Krugman’s Economic Advice for the Incoming Administration

In his latest New York Times column Paul Krugman offers his advice to the incoming Biden Administration. In brief it amounts to spend as much as you want on anything you want and be prepared to ram it through the Congress using reconciliation:

Putting all of this together, the message is “damn the torpedoes, full speed ahead.” Neither defunct ideology, nor bogus economic concerns, nor the vain hope of comity should be allowed to stand in the way of delivering the policies America needs.

His advice actually consists of four points:

Rule #1: Don’t doubt the power of government to help.

This first point is one on which I’m in partial agreement with Dr. Krugman. It’s the reason I’m a Democrat. Yes, government can help. Not just the federal government but state and local governments as well and it’s darned helpful if they’re all rowing in the same direction. Where I differ from Dr. Krugman and many Democrats is that don’t believe that everything that the federal government does is de facto helpful. It may be helpful, counter-productive, or not do much at all other than pay bureaucrats and political cronies. And beware of unforeseen secondary effects! You can’t just enact a law and trust the bureaucrats to do the right thing.

Rule #2: Don’t obsess about debt.

On this point I’m in partial agreement as well. Don’t obsess about it. But don’t dismiss it or ignore it, either. Going into debt is reasonable for long-term investments but not for consumption. An updated sewer system or electrical grid is a valid long-term investment. A “bridge to nowhere” isn’t. You can torture the meaning of investment to include things like healthcare spending and spending on higher education but beware! Paying operating expenses or for consumption with debt is a losing proposition even for the federal government.

Rule #3: Don’t worry about inflation.

I don’t agree with him on this one or at best I think his explanation is a part-truth. Consumer inflation has been low for many things for the last decade. But asset prices have soared. When Barack Obama took office the DJIA was around 8,000. Now it’s around 31,000. I don’t think there’s any credible explanation for that other than asset inflation.

The prices of some services have risen sharply, too, education and healthcare in particular. So, for example, healthcare spending per person has increased more than 40% 2009 to 2019. You can rationalize that in all sorts of ways but I think that we need to acknowledge that inflation is one of the causes.

Rule #4: Don’t count on Republicans to help govern.

This, too, is at best a part-truth. His explanation:

The original sin of Obama economic policy was the underpowered stimulus of 2009. The American Recovery and Reinvestment Act helped stabilize the economy, but it was much too small given the depths of the crisis. This isn’t hindsight; some of us were very publicly tearing our hair out in real time.

One reason the plan was too small was that Obama was trying to gain bipartisan support, rather than using reconciliation to push it through with Democratic votes (which is how Republicans passed the 2017 tax cut).

I can and have produced copious evidence from December through January of 2008-2009 of President-Elect Obama and his chief economic advisors saying unequivocally that the amount they were seeking was exactly the right amount. Not too hot, not too cold, just right. If they were wrong, it was not simply because they were trying to secure bipartisan support. They were equally trying to appease members of their own caucus. As H. L. Mencken to every problem there is a well-known solution to every human problem—neat, plausible, and wrong. For the first several years of Obama’s first term the Democratic-led Congress was passing things in reconciliation. If you don’t want reconciliation to be abused, don’t abuse reconciliation yourself.

I also wonder how Dr. Krugman explains the uncomfortable truth that the Great Recession was over before a dollar of the money appropriated under the ARRA was disbursed?

In summary I think that Dr. Krugman’s column shows us the contours of what unifying the country may look like. Fasten your seat belts, we’re in for a bumpy ride.