Dr. Krugman: This Patient Needs More Bloodletting
New York Times columnist and Nobel laureate Paul Krugman—who I've noticed some econ bloggers refer to as "Dr. Krugman" with no hint of sarcasm – says now's the time to up our daily allowance of stimulis. If you know Krugman's FDR-was-a-girlyman version of Depression history, you won't be surprised to find him arguing that true economic interventionists must close their hearts to pity, their minds to logic and their eyes to evidence. But it's interesting to see the belief in action:
The first example of policy in a liquidity trap comes from the 1930s. The U.S. economy grew rapidly from 1933 to 1937, helped along by New Deal policies. America, however, remained well short of full employment.
Yet policy makers stopped worrying about depression and started worrying about inflation. The Federal Reserve tightened monetary policy, while F.D.R. tried to balance the federal budget. Sure enough, the economy slumped again, and full recovery had to wait for World War II.
The second example is Japan in the 1990s. After slumping early in the decade, Japan experienced a partial recovery, with the economy growing almost 3 percent in 1996. Policy makers responded by shifting their focus to the budget deficit, raising taxes and cutting spending. Japan proceeded to slide back into recession.
And here we go again.
I'll presume Krugman's right about the economy's growing "rapidly" from 1933 to 1937, though you should take a[nother] look at Amity Shlaes' case that the economy would have recovered sooner if the National Recovery Administration had never gotten a chance to make (almost literal) war on the U.S. economy. Even more relevant is Shlaes' point that, even if intelligently targeted stimulus were possible, there's no going back to 1933 because the size of the federal apparatus, the load of public and private debt, and the incrustation of programs have all combined to make the government less capable of robust action. You can think of all these lousy Treasury auctions as a visit to Dr. Bond Market, who keeps pleading with the old timer to slow down, cut out the desserts and get more rest.
For now, I'll just point out that Krugman's case for additional stimulus uses the same logic as Caliph Omar's decision about the good and bad books in Alexandria. If we don't stimulate and the economy tanks, it's because we're not stimulating; if we stimulate and the economy tanks, it's because we're not stimulating enough. There's no way to refute premises stacked in this way. Krugman is not a humorless character—or at least he wasn't when he was at Slate, Bill Clinton was in the White House, and all was right with the world – so I don't think he means to make a despotic argument. But that's what it is.
Arnold Kling made the case for Krugman in Reason last year. Michael Moynihan was less charitable in January. Reason's current cover story explains the real roots of Japan's lost decade.
And I was hoping to explain the title allusion with an embed of the transcendent Steve Martin sketch "Theodoric of York, Medieval Barber," but since I can't, amuse yourself with this bit of FDR-era pro-inflation propaganda – which if nothing else demonstrates why the past is a permanently closed country. Imagine having to explain what inflation is to Americans in 2009, let alone trying to get them to be happy about it: