In his op-ed piece in The New York Times on Sunday, Nobel Prize-winning economist Paul Krugman argued that if the Obama administration and Congress on the one hand and Fed on the other withdraw their stimulus programs, that the economy will collapse again, as it did in 1937 when FDR made similar moves, wrongly assuming the Great Depression was over. Krugman wrote "As you read the economic news, it will be important to remember, first of all, that blips -- occasional good numbers, signifying nothing -- are common even when the economy is, in fact, mired in a prolonged slump."%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%% Krugman is suggesting taking a safe road. The Obama stimulus of $787 billion will have its maximum effect this year, he notes. Simultaneously, the Fed will begin to end its purchases of government debt and mortgage-backed securities. If the stimulus is not increased within a few months and the Fed does not keep up its intervention, which includes keeping interest rates near zero, the oxygen to a weakened economy will be shut off. These things, Krugman argues, will cause a double-dip recession.
The counterargument to Krugman's prescription of further stimulus is simple. A number of economists believe that the increasing deficit and rising national debt will inevitably cause a rise in interest rates. The global capital markets can only support so much U.S. borrowing, which will force the Treasury to raise rates. The other "solution" to a growing debt burden is raising taxes. That is usually a prescription for lower consumer and business spending. What goes to the IRS does not go into GDP.
Krugman has presented only half of a "damned if you do, damned if you don't" problem. An increased commitment to stimulating the economy could stimulate both higher taxes and higher interest rates. Those could cause another recession as well.