Krugman Unleashed: Economics as Though the Non Sequitur Means Something

Following with his thematic writing (in following recent blog posts, including this one, along with my response), Paul Krugman continues to insist that if the Obama administration decides to really crank up the borrowing and spending, we, too, can experience a wonderful boom, just as Americans did in the 1940s.

Now, I find interesting that Krugman now has decided that World War II, a time when at least 50 million people met horrible deaths, really was a wonderful time of plenty and happiness, or at least it gave us an "economic boom," and Krugman believes booms are good. Lest anyone think I am exaggerating, read Krugman's own words:

From an economic point of view World War II was, above all, a burst of deficit-financed government spending, on a scale that would never have been approved otherwise. Over the course of the war the federal government borrowed an amount equal to roughly twice the value of G.D.P. in 1940 — the equivalent of roughly $30 trillion today.

Had anyone proposed spending even a fraction that much before the war, people would have said the same things they’re saying today. They would have warned about crushing debt and runaway inflation. They would also have said, rightly, that the Depression was in large part caused by excess debt — and then have declared that it was impossible to fix this problem by issuing even more debt.

But guess what? Deficit spending created an economic boom — and the boom laid the foundation for long-run prosperity. Overall debt in the economy — public plus private — actually fell as a percentage of G.D.P., thanks to economic growth and, yes, some inflation, which reduced the real value of outstanding debts. And after the war, thanks to the improved financial position of the private sector, the economy was able to thrive without continuing deficits.

As I have noted before, Robert Higgs, who actually is an economist who knows something about history (and is not simply a partisan political operative like a famous faculty member from Princeton), lays out the reality of the World War II home front quite well. Furthermore, there is the little problem of Krugman's non sequitur: How in the world can we say that World War II created a "boom" that "laid the foundation for long-run prosperity"?

First, the economy was tuned to war goods, not goods that people actually would want or need in normal life. Much of the capital that was developed during the war was not easily turned toward civilian production.

Second, there is no causality here. Krugman notes that the government went into huge deficit spending during the war, and then "long-run prosperity" just naturally followed. How, I ask, does that follow?

No doubt, Krugman would argue that the economy had "gained traction" during that time, but that is a circular argument at best. In that view, the economy booms because, well, it booms.

Finally, is Krugman demanding that the government expand the way it did during World War II, and that somehow, that will create long-term prosperity? If enough of us get jobs raking leaves and digging holes, and then filling them up again, will that magically make goods appear on the shelves and give us the Horn of Plenty?

Prof. Higgs has a much better handle on the subject. In this paper on "Regime Uncertainty," he not only lays out what happened during the 1930s and the war, but also what happened afterward. The difference is that his paper actually uses believable causal mechanisms, not Krugman's "Hair of the Dog" economic theories.