Nobel Prize winning economist Paul Krugman is at it again. Writing on this page (ADN July 6) he advocates more and more government spending to avoid a third Great Depression.
He gets personal, as always, and offers that "when I was young and naive, I believed that important people took positions based on careful consideration of the options." Now he knows better and opines that prejudices, not analysis, based on fads and fashion rule the day. He's smart and the opposition is either stupid or unprincipled, you see.
There is an important debate raging in the country over what economic policies are best to set the nation on a steady course to prosperity. The Krugman solution is spend, baby, spend. Others worry about the size of the deficit and accumulating national debt and argue for austerity, although mostly that means a reduction in deficit spending, not eliminating it right away.
It is reminiscent of the old Miller Light "tastes great, less filling" commercial. But unlike the beer, you can't have it both ways. You can't have "more spending and less debt." You have to choose.
The president has sided with the Krugmanites. He argued at the recent G20 summit of world leaders that we must spend more to assure that we don't have double-dip recession. They mostly ignored him and are reducing spending to try and get their ballooning debt burdens under control.
The Krugmanites hero is FDR and his New Deal. Although I'm sure they would say he didn't spend enough during the Great Depression. While most political historians seem to love FDR, economic historians are very much divided as to whether his policies helped or hurt matters.
FDR's constant meddling and anti-business rhetoric in particular (just read his first inaugural for a taste of that) created uncertainty and undermined business confidence. In fact at one point famed economist John Maynard Keynes wrote to FDR and told him to either regulate the utilities or not but to "stop chasing them around the lot every week."
Henry Morgenthau, FDR's Secretary of the Treasury, summed up his Depression experience this way:
"We are spending more than we ever spent before, and it does not work. We have never made good on our promises ... after eight years of this Administration we have just as much unemployment as when we started ...and an enormous debt to boot."
Does all of this sound familiar? It pretty much describes the Obama approach to managing the economy. Spend freely and carry a big stick.
Look, I can see a case for more spending now. But that's only if we make progress on solving the big entitlement spending on Social Security, Medicare and Medicaid that drive the string of budget deficits out into the future. Over the past year, mandatory spending (mainly these three programs) devoured all of the revenue taken in by the Federal government. The rest of spending was paid for with debt.
If you want your dessert (more spending now) you've got to eat your broccoli (long-term fiscal reform), and the latter must come first. That's because citizens and markets don't have confidence in government promises of deficit reduction later.
One thing the president could do is stop bashing Big Pharma, Big Banks and Big Oil among others (George Bush, of course). Recently he chided insurance executive for considering increases in premiums in light of the extra expenses health care legislation would cost them. Needless to say, BP has felt the full weight of the president's boot on its throat.
It doesn't do anyone (especially the unemployed) any good to frighten investors and create an uncertain and unfriendly business climate. Companies respond by hunkering down, squirreling away savings and not spending. It is completely predictable and rational. And it is happening now.
I wish the president would look to Ronald Reagan as a role model instead of FDR. Reagan also inherited a difficult economy. But he cut taxes and brokered a deal to mend Social Security early in his presidency. His optimism was infectious. The economy boomed.
Jeff Pantages is an investment adviser. He lives in Anchorage.
By JEFF PANTAGES