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Liberal economist Paul Krugman is beating the debt drum to ward off recession relapse. Little wonder. He finds himself trapped between the economics and politics of a still-struggling economy. To extricate himself, he is rewriting the history of the 1930s. The problem is that what he is not telling us is far more important than what he is.
Krugman writes: "Condemning deficits and refusing to help a still-struggling economy has become the fashion everywhere .. . economic policy around the world has taken a major wrong turn and ... the odds of a prolonged slump are rising by the day."
Considering America's debt, as a percentage of its economy, has increased 50% in just two years, he should not be surprised by deficit denunciations. The onus of explanation is really on him — to convince us why the obvious isn't.
Reaching back to the New Deal, he attempts to do so: "Many economists, myself included, regard this turn to austerity a huge mistake. It raises memories of 1937, when FDR's premature attempt to balance the budget helped plunge a recovering economy back into severe recession."
Krugman would like us simply to take his example at face value and apply it to today's circumstances. However, we risk repeating his mistake by doing so. By deconstructing his example, we simultaneously reveal his goal in seeking its current application.
In 1938, the deficit, spending and economy all did decline. But Krugman leaves out crucial elements of the story. Federal spending fell 10% ($740 million) in 1938. On the other hand, thanks to FDR's imposition of a corporate tax on retained earnings and a comprehensive Social Security tax, revenues increased 25% ($1.36 billion).
Additionally, even though Krugman compliments today's Fed for not making the mistakes of its predecessors, he makes no mention of the fall in the money supply. But another Nobel economist, Milton Friedman, did in a seminal study five decades ago.
"The sharp retardation in the rate of growth of the money stock must surely have been a factor curbing expansion, and the (later) absolute decline, a factor intensifying contraction. Though the decline (in the money supply) may not seem large in absolute amount, it was the third-largest cyclical decline recorded (during his 1867-1960 study)."
Friedman's work toppled prevailing Keynesian orthodoxy. Today Krugman is not simply seeking to restore Keynes, but recreate him in his own more liberal image. This is why it is insufficient just to give fiscal policy primacy over monetary policy; spending must have greater emphasis than taxes — despite the fact that in Krugman's example, tax policy had twice spending's impact!
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Posted By: Vicki551(850) on 8/6/2010 | 1:59 AM ET
And don't forget that in the thirties, the majority of the population still grew some of their own food, the citizens didn't have the huge amount of personal debt that we do today and the country still had a manufacturing base which we no longer have. Other factors which we don't have today are the educational level of the populace and a society that imposed 'morals' and 'values'. People educated only through the eighth grade knew more in terms of basic reading, writing & arithmetic than most of our college graduates today. Children were, for the most part, brought up with 'values' at home re-enforced by the community at large. It wasn't until after WWII that the 'Progressives' replaced fathers in the home with 'Big Daddy' government and values and morals were declared old-fashioned and obsolete. Our modern society is no longer equipped to recover from this government initiated 'downturn'. It will be a never ending downward spiral to our ultimate demise.
Posted By: dwdrury(2140) on 8/6/2010 | 1:08 AM ET
It is also instructive to compare the 1920 recession, and the Federal response, to that of 1929 thru 1939, and to today's. The 1920 you say? Govt cut spending and taxes, and it was over in a blink. But then doing the right thing for and by the country lets an opportunity to grab power go to waste, in violation of the Rahmbo Principle.
Posted By: Serfdumb(3105) on 8/6/2010 | 12:19 AM ET
In 1933, Keynes endorsed, though with reservations, the social "experiments" that were going on at the time in Italy, Germany, and Russia? Keynes, in the introduction to the 1936 German translation of the General Theory, wrote that "his approach to economic policy is much better suited to a totalitarian state such as that run by the *** than, for instance, to Britain." An interesting read on the Keynesian Revolution: http://1776solution.blogspot.com/2009/02/keynesian-socialist-subversion.html
Posted By: Serfdumb(3105) on 8/6/2010 | 12:06 AM ET
Reagans Econ Advisor, Milton Freidman knew his stuff but Krugaman, like all the fabian socialists of Keynes day and beyond, siezed upon Keynesian economics as a way to ensure an ever expanding role of gov't in economic planning and to grant power and control to the soon growing central gov't over private industry and individuals-even Hitler embraced Keynes policies. Keynes proclaimed the Webbs fabian soc. book, 'Soviet Communism' was one "which every serious citizen will do well to look into"
Posted By: BaltimoreJoe(2215) on 8/5/2010 | 10:03 PM ET
It's clear that lies, deception, and perpetuating the myths that contribute to bad policy are the qualifications sought after by the Nobel Prize selection committee.
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