Krugman is right: This is not the time to reverse economic policies
Filed under: Economy, Investing
The debate over economic policy has taken a predictable turn, and it's going to be a lamentable one, New York Times (NYT) columnist and Noble Prize-winning economist Paul Krugman says, if we repeat the mistakes of 1936-37. Just as the critics of President Franklin D. Roosevelt did during the Great Depression, the critics of President Barack Obama's fiscal stimulus package and liquidity-enhancing policies are questioning whether the nation should continue these programs to get the U.S. economy moving again.
In 1936-37, the critics won by harping about inflation. And FDR and his policy makers reversed course. FDR sought to balance the budget in 1936-37 and the U.S. Federal Reserve tightened monetary policy -- despite an economy that was well short of full employment. A liquidity trap ensued, Krugman argues, plunging the U.S. economy back into crisis. The Depression worsened, and full recovery had to wait until increased government spending occurred during World War II.
Japan repeated the error in the 1990s, when their export-oriented economy was showing the first signs of recovery in 1996, by trying to balance the budget too soon via cutting spending and raising taxes. Same error, same result, Krugman says: Japan slid back into recession.
Those who fail to learn from history . . .
Now, you'd think the economic conservatives would learn from history, but they don't, in Krugman's view. Here we are in 2009, and what are the economic conservatives recommending? Economist Art Laffer is warning that the Fed's policies will lead to high inflation. Laffer's recommendation: he wants to raise banks' reserve requirements – exactly what the Fed did in 1936 and 1937 – and exactly what economist Milton Friedman said strangled the budding U.S. economic recovery in 1936 and 1937.
Meanwhile, some in Congress are demanding that President Obama's fiscal stimulus plan be canceled, Krugman noted. The reason? Some Republicans are arguing that the stimulus plan has failed because it hasn't produced Roaring 20s-style growth in four months. Unemployment is rising, the critics note.
Four months. Wow. What patience, by the critics. What commitment. Krugman: Following the enactment of President Ronald Reagan's economic policies in 1981, the U.S. unemployment rate rose for 16 months. Critics need to chew on that economic reality before they venture forth with critiques of the current economic policy.
. . . are doomed to repeat it
Here's the economic reality, according to Krugman: Green shoots have appeared, but it's way to soon to start thinking in terms of 'we need to take actions to slow down the economy.' Inflation is not a problem, at this juncture. Art Laffer is concerned about a rising monetary base, but a rising monetary base isn't inflationary when you're in a liquidity trap, Krugman notes. The U.S.'s monetary base doubled between 1929 and 1939. And prices during that period? They fell 19 percent.
And government borrowing? All it's doing is offsetting a plunge in private borrowing, Krugman noted. Further, interest rates, while they've risen recently, are still low, in historical terms.
Economic Analysis: Krugman's conclusion? A few months ago, the U.S. economy was in danger of falling into a depression. Aggressive monetary policy and deficit spending have, for the time being, averted that danger. Now suddenly critics are arguing we should end both policies, and go back to business as usual. It's way to soon to think in those terms, because the stimulating polices have, at most, just begun to work, i.e. have pulled us slightly back from the rising river. Hence, we should maintain current monetary and economic polices.
And that's my view, as well. Further, to judge the Obama administration's economic policies after four months represents a double standard of the very worst sort: policy makers supported the Reagan administration's economic policies, despite the fact the the U.S. unemployment rate continued to rise for about a year and half following their enactment: the same evaluation standard should be applied today.
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Reader Comments (Page 1 of 1)
6-22-2009 @ 6:57PM
paul said...
It's guys like Krugman that are the reason we are in as bad an economic condition as we are. If we had Krugman, Barney (my boyfriend is a prostitude) Frank and Chris (under the table loans) Dodd walk the plank America would be a better place.
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6-19-2009 @ 1:01PM
Jeff said...
Nice to read a common-sense article for a change. I'm really sick of the pessimism-porn.
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6-19-2009 @ 1:59PM
Patricio said...
While I agree that it is far to early to talk about reversing course, Paul Krugman will take and make any factoid he can work in Obama's favor. Here is a guy calling for ANOTHER round of stimulus spending barely a month into the first one - the ink on the first round hadn't even dried yet, and this before the $410 TRILLION budget, before the Supplemental that just passed for the wars, and before we are now arguing over National healthcare to the tune of 1.8 TRILLION. As Obama said in Denver - ENOUGH!
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6-19-2009 @ 4:33PM
Iridium said...
It is amazing just how wrong someone can be. It would take far too much time to point out everything wrong with this blog article and everything wrong with the entire economic policy of the Obama administration.
Japan fell back into recession because the Japanese people hoarded money once things started to get a little better. They were afraid to spend. Cutting spending was the 100% correct thing to do but they made a huge error in raising taxes. This coupled with the population unwilling to spend is what caused the double dip.
HELLO, EXACTLY WHAT WE ARE DOING RIGHT NOW !!! Every policy of the Obama administration relies on an increase in government funds. That can only come through taxation.
"Krugman: Following the enactment of President Ronald Reagan's economic policies in 1981, the U.S. unemployment rate rose for 16 months. Critics need to chew on that economic reality before they venture forth with critiques of the current economic policy."
Unemployment rose for 16 months after the election of Reagan because it took a year and a half for any economic policies to have any effect. Coupled with the fact that he needed to reverse a ship much farther down the wrong path than the ship right now. Obama is giving us everything Carter could ever dream of. In fact Obama is going to give us far worse than Carter. We are going to get hyperinflation, a bankrupt government, millions of middle class homeless, 70% taxation for those who still have jobs, and 20% interest rates. If that wasn’t enough we’ll get hype-regulation and $7 gasoline.
I am appalled that you would bring out a statistic like, "Unemployment rose for 16 months after the election of Reagan" blaming him and conservatives and then claim that we need to wait far longer for Obama's great programs to take effect. In all likelihood unemployment will keep rising for the next year. Oh I'm sorry but that amounts to more than 16 months, doesn't it?
My god the hypocrisy is killing me. The right path to chose was not to do anything last fall to bail out anybody. Since we did we have to chose between rapid inflation and massive unemployment. The policies undertaken give us no other options.
The answer to any economic downturn is simple.
Part One: Get the government's hands out of it minus one key responsibility, prosecution of those abusing the system.
Part Two: Give as much money possible back to the common worker by not taking it in the first place. KEY WORD IS WORKER, NOT HANDOUTS TO THOSE WHO DO NOT WORK.
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