As the economy goes south, we hear calls for a “second stimulus,” most prominently from Paul Krugman, the Nobel-prize-winning economist and New York Times columnist. To argue against further accumulation of government debt and the printing of new money, according to Krugman, is to fall back on “discredited” economic thinking:

For the past 30 years, we’ve been told that government spending is bad, and conservative opposition to fiscal stimulus (which might make people think better of government) has been bitter and unrelenting even in the face of the worst slump since the Great Depression. Predictably, then, Republicans — and some Democrats — have treated any bad news as evidence of failure, rather than as a reason to make the policy stronger.

In dealing with the crude analysis that accompanies such Keynesian thinking, I use Krugman’s columns because he is the most popular exponent of that viewpoint. If one wishes to learn Keynesianism, read Krugman’s columns.

The Keynesian economic “theology” holds that only spending matters. Keynesians believe that it does not matter who does the spending, although it is preferable for government to do it, since politicians love to buy votes with other people’s money.

A recent quote in a Krugman column demonstrates this point. He claims that since private borrowing is down, even with the government’s current rapid accumulation of debt, overall borrowing is less than what it was during the boom. Thus he concludes the overt worrying of some over the massive increase in government debt is just another tale of woe from the “economic Cassandras.”

In other words, Krugman does not differentiate between private and government borrowing, even though business borrowing mainly is done for capital investment and government borrowing is done so governments can spend more than they take in with taxes. Keynesians seem to believe that the only benefit business borrowing provides is the spending that takes place, so if government does the borrowing and spending instead, then all the better.

Now to deal with the quote from Krugman’s column. Austrian economists do not respond negatively to what Krugman says because we “hate” government for “ideological” reasons (even though most of us look askance at government and its coercive ways), but rather because we understand the differences between private and government spending. They are not mirror images of each other, no matter what Krugman says.

In the Keynesian viewpoint, all assets and all capital are homogeneous. It does not matter if one spends money on a “bridge to nowhere” or invests in a new line of production; what is important is that money is spent.

Furthermore, in Keynesian thinking, as long as there are “idle resources,” then government spending — if it is enough and enough money is printed — ultimately can result in “full employment” of those resources. Why those resources might be idle in the first place is not up for discussion; the important thing is that government “stimulates” enough spending to put those resources back to work.

This is short-sighted and crude analysis. In the real world, capital matters, for it is in the development of capital that we make workers more productive, thus increasing individual wealth and the overall standard of living in a society. Capital spending is not just money dropped from a helicopter; it is undertaken for a specific productive purpose.

Austrians hold that typical Fed-created credit booms are not sustainable and that when once-productive assets become idle in the downturn, it is because the capital was malinvested. Granted, to understand the entire concept of malinvestment, one must be able to differentiate between the kinds of capital investment that can be sustained and what will have to be abandoned. Keynesians, unfortunately, have decided to ignore that kind of thinking or unilaterally to declare it “discredited.”

Yet when one applies simple logic, it is not hard to see which set of economic ideas should be discredited, and it is not the Austrian theory.