Monday, September 06, 2010

Krugman deficit spending campaign goes extreme

In an op-ed column in today's NYT, Paul Krugman once again promotes deficit spending as the way out of the recession and the path to better times. He has been making some good arguments and certainly President Obama's proposal today for new infrastructure spending is the kind of deficit spending that is necessary, no question about it. While worrying about the deficit we are leaving future generations, why not also worry about the outdated infrastructure and stunted economic growth that could also come their way.

Krugman's argument today, however, goes a step too far. He gets into the 1930's examples that he likes to reference and then uses the deficit spending of 1940's wartime as an example of how it works. He writes, "Over the course of the war the federal government borrowed an amount equal to roughly twice the value of GDP in 1940 - the equivalent of roughly $30 trillion today." He later describes the outcome of this kind of spending that even at much smaller levels would be derided by many today - "But guess what? Deficit spending created an economic boom - and the boom laid the foundation for economic prosperity."

What is he talking about. How can he make such a comparison. At the end of WWII, America was the last man standing, the only industrial country still fully functioning, the prince of credit ratings because no war had been fought on its land, a land which remained productive. There was a ten year period after WWII in which economic competition was minimal as the rest of the world picked itself up and put itself back together again. America was on top.

Today there is tough competition from all sides. We don't get a free pass. Deficit spending invested and managed well should be one of the tools to get back on track, but it's not some magic pill that has no side effects, all gain and no pain. That mind-set was tried with Fannie and Freddie. It doesn't work.

First Reich three days ago and now Krugman --- why take good information and directionally helpful ideas and trash them with extreme and useless conclusions. Have these smart commentators reduced themselves to the levels of Dowd, Herbert, Collins, and Rich such that they only appeal to the set in their ways self admiring "elites" who can chortle with satisfaction as they read their dear old New York Times.


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