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.

The usual canards thrown at GM include (1) GM did not build cars consumers wanted, (2) the quality of GM cars was lower than the quality of competitive brands, (3) GM’s management was not responsive to consumers, and (4) GM concentrated on building “gas-guzzling” SUV’s instead of building smaller cars that did not use as much gasoline.  All are true, in one sense, but they did not originate with GM or its management as much as they came about because of government policies.

Mises understood that in a free market, no business would bureaucratize itself, as such a move would generate costs upon costs for which there would be no market for the end result.  Businesses exist only because of the decisions made by consumers to purchase their goods, and for no other reason.  They do not exist to provide employment for workers; employment opportunities exist only as long as consumers are willing to purchase those goods made by the employees.

As long as consumers have choices, they will use them, especially if a particular business is unresponsive to them.  In the case of GM, the real story is not with any deliberate intransigence on behalf of the GM management, but why it chose to be intransigent in the first place.  This certainly was not the case with GM during the Great Depression, when the company still managed to eke out a profit.

Government moved against GM on many fronts.  First, the government made it clear it stood behind the United Auto Workers union when it organized GM and whenever the union went out on strike.  Second, the unions were able to take what once had been a mark of efficiency – GM’s vertical integration – and turn it into a liability by holding the company hostage at various stages of production.

Second, government employment mandates created the requirement for GM to create a bureaucracy to deal with the huge amounts of forms and regulations that were levied by various departments of the state and federal governments.  Furthermore, because labor unions are primarily political creatures, the politics of organized labor forced GM and other firms to adopt bureaucratic methods to please their government “superiors.”

Third, the UAW made it extremely difficult for GM to be flexible and to adopt production methods that would have enabled it to be competitive.  (Indeed, we have seen the same problems at Ford and Chrysler, and Chrysler essentially is bankrupt like GM.  Ford barely hangs on.)

The government and union-created inflexibility that became institutionalized at GM magnified both successes and failures.  Furthermore, because GM’s comparative advantage was in trucks and sport utility vehicles, the company also became hostage to spikes in gasoline prices.

It is true that GM did not make many small, fuel-efficient cars, but it was due to the hard fact that GM’s labor contracts were so costly and so inflexible that the company could not step out and take any chances and make those cars.  Unfortunately, because the Obama administration is pretty much a wholly-owned subsidiary of the UAW, the new “Government Motors” will be just as inflexible, which means that even though GM will be building new “small” cars, nonetheless the company still will lose money (like Amtrak and the Postal Service) as the modern-day “Trabants” move along the assembly lines.  And when we stop buying these lousy products?  Well, the hard truth is that the government, in an attempt to prop up the UAW, will hamstring GM’s foreign competitors.  That means shoddy products and “service with a snarl.”

Another thing I constantly heard in grad school was: “We are not interested in your inputs.  We care about your outputs.”  In other words, they were not going to judge my work on the basis of my own efforts, but rather what I produced. The first paper I read in grad school was Milton Friedman’s 1953 classic, “The Methodology of Positive Economics,” which said that the accuracy of a theory did not depend upon the reliability or reality of its assumptions, but rather on the theory’s ability “to predict events.”  To put it another way, the outputs of analysis are much more important than its inputs.

I cannot say I disagree completely with that.  Bad theory will produce bad outcomes, yet when one puts together the so-called market test with outcomes-based theory, something does not make sense.  Why?  There is no worse theory out there than Keynesian theory, yet it is taught in the economics textbooks as though it were an unvarnished truth.

The fundamental tenet of Keynesianism is that there cannot be a simultaneous rise in inflation and unemployment, the Phillips Curve being the Holy Grail.  However, when the U.S. and British economies suffered severe stagflation during the late 1970s, people began to wonder what was happening.

I specifically remember seeing ABC’s economic correspondent, Dan Cordtz, around 1979 say that the theory no longer was working, as inflation and unemployment were increasing at the same time.  It was then that the supply-side theory–cutting taxes and encouraging capital formation and production–appeared, and while I have had some real disagreements with the supply-siders, nonetheless they made some good points.

