Saturday, September 25, 2010

"Growing Out Of Debt" Again

Paul Krugman is still at it. On a blog post today he refers to, “a period of moderate inflation that reduces the real burden of debt; that’s how World War II cured the depression.” World War II did not cure the depression. World War II was stimulus spending that marked time until market conditions created by the aftermath of World War II cured the depression.

The growth of GDP that Krugman touts as having “reduced the real burden of debt” did not occur during World War II, in fact, that’s when we incurred that debt. The growth which “reduced the real burden of debt” occurred in the 50’s and 60’s, and it occurred largely because we were producing the goods to rebuild a world devastated by war, and we had no competition in that process.

Let’s make a hypothetical; Krugman is fond of hypotheticals. Suppose World War II ended and the entire rest of the world was fully and totally intact. All of the European, British and Russian factories were in full working order, all of the German and Polish oil fields were producing and shipping oil, etc. What, in that event, would be our economic advantage over the rest of the world, and what would be the basis for our economic expansion?

In the absence of that devastation, and with a whole functioning world competing with us, what would all those millions of demobilized soldiers have done? The world market for guns and tanks, which is what we were building, was pretty limited at that point. Our conversion to producing consumer goods and the creating the wherewithal to build the factories for producing those goods would have been a small fraction of what did occur, so they would mostly have become unemployed.

So, what would have happened in our hypothetical; when the government spending that was World War II ended was what always happens when government stimulus spending ends, the economy would have slowed down. What prevented that from happening was a very unusual event; a world destroyed by war that needed to be rebuilt.

Paul Krugman is pathologically incapable of seeing the lack of similarity between that condition and the conditions which exist today. The world does not need what we make, as it did then; to the contrary, we need what the world makes and are borrowing to import it.

We ran up a huge debt in World War II and “grew out of it” by rebuilding a devastated world. We cannot do that again unless we duplicate the conditions that allowed us to do it the first time. We can certainly duplicate the running up of debt, but we cannot duplicate the conditions that allowed the growth that Krugman believes will shrink that debt to insignificance.

*Karl Denninger at Market Ticker claimed yesterday that the Keynesian theory is “a fraud” because the theory includes that in good times the government is supposed to run a budget surplus and pay down the debt and that has never happened.

He’s right that it has never happened, I think, but I don’t agree that proves fraud. It merely proves that our government has never complied with the Keynesian theory. Of course, based on the evidence that Paul Krugman posits above, I do happen to think that the theory is total crap, so I may be splitting hairs.

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