What I know about economics is next to nothing; no economics Cult of the Amateur here! But I cannot wrap my mind around the argument Paul Krugman has been making, namely that we are dead wrong to cut spending in the face of intense and deep recession, and that we should instead be spending more. In today’s Times, Krugman acknowledges that this argument has been losing, and he says we’re headed into a long, dark valley:
But future historians will tell us that this [the weak apparent recovery — RD] wasn’t the end of the third depression, just as the business upturn that began in 1933 wasn’t the end of the Great Depression. After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.
In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.
Over the weekend, I heard a long interview with Harvard financial historian Niall Ferguson, who has emerged as a principal antagonist of Krugman’s on this question. Ferguson laid out his argument that we simply have no choice but to slash spending in a desperate effort to balance our books; the alternative is default, with terrible consequences that are hard to predict. The French Revolution, he points out, was sparked principally by massive levels of government debt and the material misery that caused for the French people. Here’s a synopsis from 2009 of the long Krugman-Ferguson battle.
Again, I’m in no way an expert, but I find Ferguson’s argument irresistable. If we weren’t already in such a fathomless hole of debt, I’d be more open to Krugman’s Keynesianism. But given where we are, and where we are headed absent a swift and sure turnaround, it strikes me as sheer madness to borrow even more, as Krugman advises.
Well, we’re screwed either way, most likely, but tell me, what do you think? By the way, the Royal Bank of Scotland is telling its clients to prepare for the U.S. Treasury to undertake a “monster” ramping up of its printing presses. Excerpt:
Andrew Roberts, credit chief at RBS, is advising clients to read the Bernanke text very closely because the Fed is soon going to have to the pull the lever on “monster” quantitative easing (QE)”.
“We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable,” he said in a note to investors.
And by the way x 2, take a look at this excellent, if extremely depressing but informative piece from The Economist about debt — how we got into this hole, and how we might get out of it.