Update I, below. Update II, below.
There’s a saying in Spanish: Por la boca muere el pez. “A fish dies by its mouth.” Nobel economics laureate Paul Krugman has a recent op-ed piece in the New York Times which goes an awful long way to showing that he is a complete and utter imbecile—or the worst sort of cheap huckster imaginable.
It is one or the other—there are no other alternatives. This wasn’t a casual blog where Krugman “misspoke”—this was a full-on editorial in the Sunday edition of the Times on Labor Day weekend. So what Krugman said was thought out, and dead serious—and so foolish or ridiculous (depending on your point of view) that he can no longer be taken seriously:
In the piece, titled “1938 in 2010”, Krugman argues that 1938 was similar to 2010, in that the Federal governments’ stimulus program—then implemented by FDR—was insufficient to pull the country out of the Great Depression. Krugman argues that this is similar to what has happened to the Obama administration—Krugman has forever been arguing that the Obama stimulus package was “not enough”.
This in itself is not objectionable—in fact, I think policy disagreements are a good thing. They lead to ultimately better solutions, if all sides of a policy debate allow that opposing sides might have very valid points. Krugman’s very valid point is, unemployment in the current Global Depression is severe—therefore, the quick-fix of fiscal stimulus might be best, in order to assuage people’s suffering.
But then, in order to make his point that more stimulus is needed, Krugman crosses the line:
In Krugman’s analysis, 1938 was different from 2010: “Luckily” (most definitely in quotation marks), World War II came to Europe in 1939, and to the U.S. in very late 1941. In Krugman’s analysis, the War saved the U.S. economy. It allowed the Federal government to go into monstrous fiscal debt, in order to fight the war with Nazi Germany and Imperial Japan. This isn’t novel or controversial.
But then, Krugman misleadingly claims the U.S. government “borrowed an amount equal to roughly twice the value of GDP in 1940—the equivalent of roughly $30 trillion today.”
It’s a sneaky asseveration, partly because it sounds plausible—everyone knows the Federal government went into huge debt to finance WWII—and partly because it’s technically accurate: United States’ GDP in 1940—before Pearl Harbor—was $101 billion, and by the end of the war, 1945, the Federal government had borrowed $250 billion. Apply simple math: That’s more than twice 1940’s GDP—closer to 250% of the gross domestic product. Of 1940.
But Krugman is fudging the facts—1945 GDP was $223 billion. So the fiscal debt by 1945 was not “twice the GDP”—it was 116% of GDP. Comparing 1945 debt levels to 1940 GDP numbers isn’t apples to oranges—it’s flat-out misleading.
If you’re going to make a comparison, current debt-to-GDP ratio is much more accurate, in seeing how far the U.S. Federal government went into debt during that period. If we look at the period of the Great Depression and World War II, this is what we find:
(Gross Public Debt, 1930–1950. The blue band is Federal government debt, the red band is state debt, the green band is local debt. Source is here, for both charts and raw data.)
As can be readily seen, the U.S. Federal government debt never surpassed 45% even at the height of the Great Depression. When it peaked in 1946, gross public debt never crossed 130%—and that was after fighting the largest war in human history.
The situation in the U.S. today is nowhere near the same—except in terms of fiscal debt:
(Gross Public Debt, 1970–2010. Color scheme is same as above. Source is here, for both charts and raw data.)
Federal government debt is just shy of 100% of GDP. If we include state and local debt, gross fiscal debt is tiptoeing to 120% of GDP—and now Paul Krugman is saying that even more debt should be piled on.
According to Krugman: It worked in 1945, so it must be good now!
Krugman—obviously—used misleading data points in order to sell his policy prescription. He denies the incredibly different situation the United States finds itself in now, with where it was in 1938. Furthermore, he misleadingly fudges data, mixing 1940 and 1945 data, in order to prove his point.
I will not fall for the trap of inferring that Krugman is arguing in favor of total world war, in order to save the U.S. economy—I think some commentators who are making that inference are driven by mean-spiritedness towards Mr. Krugman.
But I will state—categorically—that Krugman’s misleading use of data to prove his point is something a sophomore eccy student would pull: Not someone who expects to be taken seriously.
