I just watched a debate with Paul Krugman and a couple of British conservatives on the BBC. Krugman’s a smart fellow. There is a reason why he won the Nobel Prize. But he is just flat wrong on so many things.
His position is that we are in the midst of a depression, which I agree with him on, and that in order to deal with this depression we must take on more debt to spur demand, which I do not. Demand is the problem he says, therefore we need government to create jobs which puts money into the system etc. You know the bit.
It struck me that the reason Krugman is so convinced that this is the way forward (other than his obvious commitment to deep statism) is that he believes the current world economy essentially has a liquidity problem, that if it can bridge this very rough patch with government spending and printing from the world’s central banks things will return to more or less “normal” with time.
But I don’t think we have a liquidity problem. I believe we have a global solvency problem which is made worse the further we go down Krugman’s line.
It is true that things just feel better in the short term if we use gobs of government money to pay our immediate bills. People keep their jobs (in government especially) and a hollow feeling economy can continue on at least for a while. Colossal economic mistakes can be papered over. The piper is kept at bay. For a time.
But what Bernanke’s experiment (which has been generally cheered on by Krugman and co.) has shown us is that an ersatz economy, such as the one we now see in the USA, is highly unstable. When the play money is taken away all hell breaks loose. This is unsustainable over the medium to long term (and perhaps increasingly even in the short).
So Krugman is right, there will be pain if we stop piling on debt, but that is because we are now insolvent, perhaps as a globe.
The piper may be at bay, but he’s not going away.
The Keynesians used to say that government needed to act to “prime the pump” of the economy. Government infusions would get things going and then expenditures could be reined in. (In theory, but this never happened which is big part of our current problems.) But now the call it seems is forever more money, not because it will spark the economic engine so that the economy can again operate under its own power, but because without infusions the current system collapses and the reckoning comes.
In the attached debate you can see in Krugman’s responses that his fear is really for the death of the post war welfare state. He accuses his opponents for advocating for “austerity” simply because they want a smaller state. They are using the current economic crisis merely in a cynical and cold hearted attempt to end the efforts of Labor and the New Dealers. This is why the Conservatives want to rein in spending, not because spending like we have will result in an even bigger disaster down the line than the one we are faced with now.
The sad question we are faced with as a planet is not if but when are we going to feel the pain. Had we let the market right itself in 2008 we’d be out of this mess by now in my estimation. (Krugman of course would beg to differ.) If we let the market correct now we might emerge with a real economy in a couple of years after much pain. But if we continue to delay the reckoning forever with ever more debt as Krugman would have us do, one day the universe is going to take the house of cards down and it will be infinitely more painful than if we put things in order now. And it would be very painful if we got our act together now.
Krugman has no exit strategy. He has no way out. He can sell easy money, because what is easier to sell than the avoidance of pain? Just another shot. Just another fix. Hell, we can do this forever right?