Here’s a small part of what Paul Krugman recently wrote in the New York Times on the debt-ceiling deal:
We currently have a deeply depressed economy. We will almost certainly continue to have a depressed economy all through next year. And we will probably have a depressed economy through 2013 as well, if not beyond.
The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further. Pay no attention to those who invoke the confidence fairy, claiming that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn’t work that way, a fact confirmed by many studies of the historical record.
I think Paul Krugman’s Keynesian take on the debt-ceiling deal is wrong, but he’s a Nobel Prize winning economist and I’m just an English teacher.
My guess is that, through the debt-ceiling deal, Barack Obama has set himself up for reelection rather nicely and that the economy will come back strong by next year. But Paul Krugman’s opinion, given his intelligence and expertise, gives me pause.
But not much. If I were a financial planner, I’d say the following:
Sell your gold and put it into stocks.
My bet is that President Obama is the new Reagan-Thatcher-Clinton who will happily preside over a new and sustained period of economic expansion.
I think this is President Obama’s bet as well. Rolling the dice with the Friedmanites against the Keynesians is what I’m guessing is in the President’s head.
We’ll know, of course, at the end of next year whether he was right to do so.
As regards to why, exactly, I think Krugman is probably wrong, I would offer one observation: in the above quote of Krugman’s, note its materialist premise. He thinks that the government, by borrowing money and spending it, is a greater engine for economic growth than the mental states of investors, business owners, entrepreneurs, and CEOs. What capitalists think about the national debt is less important, in Krugman’s estimation, than simply bringing consumers into their stores.
Krugman, in other words, treats capitalists like park pigeons responding, without worry for the future, to an immediate reward of bread crumbs scattered over the ground. To make the argument that the national debt should be lowered to positively impact the long-term psychology of capitalists is to “invoke the confidence fairy.”
But it is the human mind, and it’s ability to anticipate the future, that is the key to sustainable economic growth, not artificially manufactured and temporary demand.
That’s my take, for what it’s worth.
Here’s an old clip of Milton Friedman, an economist of Krugman’s stature, questioning Keynesianism: