Selective Vision

Again Paul Krugman makes an argument in the New York Times that he is right and the rest of the world is wrong, and again the left embraces him as if every theory that he pronounces is not a theory at all but is a fact cast in stone. Paul Krugman may have a Nobel Prize, but that does not magically turn his theories into facts.

I’m not arguing that he is wrong; I’m not qualified to say that he is wrong. I do say, however, that Paul Krugman uses history to make arguments that are convenient rather than necessarily accurate.

He cites, for instance that after some five years of deficit spending in the 1930’s when FDR made a “premature” effort to begin balancing the federal budget the economy slid back into recession, and uses that as proof that deficit spending is necessary to “restart the economy” now. I might suggest precisely the opposite; that if cutting off the stimulus after five years resulted in collapse, then it had not “restarted” anything; that the five years were lost years, permitting the economy to remain dormant with no reason to regain momentum so long as government spending was propping it up. So I see the moment which Krugman cites, in fact, as evidence that deficit spending does not "restart the economy."

My interpretation may be wrong, but it is just as reasonable as Krugman’s.

In any case, Krugman goes on to talk about the recovery period and deficit reduction in the 1950’s as justification for the Keynesian theory of government spending to “restart the economy,” without considering the effect of a four-year, immensely destructive, world wide war. I’m not referring to the government spending of war production here, but of the effect on the post war period of the 1950’s when the economic boom occurred. We were the sole nation able to produce the goods needed to rebuild a world reduced to rubble. We were an economy with an almost unlimited market and absolutely no competition.

In light of that, the connection between the economic boom of the 1950’s and government spending in the 1930’s with a world war in between might be a little tenuous.

Krugman has argued that the timing is good to incur debt because interest rates are low and so the government can run a large deficit without burdening its budget with major interest payments on that debt. This debt, however consists of term-limited bonds which must at some point be paid off or refinanced. What the interest rate will be when that happens is, of course, unknown, but it’s highly unlikely that it will be as low as it is now. So the budget impact of deficit spending might be low now, but it could become seriously crippling in the future.

There is a very valid and powerful argument to be made for interim spending as a “holding action” to serve the population presently devastated by the economy, but it should be done thoughtfully and with regard to its future consequences, and it should be accompanied by reduction of other, less necessary spending. Justifying the reckless increase of debt without end by selective arguments and interpretive history to support pet theories is not the answer.