Saturday, July 02, 2011

Paul Krugman, Fantasies

On an NPR program this morning the host had a discussion with Paul Krugman about the deficit and the debt ceiling.  Krugman claims that a) we would be better off by going deeper into debt and re-creating the Works Progress Administration and b) that the debt ceiling is a meaningless construct.   What gets me about Krugman (and as you have seen in previous posts he annoys me a lot) is that he begins with moral outrage and like his buddy Robert Reich then lets his own biases trump evidence.

So let me offer a counter to both ideas.   Many on the left claim that the Roosevelt programs brought the country back from the brink of economic collapse.   The trouble with the argument is that it is not true.  The downturn in economic activity that began in the late 1920s has some parallel to the current period.  Included in that parallel was the actions of a GOP president (in the 20s Hoover and in the 2008-9 downturn Bush) who did a lot of what Krugman argues for.   All the spending in both periods had little positive effect in getting us out of the downturn; indeed some economists argue that the programs actually exacerbated the problem.  Krugman than argues that WWII brought us out of the depression.   (Although there was a slight uptick in 1937-38.)  Problem is that WWII merely substituted one type of consumption for another.  The real growth came after WWII as the GIs came back into the market and consumption began to grow.   Many of the FDR economists near the end of WWII argued (incorrectly) that the returning GIs would be a damper on economic growth.   The first two and a half years of this "recovery" offer a remarkably similar pattern to the earlier period.   We've lost 2.1 million jobs with the Trillions we have spent and the housing market continues to implode.  Gee, if we did more of this things would be even better.

Then you get to the debt doesn't matter argument.  Krugman points out that a) our debt ratios are low compared to other periods (especially WWII) and countries (for example Great Britain for most of the 20th Century) and b) that the debt ceiling is probably unconstitutional.   The second argument is speculative so let's deal with the first.   If you look at the percentage of GDP that the debt represents (assuming that it is right to include the government to government debt) it has risen very quickly in the last several years - fast during the end of the Bush Administration and accelerating in the first couple of years of Obama.  Krugman would ignore the unfunded liabilities of Social Security and federal pensions - but that is just nonsense.  The workforce is aging and we have fewer taxpayers paying in to the systems than we did and escalating projected expenditures.   That is not a good situation.  

At what point do the ratios begin to be troublesome?  Who knows.  But it is clear that the trendline is against us.   Krugman estimates the national debt at $10 trillion (actually it is closer to $15) and our shrunken GDP would soon not be able to handle the debt service needed to handle the debt.  At some point, and most conservatives believe it will be sooner rather than later, the debt becomes crushing and even if a lot of the debt is owed to ourselves we begin to need to make significant changes.  Krugman may be a supporter of the reverse Stockman thesis (discussed a few days ago).   Although he thought debt was troubling in the Bush era, he now believes it is inconsequential.   What gets me the most about Krugman is his smugness.   But people who have been listening to him for a long time understand that all of his views on domestic economics are colored by his partisan views.

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