Now that the Republicans have won the House of Representatives, Paul Krugman predicts their next moves:
They’ll refuse to do anything to boost the economy now, claiming to be worried about the deficit, while simultaneously increasing long-run deficits with irresponsible tax cuts — cuts they have already announced won’t have to be offset with spending cuts.
Krugman also sees these things coming:
The resurgent Republicans have learned nothing from the economic crisis, except that doing everything they can to undermine Mr. Obama is a winning political strategy. Tax cuts and deregulation are still the alpha and omega of their economic vision. . . . [A] cutoff of desperately needed aid to the unemployed and a freeze on further help for state and local governments — is a given. The only question is whether we’ll have political chaos as well, with Republicans’ shutting down the government at some point over the next two years. And the odds are that we will.
And such moves by the Republicans, according to Krugman, will simply exacerbate our current economic sluggishness. He explains why he thinks this with admirable clarity:
[B]orrowing [during the Bush years] made the world as a whole neither richer nor poorer: one person’s debt is another person’s asset. . . . The key thing to bear in mind is that for the world as a whole, spending equals income. If one group of people — those with excessive debts — is forced to cut spending to pay down its debts, one of two things must happen: either someone else must spend more, or world income will fall. Yet those parts of the private sector not burdened by high levels of debt see little reason to increase spending. Corporations are flush with cash — but why expand when so much of the capacity they already have is sitting idle? Consumers who didn’t overborrow can get loans at low rates — but that incentive to spend is more than outweighed by worries about a weak job market. Nobody in the private sector is willing to fill the hole created by the debt overhang. So what should we be doing? First, governments should be spending while the private sector won’t, so that debtors can pay down their debts without perpetuating a global slump. Second, governments should be promoting widespread debt relief: reducing obligations to levels the debtors can handle is the fastest way to eliminate that debt overhang. But the moralizers will have none of it. They denounce deficit spending, declaring that you can’t solve debt problems with more debt. They denounce debt relief, calling it a reward for the undeserving. And if you point out that their arguments don’t add up, they fly into a rage. Try to explain that when debtors spend less, the economy will be depressed unless somebody else spends more, and they call you a socialist.
The last sentence immediately above contains Krugman’s Economics 101 lesson in a nutshell:
[W]hen debtors spend less, the economy will be depressed unless somebody else spends more.
It seems to me that this makes perfect sense, and is actually an iron law of economics that the right-wing politics of our time so easily demagogues: you are a socialist and driving the country to ruin if you promote government spending in a time of slack demand for goods and services. But Krugman is arguing (and it sounds right to me) that when private individuals are trying to pay down debt, corporations and banks will cautiously sit on their cash if demand isn’t coming from somewhere. Thus the government can keep people working by deficit spending on worthy causes (infrastructure, etc) until individual debt levels come down and consumers start spending again. But this solution seems counterintuitive, and even immoral, and so Krugman observes:
More and more voters, both here and in Europe, are convinced that what we need is not more stimulus but more punishment. Governments must tighten their belts; debtors must pay what they owe. The irony is that in their determination to punish the undeserving, voters are punishing themselves: by rejecting fiscal stimulus and debt relief, they’re perpetuating high unemployment. They are, in effect, cutting off their own jobs to spite their neighbors.
Another way to put this is that the American economy has a lot of potential and capacity that is not being utilized, and we could rationally choose to put people to work on worthy projects, but we’re not. And we’re not because we do not agree about what constitutes worthy projects, it’s socialist to do so in any case, and those individuals who got themselves into debt must be held accountable. And so we’re stuck in an economy where all the major actors—banks, corporations, individuals, and the government—are waiting for one another to “go first,” and start spending again. But economies only grow when people rationally move around (that is, work), and yet people won’t move around unless there’s money to chase. That’s Krugman’s (and, I think, America’s) catch-22.
And what was President Barack Obama’s role in America reaching this point? President Obama, in Krugman’s view, failed in nerve; failed (ironically) in audacity:
Mr. Obama’s problem wasn’t lack of focus; it was lack of audacity. At the start of his administration he settled for an economic plan that was far too weak. He compounded this original sin both by pretending that everything was on track and by adopting the rhetoric of his enemies. The aftermath of major financial crises is almost always terrible: severe crises are typically followed by multiple years of very high unemployment. And when Mr. Obama took office, America had just suffered its worst financial crisis since the 1930s. What the nation needed, given this grim prospect, was a really ambitious recovery plan. Could Mr. Obama actually have offered such a plan? He might not have been able to get a big plan through Congress, or at least not without using extraordinary political tactics. Still, he could have chosen to be bold — to make Plan A the passage of a truly adequate economic plan, with Plan B being to place blame for the economy’s troubles on Republicans if they succeeded in blocking such a plan. But he chose a seemingly safer course: a medium-size stimulus package that was clearly not up to the task.
And President Obama’s failure of nerve has continued. He has even adopted the rhetoric of his enemies:
I felt a sense of despair during Mr. Obama’s first State of the Union address, in which he declared that “families across the country are tightening their belts and making tough decisions. The federal government should do the same.” Not only was this bad economics — right now the government must spend, because the private sector can’t or won’t — it was almost a verbatim repeat of what John Boehner . . . said when attacking the original stimulus.
So this is Paul Krugman’s take on the world, and the way he frames the situation sounds more than plausible to me. But I wonder. Who is the smartest economist around making the intellectual counterargument to Krugman? Does anybody have an opinion about this? Who should I be reading to get the other side?