Dean Krugman to the Marching Band: "Stay the Course!"
All of us who warmly remember Animal House can recall the scene at the end in which the band is trying to walk through the wall at the end of the alley, having been led there by one of the pranksters from Delta House. Obviously, like the rest of the movie, this moment is an absurdity, but nonetheless I can think of no better way to describe Paul Krugman's latest exhortation to the Obama administration to "stay the course."
Krugman's most recent book is The Return of Depression Economics and what he says in his column is consistent with the advice he gives in the book: when in doubt, print money, lots of it.
If I am to stick with the Animal House analogy, Krugman's advice would be analogous to Dean Wormer urging the Deltas to have yet another toga party, break out the booze, and get drunk, really drunk.
Krugman himself realizes that his advice sounds a bit off, given that "conventional" economics actually emphasizes things like work, production, and living within one's means:
For this is the third time in history that a major economy has found itself in a liquidity trap, a situation in which interest-rate cuts, the conventional way to perk up the economy, have reached their limit. When this happens, unconventional measures are the only way to fight recession.
Yet such unconventional measures make the conventionally minded uncomfortable, and they keep pushing for a return to normalcy. In previous liquidity-trap episodes, policymakers gave in to these pressures far too soon, plunging the economy back into crisis. And if the critics have their way, we'll do the same thing this time.
And what are those "conventional" things? Indeed, they might include concern about federal budget deficits that are approaching numbers so gargantuan that it is difficult to place them in any perspective. The coming deficit, nominally speaking, will be greater than the entire federal budget of just eight years ago. There are also concerns about inflation, although I would expect an "economist" who claims that inflation cures just about every economic problem not to have a problem with printing money.
Nonetheless, we really should ask just what is this "course" that the Nobel Prize winner claims must be kept in place at all costs, and what would be the real cost of abandoning this "path of wisdom." To do so, however, we have to remember that Krugman is a fervent disciple of John Maynard Keynes, and to him the General Theory is to economics what the Bible is to Christianity.
Keynes argued that the standard views of economics were mistaken. Thrift was bad, especially if lots of people saved at the same time. There was no particular "structure of production" in which an economy dealt with a mix of capital and consumption goods. An economy simply was (and is) a "blob" in which only spending matters, and it does not matter on what one spends, just as long as enough spending exists to place resources at "full employment."
This is a strange economy, indeed, and Keynes's view fails to address an important point about just what an economy really is. In the real world, an economy is the social organization that comes about when large numbers of people act to alleviate scarcity. Economies are based upon exchange, since all production itself is a form of exchange, something Murray Rothbard makes abundantly clear in his classic Man, Economy, and State.
Contrary to what Krugman seems to believe, an economy does not just happen. Capital does not appear out of nowhere, and people do not develop special employment skills just to be doing something. Furthermore, there is no decent causal mechanism in Krugman's pushing of Keynes's liquidity-trap theory. In Krugman's world, people suddenly stop spending, the economy moves into the "liquidity trap," and then government must rescue it by spending, spending, and more spending.
To come up with such an interpretation of events, Krugman must become creative with his facts. Witness the following claim:
The U.S. economy grew rapidly from 1933 to 1937, helped along by New Deal policies. America, however, remained well short of full employment.
Yet policy makers stopped worrying about depression and started worrying about inflation. The Federal Reserve tightened monetary policy, while F.D.R. tried to balance the federal budget. Sure enough, the economy slumped again, and full recovery had to wait for World War II.
Whatever economic recovery there was in the 1930s was hampered by the New Deal, not driven by it. The first New Deal was an attempt to organize the US economy into a series of hundreds of cartels in which firms held back output in order to keep prices high. On the agricultural front, the government ordered the destruction of thousands of acres of crops, once again to keep agricultural prices high.
This is not policy to drive a recovery; this is an attempt to keep a recovery from happening. There was "rapid" growth (or at least by GDP numbers) because the economy had fallen so far into a hole by 1933 that any growth would look spectacular. However, the rate of unemployment was still well in double-digits in 1937, which was hardly a recovery.
There is something else Krugman does not mention, although Robert Higgs does in his classic 1997 paper on "Regime Uncertainty." Indeed, if one reads Krugman regularly, one finds out that in the period from 1936 to 1938, the Franklin Roosevelt administration was following the Krugman playbook. First, FDR railed against the "economic royalists" just as Krugman has done from his own perches. Second, the tax increases that Higgs believes were harmful were the "soak-the-rich" taxes that Krugman and others of his ilk have supported. (I remember Krugman blaming tax cuts for the recession of 2001–2002, so the man cannot have it both ways. If cutting taxes causes a recession, then raising them cannot cause one, too, not even by Krugman's logic.)
To add to the Krugman playbook, the US Supreme Court ruled in favor of the National Labor Relations Act in 1937 (in response to FDR's announced plan to "pack the court") and upheld a number of other government initiatives to raise business costs, make it easier for labor unions to organize businesses, and make it easier for the government to attack private property rights. Indeed, this would be a Krugman paradise, a plan for permanent prosperity.
In Krugman's world, prosperity is created by spending, and it does not matter who spends what on whom just as long as someone is spending. If consumers cannot empty their wallets fast enough, then government can do it, and when governments run out of revenues, they can create them via the printing press. Borrowing and printing simply are different sides of the same coin, and to do anything less, Krugman argues, would be disastrous:
Well then, what about all that government borrowing? All it's doing is offsetting a plunge in private borrowing — total borrowing is down, not up. Indeed, if the government weren't running a big deficit right now, the economy would probably be well on its way to a full-fledged depression.
If that is a "course" to economic recovery, then the brick wall in front of the Animal House band was nothing more than a temporary obstacle. Understand that businesses do not borrow simply to be spending money; they borrow because they believe the investments they are making with borrowed money will lead to future growth of their businesses, which will enable them to pay back those loans. It is that simple.
Unfortunately, Krugman's wonderland is devoid of such logic. Krugman is like Dean Wormer himself butting his head against the wall and demanding that the rest of us do the same.
Wall? What wall?