KRUGMAN IS CORRECT, PARTLY

Krugman may be a Progressive political advocate posing as an economist but when Krugman is right, Krugman is right, well partly. In a recent Op Ed piece for the Times he writes “Default Is In Our Stars”. His thesis is that excessive debt played a key role in the creation of the current financial crisis and that reducing debt to reasonable levels by curtailing spending puts a damper on the economy. That much is correct.

He didn’t exactly say debt, he said personal debt. I don’t think he considers government debt to be debt. Having started his piece by saying (personal) debt was a cause of the crisis he then says “A naive view says that what we need is a return to virtue: everyone needs to save more, pay down debt, and restore healthy balance sheets.” That is naïve?

Our Nobel winning economist has been calling all along for the government to go deeper in debt on another stimulus plan. Now he is calling for consumers not to save and not to slack off on their spending. In other words, to remain over-extended. That idea would push the problem further down the road and deepen it. Then what of the future?

It has long been my opinion that those on his side of the political divide are given to short term thinking. Give a hungry man a fish and the problem of hunger is solved. If he is hungry again tomorrow, give him another fish. Meanwhile, condemn the fisherman for trying to gain from his work. If the supply runs out…..no never mind that, the man is hungry. Just give him a fish.

Krugman’s solution – “In the end, I’d argue, what must happen is an effective default on a significant part of debt, one way or another.” What is default? It is a broken commitment. It is passing the cost of ones spending onto someone else. It is the liberal solution. And “one way or another” is an example of not thinking something through to its consequences.

The default could be implicit, via a period of moderate inflation that reduces the real burden of debt; that’s how World War II cured the depression.” Huh? It was inflation that cured the Depression? He could not have meant that it was WWII that got us out of the Depression, not FDR; that’s an observation only made by Conservatives and denied by the Left.

Let me see, do I have this right? What the nation needs now is is continued high levels of personal debt, less personal savings, more government money spent on stimulus programs, which means a higher level of government debt, and a return of inflation. It makes me proud to say I do not have a PhD.

Here is a link if you want to read the article.

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