Describing "austerity policies" as "the insistence that governments should slash spending even in the face of high unemployment" in the hope that such spending cuts will restore business confidence, Paul Krugman remarks: "If this sounds to you like something Herbert Hoover might have said, you're right: It does and he did" ("Pain Without Gain," Feb. 20).[End Update]
Easily accessed evidence prove Mr. Krugman wrong.
Here, for example, is economist Steven Horwitz: "the real size of government spending in 1933 was almost double that of 1929. The budget deficits of 1931 and 1932 represented 52.5 percent and 43.3 percent of total federal expenditures. No year between 1933 and 1941 under Roosevelt had a deficit that large." Also contrary to Mr. Krugman's claim, Hoover proudly trumpeted his administration's high-spending and interventionist policies. On the campaign trail in 1932 Hoover bragged that "We might have done nothing. That would have been utter ruin. Instead, we met the situation with proposals to private business and the Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic."**
Mr. Krugman's unfamiliarity with history is disturbing.
The eternal downturn continues and no real recovery is in sight, yet the advice from Paul Krugman always is the same: borrow, spend, pretend. Pretend what? Pretend that borrowing and essentially printing new dollars is the same thing as actually having a productive, prosperous economy. Print money and get rich!
The Keynesian view of the economy is pretty simple. Factors of production are homogeneous, production and consumption are not related except to say that the purpose of consumption is to clear the shelves so that producers can make new goods to put on the shelves. The sole purpose of a "job" is to put income in the hands of workers so that they can spend and in order to make way for new production. In other words, it is a model-driven, mechanistic view of economics in which human action is not purposeful, but rather robotic.
In dealing with the situation with the European countries such as Greece, Spain, Ireland, and Portugal, he rightly condemns the policies that the European Central Bank has imposed, but for all of the wrong reasons. You see, Krugman really believes that if the ECB simply slashed its interest rates and loaned near-infinite amounts of money to these countries, that they soon would spend themselves into prosperity and that somehow there would be so much economic activity and new tax revenues that the extra loans would pay for themselves.
Austerity, according to Krugman, is bad but not because it imposes unjust tax and regulatory burdens upon people in order to pay the debt service for loans that profligate governments took out in order to spend beyond their means. No, austerity is bad because it cuts government spending.
Furthermore, the real reason that these countries are forced into austerity measures is because the banks that made these foolish loans (with the promise of being backstopped by central banks) are now calling the policy shots. Yet, we now see the ridiculous scenario of banks lending money to these governments so they can pay their debt service for previous loans although everyone knows that these countries cannot generate enough economic activity to pay back these loans in full.
In other words, we are looking at default. Now, the USA, which Krugman holds as a model of how to properly deal with the recession (or at least has not engaged in European-style "austerity"), is defaulting through inflation. I believe that it would be much better for Greece and the other European states that are facing these crises to default on their loans, and reduce their payments or suspend them altogether.
Unfortunately, Krugman prefers the game of "Let's Pretend We're Rich." He urges Congress to borrow even money to give to states for their own spending, with the idea that we can worry about the unpayable debt tomorrow, a Scarlett O'Hara approach.
Even Krugman knows that this cycle of debt cannot continue forever, but he seems consumed with the belief that sooner or later the perpetual motion machine that is the economy will gain "traction" and move on its own, paying down the debt as it goes. That is nonsense, but unfortunately it is nonsense that is being passed off as sophisticated economic thinking.