the recent drop-off in government infrastructure “investment.”
Contrary to Krugman’s worldview in which “full employment” is the only feasible economic ideal, employment is only “good” when it occurs voluntarily under market processes. Why? Because working for working’s sake is wasteful. Take the example of one New Deal program which paid one group of workers to dig ditches….and another group to fill them. By comparison, Krugman’s call for additional government spending on roads, bridges, and other public projects seems downright efficient. Nonetheless, deeper analysis reveals that this is simply not the case.
A recession is the worst time for government to be embarking on such “investment” projects. Recessions come about when resources are misallocated. Economic calculation is obscured when central banks force interest rates below the natural market level. The result is confusion as entrepreneurs believe that certain projects are profitable (due to low interest rates) that actually lack real savings to complete. Otherwise reliable economic calculation has failed. Government, unlike the entrepreneur, has no economic calculation at all, even under the most natural market conditions. This makes spending on infrastructure projects an endeavor that is likely to *further* skew the societal allocation of resources—promising to only worsen the recession. The late economist Murray Rothbard elaborates:
“Capital is an intricate, delicate, interweaving structure of capital goods. All of the delicate strands of this structure have to fit, and fit precisely, or else malinvestment occurs. The free market is almost an automatic mechanism for such fitting; and we have seen throughout this volume how the free market, with its price system and profit-and-loss criteria, adjusts the output and variety of the different strands of production, preventing any one from getting long out of alignment. But under socialism or with massive government investment, there is no such mechanism for fitting and harmonizing. Deprived of a free price system and profit and-loss criteria, the government can only blunder along, blindly “investing” without being able to invest properly in the right fields, the right products, or the right places. A beautiful subway will be built, but no wheels will be available for the trains; a giant dam, but no copper for transmission lines, etc. These sudden surpluses and shortages, so characteristic of government planning, are the result of massive malinvestment by the government” (pg. 967). http://mises.org/books/mespm.pdf
The logical conclusion of such analysis is that government investment is not investment at all. Investment is something which requires the foregoing of current consumption. This is not the case for so-called “government investment.” In reality, government is simply transferring scarce resources from one group to another in the hope of boosting employment. This consumption of resources is the last thing the doctor called for in the middle of a recession.