Paul Krugman Is Right

by: Dana Blankenhorn

What James Picerno and his Amen Chorus fail to understand, in their self-righteous umbrage aimed at liberal economist Paul Krugman, who called for the President to hang tough against Republicans in the "fiscal cliff" negotiations, is that Krugman is, and has been, right.

Not right as in right-left. Krugman's definitely left. He's not a socialist per se but, like another Nobel laureate, Joseph Stiglitz, he's definitely to the left-of-center on most policy questions.

Krugman is right as in correct. Because a Depression - and that's what has been threatening ever since the U.S. economy went off a cliff in 2008 - requires different medicine from a common recession, just as cancer requires different medicine from a cold.

My real hero in this case is the other man conservatives most love to vilify these days, Fed chair Ben Bernanke. "Helicopter Ben" got his nickname for suggesting that the government could just throw money from helicopters to halt a market collapse. In the end, in 2008, he didn't do that. Instead the Fed gave trillions to the big banks, at the behest of then-Treasury Secretary Hank Paulson. The banks stuck the money in their vaults, gave each other huge bonuses, kept the bad loans Bernanke's money had re-paid to squeeze debtors a little more, and stuck the rest in the Romney campaign kitty.

What Bernanke originally suggested, what Krugman said should have been done, was to simply spend the money, instead of trying to get it into the system through the bankers whose policies had caused the collapse. And that's the classic cure for Depression, which is a crisis in demand that eventually results in deflation as supply can't find a market, contracting supply and collapsing the economy like an airplane falling from the sky.

The Recovery Act of 2009 tried to do some of that. Krugman argues it didn't do enough and, due to political opposition, did much of its work in inefficient ways, lowering some folks' taxes instead of just getting people to work. The act was sized based on what government economists said the economy was doing at the end of 2008 - falling at an annual rate of 4%/year. Instead, it was falling at a rate of 9%, twice as fast. And it kept falling at that rate through the first part of 2009, while the act was being debated. Things were that bad.

Krugman argues that because the Recovery Act wasn't big enough, and because it didn't focus enough on direct job creation, the recovery from that point has been weak. And it has been. He says the inability to get additional stimulus from a Republican Congress, combined with Europe's decision to act like Republicans and plop for austerity, has kept the recovery weak. What he wants now isn't austerity, but more stimulus, and he thinks calling the Republicans' bluff on the "fiscal cliff" - which he calls nonsense - is the best way forward.

How is that "going too far," Mr. Picerno? It's only "going too far" insofar as Krugman disagrees with you on the correct policy. To Krugman, it's the globe that's now heading into a Great Depression, as fear of new debt, and an unwillingness to write off bad debt, pushes Europe toward collapse.

You know who agrees with Krugman? China. Our biggest creditor, Europe's biggest creditor, wants growth policies instead of austerity. "The general public's tolerance for austerity has been stretched to the breaking point," said the head of its sovereign wealth fund.

When the world's biggest creditor says we've gone too far in trying to repay his loans, pay attention.

When you have bad loans, you write them off. That reduces the money supply so you order up new money. Then you put that money to work on new loans, for things that will lead to more economic growth. Like infrastructure. That's what would get our unemployment rate down, since it's mostly those without college degrees who are hurting. Put people to work building stuff that the rest of us can use to expand the economy at an accelerating rate, and we'll be fine in no time.

At the risk of angering every reader I've ever had at Seeking Alpha, I'll say it.

I stand with Krugman.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.