If that were his only sin in the piece, then it might be excusable. But then, Krugman makes a truly despicable statement: “Deficit spending created an economic boom [in the post-War years]—and the boom laid the foundation for long-run prosperity.”
Krugman is an imbecile—or he is deliberately distorting history in order to sell his spend!-spend!-spend! bromide like a cheap salesman goosing a distracted customer.
As everyone with even a passing knowledge of post-War history knows, literally the rest of the world was a heap of rouble in 1945—only the United States was untouched by bombs and mortar shells.
The prosperity the United States experienced in the two decades after World War II had nothing to do with deficit spending, and everything to do with the fact that it was the only industrialized nation still standing after a total world war—so the rest of the world was forced to buy from the U.S. because there was no one else left to buy from.
Deficits had nothing to do with it.
Krugman is too smart not to know this—I cannot really believe that he would be ignorant of this basic post-War history.
Therefore, it’s obvious to me that Paul Krugman will say literally anything in order to support his prescription of increased Federal government spending. Not even facts and brute history matter to the man. In a very real sense, Krugman is now Glenn Beck, only with a doctorate in economics, and a hysterical fear and hatred of austerity, rather than terrorists.
I used to take Krugman seriously—often I disagreed with him, but at least I thought he was honestly arriving at his conclusions. But after this piece, I find myself dismissing him with contempt: In his urge to sell his policy prescription, he has sold out his integrity. There is literally no lie or falsehood he will not stoop to, in order to “win” the argument.
Like the fish of the Spanish aphorism, Krugman has killed himself by his mouth.
Update I:
Tyler Durden, editor extraordinaire of Zero Hedge, kindly pointed out the following quote by Krugman from August, 2002:
[T]he recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.
(Underline emphasis added.)
Again, it’s a shifty line: Krugman seems to be egging on the Fed to do as PIMCO suggests—id est, blow a housing bubble. There’s enough plausible deniability in the line—“. . . as Paul McCulley of Pimco put it . . .”—to make it so that Krugman could potentially weasel his way out of this policy prescription.
But then again, he said it: Blow a housing bubble, then let it loose on aggregate demand. As I've argued previously, Krugman and the “saltwater” economists see increases of aggregate demand levels as the only good—in other words, spend!-spend!-spend!
They don’t seem to realize that, eventually, that spending’s got to be paid. That’s why, they fail.
Update II:
Krugman is now changing his tune—he’s toned down his spend!-spend!-spend! rhetoric, and is coming to realize that the U.S. fiscal debt is a bigger problem than he had previously admitted.
So now, Krugman is proposing default-by-inflation. This by way of Business Insider:
So what will happen? In the end, I'd argue, what must happen is an effective default on a significant part of debt, one way or another. 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. Or, if not, we could see a gradual, painful process of individual defaults and bankruptcies.
I swear to God, his lying is like some sort of tic—Krugman once again distorts facts in order to buttress his opinion. But as everyone knows, inflation in World War II had absolutely nothing to do with “reducing the real burden of debt” brought on by the Depression.
On top of that, as I showed above, the Federal government went into serious debt during WWII—not before, as Krugman is implying. And the Federal debt of 1942–45 was not inflated away, as Krugman is stating: It was worked off in the Post-War Boom—which is what ultimately cured the Great Depression.
Krugman reminds me of that famous crack about FDR: He’s a man who’ll never tell the truth, when a lie will serve him just as well.
But getting to the meat of Krugman’s change of opinion, he is now following the Fed’s strategy: Default by inflation.
(I’ll leave it to the peanut gallery to catcall the obvious question: Whether or not this is Krugman’s new stance because he believes it, or because he’s angling for a job in the Obama administration, now that Summers is out and Tiny Tim is being handed his hat.)
Personally, I have no truck with default-by-inflation per se. The problem is, just like you can’t be “a little bit pregnant”, in the Global Depression we are experiencing, you can’t have “a period of moderate inflation”—not when Treasuries are in a bubble. Not when the dollar is weakening severely against commodities even as we speak. Not when the very currency and debt mechanism of the United States is skating on some very thin ice.
Krugman ignores these facts rather olympically—which only reinforces my original question: Is the man an imbecile, or a fraud?
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