And Still More Krugman

Krugman is at his game of misreading history again, in a New York Times op-ed, which he even titles "1938 in 2010."

He sings the same song; FDR indulged in deficit spending with the New Deal, then ended it “too soon” in 1938 causing the economy to crash back into depression. World War Two was a paroxysm of deficit spending which triggered a boom of prosperity so vast that in the following two decades the national debt shrank as a percentage of GDP until it essentially disappeared. He concludes, as did the Bush Administration, the “deficits don’t matter,” although he does at least add the caveat that they don’t matter “when the economy is deeply depressed.”

He is very specific about his claim for the economic boom of the fifties and sixties. After describing the failure of ending the New Deal too soon, he says, “Then came the war. From an economic point of view World War II was, above all, a burst of deficit-financed government spending…” He goes on, “Deficit spending created an economic boom — and the boom laid the foundation for long-run prosperity.”

To duplicate the performance of World War Two and it aftermath, we would need to recreate the conditions of World War Two and its aftermath.

Perhaps Krugman should be looking at something other than financial ledgers when he studies history; maybe picture books which show the entire developed world as a pile of rubble after World War Two, with the notable exception of the vast manufacturing capacity of the United States.

Russia, all of Europe, England, Japan and China all reduced to smoking piles of rubble; the rest of the world industrially undeveloped, and only the United States untouched.

Perhaps that economic boom had more to do with a world in desperate need of manufactured goods which we, and we alone, were capable of supplying than it did with the deficits in which we indulged in order to pound a good part of that world into rubble. Perhaps it had to do with the world’s need for the oil which we were exporting. Perhaps it had to do with our own craving for consumer goods, which were manufactured here because no other country in the world could manufacture them.

Perhaps our prosperity was the result of a world market where we had almost unlimited demand and essentially no competition, and that is a vastly different world than we face today. Perhaps deficits didn’t matter then, but that doesn’t mean they don’t matter now.

Maybe there are reasons for deficit spending, in fact I tend to favor it at this point, and perhaps there is valid evidence to support it, but World War Two and its aftermath is not it.