This column is the Nobel Laureate's detailed explanation of why David Stockman is wrong in what Krugman calls "a mammoth screed," the former Reagan Budget director's “The Great Deformation.”
Krugman begins by reminding us that when the Great Depression struck,
When the Great Depression struck, many influential people argued that the government shouldn’t even try to limit the damage.Among these were Herbert Hoover's Secretary of the Treasury Andrew Mellon, whom he quotes as opining that the President
“Liquidate labor, liquidate stocks, liquidate the farmers. ... It will purge the rottenness out of the system.”He also quotes Joseph Schumpeter, and then writes
Like many economists, I used to quote these past luminaries with a certain smugness. After all, modern macroeconomics had shown how wrong they were, and we wouldn’t repeat the mistakes of the 1930s, would we?the urge to purge - somehow when I read the title I immediately thought not of some bulemic, because that would at least carry with it the notion of having eaten well, which is not true of the ordinary American who is being crushed by what has happened in the economy and will be crushed even more by the proposed austerity, but rather of some medieval doctor further weakening the patient by "blood-letting" from an already sick man. So it is with the approach of the austerity mavens with respect to our economy.
How naïve we were. It turns out that the urge to purge — the urge to see depression as a necessary and somehow even desirable punishment for past sins, while inveighing against any attempt to mitigate suffering — is as strong as ever. Indeed, Mellonism is everywhere these days.
Krugman reminds us that those insisting upon austerity have been wrong at every stage of our recent economic crisis, while Keynesians (like himself) have been on target:
Remember how running the printing presses was going to cause runaway inflation? Since the recession began, the Fed has more than tripled the size of its balance sheet, but inflation has averaged less than 2 percent.Krugman calls Stockman's analysis of our economic history as
pretty much standard liquidationism, with a strong goldbug streak.goldbug streak - I wonder if that is intended at least in part to link Stockman to the craziness of the likes of Glenn Beck, who after all has been a paid mouthpiece for gold interests?
Perhaps not, since Stockman basically asserts that we have been going to Hell in a handbasket since FDR took us off the gold standard, and have been on sprees ever since:
spending sprees, consumption sprees, debt sprees, and above all money-printing sprees. If disaster was somehow avoided for 70-plus years, it was thanks to a series of lucky accidents.In a sense, all of that tartness is simply preface from Krugman, who then provides an important economic lesson on our rising debt. Yes, it has increased as a portion of GDP. The amount that is foreign has increased, albeit less than most Americans think, but that it mainly America borrowing from Americans
which doesn’t make the nation as a whole any poorer, and doesn’t require that we collectively spend less. In fact, the biggest problem created by all this debt is that it’s keeping the economy depressed by causing us collectively to spend too little, with debtors forced to cut back while creditors see no reason to spend more.Remember, you do not pay taxes on interest earned from government bonds, and that investment is still considered absolutely safe. Add to that the large amounts of cash being held by corporations because inflation is so low and we we should already see the need for investment to stimulate spending. As Krugman has noted for some time, because interest rates are currently so low, the government should, rather than cutting spending, be increasing it as a stimulus whose return will based on historic trends within a short time return far more in tax revenue than it will cost interest. Such additional spending will also create increases in revenue for state and local governments, as sales and income tax streams increase, the price of real estate begins to return to higher levels, and then those governments can perhaps even rehire some of those employees they have been forced to lay off because they are required to run balanced government. That rehiring adds additional spending which will also increase government revenue through taxation.
Krugman is all for restoring financial controls and oversight to deter excess leverage and prevent the next crisis.
To deal with the crisis that’s already here, we need monetary and fiscal stimulus, to induce those who aren’t too deeply indebted to spend more while the debtors are cutting back.This of course is "anathema" to Mellonites, like Stockman, like the deficit hawks, like Pete Peterson, like unfortunately too many Democrats as well. They think that deficit spending - which in their minds includes any spending on the social safety net that does go through the private sector so that corporations can gain some direct profit - is what has caused our current financial crises, which they measure primarily in the size of deficits and debts, never mind that the deficit increased under a Republican administration in part because of unnecessary tax breaks for the wealthy and corporations and fighting two wars without paying for them. Krugman warns us that their approach of liquidation is destructive, because
by turning our problems into a morality play of sin and retribution, it helps condemn us to a deeper and longer slump.Of course, the messaging from the Mellonites has been working. As Krugman puts it "sin sells." That is,
the notion of macroeconomics as morality play has a visceral appeal that’s hard to fight. Disguise it with a bit of political cross-dressing, and even liberals can fall for it.This is happening not just on the macroeconomic level of the national economy. We see it in the policies of Democratic mayors like Emanuel in Chicago, who use among other things the financial problems as a justification for slashing away at the basic local government function of public education, and finding ways of turning that function into something that can turn profits for the investor class and corporations, even as it destroys neighborhoods and ignores the needs of those hurting the most.
The real political cross-dressing comes from a Democratic President more committed to a "grand bargain" with "bi-partisan" support than he seems to be to rebuilding the economy for the long term. What is sad is that he can clearly argue that he was right on stimulus spending. That is, he could clearly argue had he pushed for a more significant stimulus the first time around. Even so, the data supports him - rather than pushing for the grand bargain he should be pushing for more stimulus.
Krugman's column saddened me because of its ending, especially the words visceral appeal that's hard to fight. I do not think it is impossible to fight but the rhetorical battle is already lost when the Democratic President accepts the framing of the argument in a way that cedes control to the Mellonites, whether they are simply hostile to government or merely wrong-headed about how governments and economies actually function.
Still, the column is important enough I wanted to bring to the attention of this community. The link gets you past the firewall and does not count against your quota of Times stories for the month.
Read the whole thing.
It is worth the time.
But then, isn't that always true of Krugman?