The Keynesians, led by President Jimmy Carter’s advisers and leftists such as John Kenneth Galbraith, declared such notions as cutting taxes and encouraging capital formation to be nonsense.  The cartoonist Bill Mauldin, after Ronald Reagan adopted the supply-side model for his campaign, had a picture of Reagan throwing gasoline (labeled “tax cut”) onto the raging fires of inflation.  The New Republic declared after Reagan’s election that his policies would lead soon to wage and price controls.  Instead, the Consumer Price Index settled into its lowest increases in more than a decade and the economy grew nicely after the 1982 recession.

One would think that this episode would discredit the Keynesian paradigm, but it seems that the beast has more lives than a magic cat.  Today the economics textbooks are dominated by Keynesian theories and Paul Krugman, who openly espouses the Keynesian paradigm, is the latest winner of the Nobel Prize in economics despite the fact that every Keynesian “solution” that the government has applied to the economy has not stopped the economic freefall.

Surely we are speaking of the failure of the Keynesian paradigm to produce satisfactory “outputs,” yet even such failures have not derailed this ideological train.  Are we supposed to assume that even with its lack of ability to predict anything, that Keynesianism still “passes the market test”?

If one compares the Austrian analysis with that of Keynesianism, one sees that Austrian economics wins hands down.  Not only have the Austrians been precise in their assessment of how the financial bubbles have brought down the economy, but also they have accurately demonstrated–through their theories–that the current government plan of borrow-and-print-money-and-spend-wildly is not going to revive the U.S. economy.

If there is a real “market test” of economic theory, it is the test of accuracy.  That academic economists are not willing to junk their Keynesian theories for something that really works is not “proof” that Keynes was right.  Instead, it demonstrates that many economists prefer to keep their heads in the sand.

With the economy performing worse than hoped, revised White House figures point to deepening budget deficits, with the government borrowing almost 50 cents for every dollar it spends this year.

The deficit for the current budget year will rise by $89 billion to above $1.8 trillion — about four times the record set just last year. The unprecedented red ink flows from the deep recession, the Wall Street bailout, the cost of President Barack Obama’s economic stimulus bill, as well as a structural imbalance between what the government spends and what it takes in.

This no longer is a “problem.”  It has become a calamity, and there are no political forces in Washington willing or able to stop what seems to be a runaway train.  Furthermore, the political arrogance that is the nation’s capital prevents people from understanding the obvious: we are witnessing an episode of ruinous government spending that is going to have severe ramifications for years to come.

After the latest numbers came out, White House Budget Director Peter Orszag declared that the deficits are being driven by the recession, which this government inherited, so the numbers are not the fault of the current set of policymakers at 1600 Pennsylvania Avenue.  I am no defender of George W. Bush and his spendthrift government, but even a Bush critic like me can see that the incoming Obama government decided the speeding train was not going fast enough, so they opened the throttle wide open and tied it down.

Some perspective is needed here.  In nominal terms, the deficits are far and away greater than anything we have seen.  According to the Statistical Abstracts of the United States, if one adds up all of the budget deficits of the Bush administration, they about equal the deficits for this fiscal year alone.  Now keep in mind that many of us believed that the Bush deficits were ruinous, with its profligate spending and monetary “creation” through the Federal Reserve System –  and the boom and bust pattern of the economy proved our point.

However, it is as though the Bush policymakers were skinflints compared to what we are seeing now.  Furthermore, there are economists who claim that the present government is not spending enough.  Recent Nobel Prize-winner Paul Krugman claims that the unprecedented surge in federal spending is only a “half-measure” that won’t revive the economy.  The solution?  Even more spending!

My first reaction is simple: Spend with what?  Borrowers need lenders, and that means that someone out there has to believe that a U.S. bond is a good investment.

Much of the U.S. deficit has been funded by Asian governments such as China and Japan which accepted dollars for goods and then rolled those dollars into U.S. government debt.  However, that gravy train is slowing down rapidly, as the seller is running out of suckers.

There is one buyer, however, that seems ready and willing to buy what Uncle Sam throws its way: the Fed.  As the recent statements by the Fed have demonstrated, the central bank is increasing its purchases of both government and private securities at an increasing rate, revving up its printing press in the process.

This cannot lead to recovery; when the government throws out this much paper, there is no way we will not see a “crowding out,” which strips the very funds needed for business investment. Rather, it will lead to inflation and lots of it.  Never mind that the Obama administration has announced that this economy will enjoy a 3.5 percent increase in output by the year’s end; the only things that are going up are the inflation and unemployment rates.

One does not have to wish this administration to fail in its economic policies.  This government is doing that without any help from the opposition.