FRED WOLFERMAN: Scary Words: Think Twice Before Launching a New New Deal
Paul Krugman recently won the Nobel Prize for economics, teaches at Princeton and writes a column for The New York Times, so I guess he must be pretty smart; I would certainly expect him to understand economics better than I.
Why was it, then, that his column of last Monday made so little sense? I guess it could just be me.
Mr. Krugman is a proponent of an immediate stimulus package from the feds. Very immediate, and very large. Well, he has a lot of company in that view, and I hesitate to argue with all these people; they travel in elite circles and make big bucks. My old-fashioned, balanced-budget, stodgy Midwestern upbringing has been out of fashion for a long time. Why should I expect any change now?
Still, his latest effort suggested a whole new level of government largesse.
Mr. Krugman begins by drawing comparisons with FDR and the New Deal. There is a lot of that going around, too. But so far, unemployment hovers around 20 points lower than it was in 1932, and the standard of living is, oh, quite a bit higher. A chicken in every pot doesn't even reach subsistence level these days, unless maybe it's in a sky-blue $220 Le Creuset Dutch oven.
From that starting point, he criticizes the New Deal for not going far enough. The era that brought us the AAA, CCC, NRA, WPA, and all that other alphabet-soup legislation, was inadequate for its purpose. If only the government had spent more, things would have been better.
He concludes this line of reasoning by saying that it took the World War II to finally to provide a stimulus package sufficient to end the Great Depression. Now there's an encouraging thought. Maybe Iraq and Afghanistan are not enough. Maybe we should just go right after Russia or China. Or both.
He does not mention the highly protective Smoot-Hawley Tariff, which effectively destroyed international trade during the '30s. He ignores the fact that much of the New Deal was held unconstitutional by the Supreme Court. It may make for titillating copy to compare 2008 to 1932, but it doesn't make much sense. Yet.
Nevertheless, Mr. Krugman's suggestion to Team Obama is "to figure out how much help they think the economy needs, then add 50 percent." That is some scary arithmetic. Team Bush is already in for -- I can't keep track -- trillions. I think it's a safe bet that Team Obama, along with co-captains Reid and Pelosi, will come up with an even larger number. Now they're supposed to tack on another 50 percent.
Mr. Krugman offers no specifics -- none at all. Just spend it.
He does make an interesting criticism about New Deal fiscal policy. He blames FDR for a tax increase in 1936, made in an effort to bring the budget closer to balance. The effect, according to Mr. Krugman, was to prolong the Depression. I can buy that. Take note, Congress -- no new taxes. Read Mr. Krugman's lips.
But here's the thing: If we spend all those trillions (Does anyone else remember Sen. Everett Dirksen's famous line: "A billion here, a billion there, and pretty soon you're talking about real money"?), and we don't increase taxes, at least not for a while, what will happen next?
The first next thing will be that tax increase. If it's too big, it will squash the economy again, so it won't be too big. The second next thing will be a lot of palaver about more efficiency in government, but we've been there before. So the third next thing will be inflation.
All the new guys in Washington should take a good look at the late Carter years, when the discount rate hit 12.5 percent and the prime rate was 21.5 percent. I know they all think they're smarter that that. Let's hope they're right.
Flooding an economy with money during a recession may be well and good; the problem is that you have to stop sometime. When the recession is over, you have to balance the budget and pay back that borrowed money. At least that would be the responsible thing to do. In all his high-falutin' economist-professor-columnist rhetoric, Mr. Krugman somehow fails to get to that point. Unfortunately, he is not alone.
Fred Wolferman lives in Southern Pines. Contact him by e-mail at email@example.com
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