Forward To The Past

Paul Krugman has an op-ed in Sunday’s New York Times bemoaning the “learned helplessness” of what seems to have become a permanently high unemployment rate. No one in authority, he says, is even talking about taking action to resolve the jobs issue and he blames high unemployment on excessive household debt.

Stating the obvious, he says that unemployment is not due to people not wanting to work but that, “The core of our economic problem is, instead, the debt — mainly mortgage debt — that households ran up during the bubble years of the last decade.”

To accept that household debt is the “core of our economic problem” one has to concede that consumer spending, which has been curtailed by household debt, is the core of our economy, and that all we need to do to restore a healthy economy is to restore the ability of the consumer to spend money. That is, in fact, Krugman’s view, one he has stated many times.

Pursuant to that view, he suggests that restoring spending is a matter of reducing debt, and suggests several ways that government could do that,

For example, we could have W.P.A.-type programs putting the unemployed to work doing useful things like repairing roads — which would also, by raising incomes, make it easier for households to pay down debt. We could have a serious program of mortgage modification, reducing the debts of troubled homeowners. We could try to get inflation back up to the 4 percent rate that prevailed during Ronald Reagan’s second term, which would help to reduce the real burden of debt.

The first point, the WPA-type program is an interesting one. Before this when he has argued for this program he has suggested that it would stimulate consumer spending because the persons filling those jobs would spend their incomes, now he’s suggesting they would use it to pay down debt. And, while I support paying people to do something rather than giving them unemployment to do nothing, this is a temporary solution at best.

The other two ideas are rewards for bad behavior. If you have borrowed money you cannot repay, and have used that money to buy something that is not worth what you paid for it, thereby saddling you with a bad debt that you cannot pay, we will make the bad portion of that debt go away.

Inflation not only rewards people who incur debt, it punishes people who have saved money. Because it allows repayment of debt with money that is worth less, it effectively reduces the debt, as Paul Krugman acknowledges.

The reality is that Krugman wants to eliminate the current debt so that households can resume incurring more debt, because he wants to go back to an economy that spends more than it earns. He wants to restore an economy that is 70% consumer spending.

I happen to believe that is actually the "core of our economic problem." I don’t know how anyone can look at that and not recognize that such an economy is one that is steadily increasing its debt load. I don’t know how anyone can fail to realize that sooner or later that economy will reach a point at which the amount of debt is unsustainable. We did it in 2008, and Paul Krugman wants to return to the same form of economy that took us to that point.