In the most recent issue of Housing Wire Magazine, economist Paul Krugman suggests more government spending as the means of dealing with the economic slump and the housing crisis.

“We will be seeing low interest rates for a very long time,” the Nobel laureate said. “The thing about housing … housing prices were stable for a long period of time, then they soared and came back down.”  So now we know that what goes up must come down.  Thank you Dr. Krugman.

Incredibly, neither Krugman nor his soul mates among the neo-Keynesian elite, a distinct group which exercises hegemony over American economic policy, seem to accept that government spending and more debt, enabled by double digit inflation, is not a solution.

“Government policies promoting consumer indebtedness with low interest rates and low down payments were partly responsible for the housing bubble,” notes Anthony Sanders of George Mason University in Housing Wire.  “It should be called the Keynesian bubble.”

Despite all of the academic fussing about the triumph of neo-liberal economic thinking in the 1980s and 1990s, the real underlying model of American political economy is entirely socialist in political terms and inflationist as to the core monetary model.  When the advocates of free market economic tenants have shown the temerity to challenge the control of the temple by the neo-Keynesian Sanhedrin, the result has been more government and ever mounting piles of public debt.

The roots of neo-Keynesian socialism of the Krugman variety go back to before WWI, to the creation of the Federal Reserve System in 1913.  I spent a good bit of time talking about the statist and ultimately socialist roots of the Fed in my book Inflated: How Money and Debt Built the American Dream, including a number of sources that deserve more attention. One of these is “The Role of Keynesians in Wartime Policy and Postwar Planning,” by Byrd L. Jones of the University of Massachusetts, who described how Harry Hopkins and the socialist brain trust around FDR plotted a course to “full employment” using deficit spending funded with debt.  Historians of this era lionize these socialists for “saving what even conservatives call capitalism,” to quote James Galbraith on Alvin Hansen, another of the authors of the Keynesian illusion of pretend economic growth via deficits and debt.

Hansen was one of the key architects of the idea of “full employment,” a concept he developed during a series of lectures at Harvard University, one of the great birthing grounds of American socialism.  James Tobin wrote of Hansen in 1976 that as the principal intellectual leader of the Keynesian conquest, Hansen deserves major credit for the “fiscal revolution in America.”

That revolution, sadly, put the US on the road to fiscal recklessness and a steady rate of debt accumulation and inflation that has robbed Americans of most of the value of a dollar of a century ago. FDR operatives such as Leon Henderson, Richard Gilbert and Lauchlin Currie based the recovery of the US economy in the 1930s on defense spending, arms exports and domestic subsidies — a tendency for an expanded government learned in WWI, expanded in WWII and continued happily ever since.

Currie, a Canadian socialist who like Hansen worked at the Fed and later at the White House for FDR, also focused on war as a means of economic stimulus — a policy still followed under President Barrack Obama.  Jones writes that in Currie’s analysis, defense spending and arms exports were means to be “temporary” aids to the economy, but that a long run solution not dependent upon “chronic fiscal deficits” required “a liberal program of progressive taxes, increases in social security benefits, more public works projects and encouragement of investment (especially in home building).”

If you think that the last sentence sounds an awful lot like what we hear coming from the mouth of Paul Krugman and other advocates of more public spending today, then you’re correct.  The basic program of the neo-Keynesian socialists has not changed in decades, namely to expand the role of the state in the US economy and use inflation to create the illusion of economic prosperity — what liberals call “full employment.”

During the years following WWII, America donned the clothing of free market capitalism, at least in a rhetorical sense, but the underlying model of political economy has remained true to the socialist roots of FDR.  Conservatives from Hayek and Henry Hazlitt on forward have warned that the end result of the neo-Keynesian path is an authoritarian state and we have one today.

Yet even with a government monopoly on the housing sector, professor Krugman still wants to spend and borrow more.  In a post on Zero Hedge yesterday, “Counter-Cyclical Follies,” my friend Dick Alford argues that economists are finally realizing that “counter-cyclical fiscal and monetary policies do not address the cause of the under-performance of the US economy and hence are not solutions.”

Maybe.  But it has taken educationally deprived Americans a century to figure out this key economic insight.  So long as people take their policy guidance from committed neo-Keynesian advocates like Paul Krugman, who continue to follow the same socialist line set down a century ago by the likes of Hansen and Currie, we shall make no progress on truly fixing the US economy.