A nice thing about Paul Krugman, he does not mince his words. Thus his new book, End This Depression Now!, repeats as boldly as possible the central point he’s repeatedly made in his New York Times columns and blogs for years. Namely, governments have to spend a lot more. They have to run gigantic deficits, much more than they’re doing now. His penchant for going straight for the jugular means that the full implications of the scheme he advocates are crystal clear.
What he’s pushing is in fact an arbitrary redistribution of income and wealth. The plan is not just to suck in people’s savings but to cause the debt to disappear, as many have suspected all along. This is a scheme that would make any con man green with envy. It is as if Bernard Madoff were able to go puff! and make his customers’ claims evaporate into air, with no adverse consequence for him.
Krugman is witty, attacking “austerian” arguments for government austerity. Mario Rizzo— and others have presented the “Austrian” or Hayekian reply to the Keynesian deficit spending case made by Krugman and Brad DeLong, for instance.
So, because governments are not spending enough to get economies out of the doldrums, the pain of unemployment goes on and on, as Krugman puts it. We have to embrace inflation. It will erode the real value of all debt, including mortgages and, even better, government bonds. Let governments borrow and spend enough to push prices up at a significantly higher rate, to generate inflation of 4% or perhaps even 5% a year.
He writes that government debt likely “won’t have to be paid off quickly, or indeed at all,” with enough inflation. Of course this is what folks have suspected for a while, hence the popularity of gold as an investment. Krugman comes right out and says what officials tend to obscure, namely the temptation to destroy the purchasing power of the currency through inflation, thereby shrinking the government’s liabilities. He’s all for falling into the temptation.
Inflation will also shrink the value of retirees’ savings, pension plans’ portfolios and the income of everybody who can’t protect themselves against rising prices. It will redistribute wealth and income from creditors to debtors and from savers to spenders. Inflation is an arbitrary redistribution mechanism. Inflation-indexed government employees will do alright while workers in competitive industries, where businesses can’t raise their prices, will suffer.
Krugman quotes Keynes: “The boom, not the slump, is the time for austerity.” Now, I have to admit that I was somewhat in sympathy with the notion that it may be premature to reduce federal spending. Government largess acts as a quickie pick-me-up, to which economies have become addicted. I thought a debt crisis – though largely brought on by government profligacy – may not be the best time to go cold turkey.
Reading Krugman’s bald brief for an immense growth in government fueled by debt that will be made to go puff! through inflation, made me realize that there may be no other option. We probably do have to go cold turkey if we want to stop Uncle Sam from inflicting the granddaddy of all frauds on us.
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I like Krugman. He’s a smart guy, and we need smart people voicing their views to help the world with policy decisions. But what world, exactly, do we live in? Do we live in a world where austerity will be implemented during boom times? During boom times, the economic models all point up–and austerity isn’t needed.