In his May 31 column, Krugman writes the following:
When the financial crisis first struck, most of the world’s policy makers responded appropriately, cutting interest rates and allowing deficits to rise. And by doing the right thing, by applying the lessons learned from the 1930s, they managed to limit the damage: It was terrible, but it wasn’t a second Great Depression.Given that Galbraith was a hardcore socialist, and one who was quick to praise the communist economies, I find it significant that Krugman quotes him, especially when one sees that Krugman has been calling for higher taxes and raising business costs as the means for securing a new "prosperity."
Now, however, demands that governments switch from supporting their economies to punishing them have been proliferating in op-eds, speeches and reports from international organizations. Indeed, the idea that what depressed economies really need is even more suffering seems to be the new conventional wisdom, which John Kenneth Galbraith famously defined as “the ideas which are esteemed at any time for their acceptability.”
What are these terrible ideas that Galbraith would have criticized? Why, they are very (very) small measures of fiscal responsibility. Krugman declares that policymakers want to let interest rates rise and for governments to begin (and only begin) the process of living within their means. Such "responsible" behavior, Krugman argues, is irresponsible in outcomes:
The best summary I’ve seen of all this (changes of policy direction) comes from Martin Wolf of The Financial Times, who describes the new conventional wisdom as being that “giving the markets what we think they may want in future — even though they show little sign of insisting on it now — should be the ruling idea in policy.”In Krugman's view, governments can stop all of the pain -- and bring back prosperity -- simply by printing and borrowing, and any attempt to bring this unsustainable action to a halt is interpreted as a deliberate infliction of "pain" upon vulnerable people. Now, if assets really were homogeneous, and if government borrowing had exactly the same results that business borrowing might have, that would be one thing.
Put that way, it sounds crazy. And it is. Yet it’s a view that’s spreading. And it’s already having ugly consequences. Last week conservative members of the House, invoking the new deficit fears, scaled back a bill extending aid to the long-term unemployed — and the Senate left town without acting on even the inadequate measures that remained. As a result, many American families are about to lose unemployment benefits, health insurance, or both — and as these families are forced to slash spending, they will endanger the jobs of many more.
And that’s just the beginning. More and more, conventional wisdom says that the responsible thing is to make the unemployed suffer. And while the benefits from inflicting pain are an illusion, the pain itself will be all too real.
However, assets are NOT homogeneous; they are heterogeneous and as Higgs noted in his articles, an economy is not a blob of homoegeneity: it is a complex organism of assets and production, and the failure to recognize this fact means that we are doomed to repeat the very failures of the 1930s.
Perhaps the greatest irony in the present economic morass is that economists and governments around the world are claiming that they are acting to "avoid the mistakes of the 1930s," yet governments actually are engaging in a repeat of that decade, and we know how it ended: in destruction, death, and war.