My Run-in with Paul “Crude” Krugman

My wife and I just returned from a 10-day lecture tour in Poland and England, where I spoke to standing room-only audiences on the growing debt crisis in the West. Most of my books now have been translated into Polish, thanks to our host, publisher extraordinaire Jan Fijor.

By coincidence, Paul Krugman, the Nobel Prize economist and foremost advocate of “crude” Keynesian deficit spending, also was in London on a book tour. We ran into each other on the Underground.

For the next half hour, we disagreed on practically every aspect of the crisis — the cause and the cure. He said his new book “End This Depression NOW!” is selling the best in countries with the most trouble like Spain. He favors doubling or tripling the high deficits! Talk about scary.

While in Europe, I heard reports of billions flowing out of Spanish banks for fear of a collapse. There’s talk once again of another “quantitative easing” by the U.S. Federal Reserve Bank. Translation: Expect Fed Chairman Ben Bernanke to panic again and print more money. Right now, the money supply (M2) is growing at a 5% rate — half of its growth rate last year.

“What about austerity?” I asked. Krugman said he opposed it now, but once we are over the recession, austerity would be required. He paraphrased St. Augustine, “Give me austerity, but not yet!” Unfortunately, we may never get there if we follow his “crude” Keynesian big-spending plans.

I asked him a series of questions. What did he think of the Canadian success story, how Canada faced a similar fiscal crisis in 1995, and cut federal spending and employment? All the Keynesian economists opposed it, but it turned out to be a big success — they balanced the budget in two years and the economy boomed. Then they went on an 11-year supply-side tax cut policy, and reduced taxes on capital gains, national sales and corporate income (the rate is now 12%!). They had no financial crisis in 2008, and no bank failures.

Krugman quickly dismissed the argument and downplayed its anti-Keynesian implications, arguing that a weak Canadian dollar helped exports and got them out of trouble. In fact, the Canadian dollar has been up sharply since 1995. (Today, the currency is on par with the U.S. dollar.) You can’t win with this guy! He never admits it when he’s wrong.

He seemed to be completely confident of his big-spending strategy. (He reminds me of Mao, who was determined in the 1970s to double up on socializing the Chinese economy — it only made things worse.)

I asked him if he could name an economist who would be his equal in debate. He couldn’t name anyone! I suggested Milton Friedman if he were alive, and he nodded but then added, “Friedman would be considered a radical leftist in today’s Republican Party because he would undoubtedly favor today’s easy-money policies to get us out of this depression.”

“But Friedman would not support fiscal stimulus!” I retorted. Krugman sheepishly agreed. Friedman was famous for arguing that monetary policy was far more effective in fighting recession than fiscal policy. He would not be surprised that the deficits haven’t gotten us out of this crisis.

What about Mitt Romney? He accused him of being an “empty shell” and even “amoral” — with no principles — and will lose the election. “The November elections won’t be determined entirely by economic issues,” Krugman said. “Admittedly the job growth numbers are awfully slow, and that’s not good for Obama.” But Krugman thinks Obama will pull it off. I think Krugman’s wrong, but we will see.

Finally, we talked about FreedomFest. He agreed to debate Steve Moore of the Wall Street Journal in our big mock trial this year, “Wall Street on Trial,” but wanted a ridiculous six-figure fee that would make a Goldman Sachs partner blush. Instead, we have Robert Frank, a New York Times columnist.

Check it out here: www.freedomfest.com.

You Blew It!: Paul Krugman Digs a Deficit Hole

“Give me austerity, but not yet.”

— Paul Krugman

Paul Krugman gets the prize for being the first person who will be highlighted for the second time in “You Blew It!”

Because of his position as a Nobel Prize economist and New York Times columnist, his influence is substantial. Countries in the West are adopting his Keynesian prescription for getting out of the depression by spending wildly and running up huge deficits. The national debt of the United States is now over 100% of its gross domestic product (GDP) — approaching World War II levels.

But his attitude is “What, me worry?” He actually advocates doubling or tripling the deficit this year to get us out of the depression.

His policy is dangerous, to put it mildly, and one reason S&P downgraded U.S. government debt.

His approach reminds me of Homer Simpson’s solution to getting out of a hole. Watch this clip.

While he was alive, Milton Friedman reviewed numerous empirical studies and concluded that stimulating the economy through deficits doesn’t work. Only monetary policy can do the trick. Fiscal stimulus creates unintended consequences — private business pulls back and offsets government spending and borrowing. To paraphrase Gresham’s Law, “Bad government drives out good business.”

While in England, I had lunch with monetarist Tim Congdon. In his excellent book, “Money in a Free Society” (Encounter Books, 2011), he demonstrates that fiscal stimulus doesn’t work most of the time, retards growth, and only leaves a country further in debt with high interest payments.

Is it not surprising that the huge Troubled Asset Relief Program (TARP) and deficit stimulus hasn’t stimulated anything other than big government and the welfare state?

Estonia, the small Eastern European country, adopted “austerity” since 2008 and has the fastest-growing economy in the region. See this report. Not surprisingly, Paul Krugman sees it differently.

Mark Skousen, Ph.D.
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