Krugman's Liquidation Fetish

Oh, sadness! Paul Krugman is beside himself, as President Obama has announced a tiny (and I mean tiny) spending freeze on about $25 billion a year. Yet, to hear the Great Nobel Laureate put it, Obama has decided to destroy the economy. In Krugman's own words:

A spending freeze? That’s the brilliant response of the Obama team to their first serious political setback?

It’s appalling on every level.

It’s bad economics, depressing demand when the economy is still suffering from mass unemployment. Jonathan Zasloff writes that Obama seems to have decided to fire Tim Geithner and replace him with “the rotting corpse of Andrew Mellon” (Mellon was Herbert Hoover’s Treasury Secretary, who according to Hoover told him to “liquidate the workers, liquidate the farmers, purge the rottenness”.)

Now, there is a bit of a problem here. With the Obama administration running up deficits of more than a trillion dollars a year, we have to ask ourselves just where the government is going to find all of these excess funds. Oh! I forgot! We print the money, the Zimbabwe solution.

(By the way, had Hoover actually listened to Mellon instead of rejecting his advice, there would have been no Great Depression. Mellon understood then -- as some of us understand now -- that there were huge amounts of malinvested assets that needed to be liquidated before the economy could begin to recover.)

The problem in the economy is not inadequate demand, no matter what Krugman claims. The problem is that the government continues to try to resurrect dead or dying assets with yet another infusion of cash, and with predictable results. These assets soak up resources and continue to distort the economic fundamentals. Granted, a Keynesian cannot understand that simple point because to a Keynesian, there are no economic fundamentals, just an amorphous mass called an "economy."

In this blog posting, Krugman lays another attack on Ronald Reagan and the Recession of 1982 without telling the whole story. (Krugman is quite adept at leaving out the important parts, especially if the facts don't coincide with his narrative.) Even though Krugman wants us to forget this point, people were predicting defeat for Reagan in 1984, as the Keynesians predicted another Great Depression.

Instead, Reagan did not try to use inflation to prop up malinvested assets, did not try to "stimulate demand" with lots of printed money, and within a year, the economy was well on the road to recovery. You might recall that he won every state except for Minnesota (his opponent, Walter Mondale, came from Minnesota, and Reagan barely lost that state) and Washington, D.C., which always votes for Democrats.

True, Krugman tries to spin a Keynesian recovery from that one, too, but it does not work. But, then, most of what Krugman wants does not work.