News & Views from 465 California Street

Where are the Troops for Paul Krugman?

Clint Reilly
Jul
7
2010

Paul Krugman is predicting another Depression because governments are refusing to keep pumping more money into the economies of Europe and the United States. He has written that the mistake of 1938 is being repeated. At that time, Franklin Roosevelt listened to the deficit hawks and cut back on federal subsidies meant to create jobs and fuel the economy. The economy tanked and the New Deal hit a brick wall.

After an $800 billion stimulus package spearheaded by President Obama and a Democratic Congress, job creation is stalled and deficits are ballooning. Republicans smell blood as the November elections approach. Political will has softened among moderate Democrats for more government spending to spur employment and growth. A large cadre of first term Democrats in Congress were elected in conservative districts fed up with George Bush and failing Republican policies.

But now Obama is the incumbent and his policies have become the target of an increasingly agitated American electorate. Wall Street’s collapse has left average citizens with a bitter taste in their mouths. The detritus is strewn throughout middle America. Millions of soured mortgages, confiscated homes, failed businesses and lost jobs remain as financial titans responsible for the carnage are nursed back to health with taxpayer subsidies. Polls show decisive majorities for shrinking government rather than embracing the pump priming policies of John Maynard Keynes that were the Democratic formula for the New Deal, Fair Deal, New Frontier and the Great Society.

Paul Krugman has blown the bugle but the soldiers are not lining up for battle.

On the other end of the spectrum are folks who are gravely concerned that the over-leveraged bank accounts of governments and consumers in Western nations, including the United States, make progress very difficult. They cry out that more government debt to stimulate the economy will only dig a deeper hole when a near trillion dollar infusion could not move the unemployment dial, as well as trillions more in bailouts.

While Krugman talks jobs, Republicans preach deficits.

Leading investment gurus – not kooks – are putting major parts of their portfolios in gold because they believe governments can only print more money to sustain social benefits that angry voters will refuse to relinquish. Even Democratic Investment icons like George Soros – who made a billion betting against the British Pound in the 1990s – are concerned that the federal printing press will devalue currencies like the dollar and the Euro and lead to either inflation or deflation on a wide scale.

I am thinking that both Krugman and his economic adversaries may be correct. Even massive government subsidies that may cushion the blow of economic hardship for some, may not be nearly enough to forestall the savage counterattack of the free market against decades of piled up debt, fiscal irresponsibility, corporate financial greed and woefully underfunded public benefits.

The Greatest Generation that was born in the Depression and survived World War II took their medicine and learned that sacrifice for greater long term rewards must be a way of life. Perhaps newer generations must relearn that powerful lesson before our country can get back on the road to progress.

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