No right-of-center pundit should spend his or her time responding to everything that Paul Krugman has ever written or ever will write. Indeed, no right-of-center pundit should even spend time replying to most things that Paul Krugman writes. But his latest editorial for the New York Times calls for a reply, seeing as how it is a one-piece chrestomathy encapsulating the main talking point Krugman spends his waking hours propagating.
That talking point being as follows: Big Government, as Peter Griffin might put it, is Freaking Sweet.
After months in which he warned that a second Great Depression was potentially upon us–months in which he argued that not only was the first $787 billion stimulus package needed, but a second stimulus package may be needed as well–Krugman now tells us that while things remain somewhat dicey on the economic front, we may well have avoided the onset of another era in which “Brother, Can You Spare A Dime” has a chance of rising to the top of the pop charts. Reason? Because Big Government came around just in time to save us from economic disaster. Government is to be celebrated, according to Krugman, because it “hasn’t slashed spending as its income has fallen.” Basic services are still being provided. Government bailouts like the Troubled Asset Relief Program (TARP) helped rescue us from the abyss as well, in Krugman’s world. And of course, the stimulus–while still too small and potentially in need of a supplement, mind you–has worked wonders.
It would be ever-so-easy to agree with Krugman’s claims. Who wouldn’t want to think that a single superhero entity could bring an end to all of our woes? But the truth is a little more complicated than Krugman likes to claim it is.
Concerning TARP, Wikipedia informs us that as of February 9th of this year, $296 billion of TARP funds had been spent. This represents a mere 2% of the total U.S. economy, whose GDP was estimated at $14.4 trillion as of last year. Concerning the stimulus package, as of May, only $45.6 billion of the $787 billion had been paid out, approximately 0.3% of GDP. What’s more, TARP hasn’t even cleared up any toxic assets, a fact that should boggle Krugman’s mind, if he bothers to pay attention to any facts that disturb his theory of Big Government as the National Messiah. To call the contributions of TARP and the stimulus package a drop in the bucket when it comes to affecting the total U.S. economy would be to vastly overstate their importance. Of course, eventually the rest of TARP and the stimulus package may be paid out, absent any action on the part of Congress to curtail or cancel the programs. But that just means that TARP and the stimulus package will fully affect the economy well after any recessionary residue has dissipated, leaving us with massive budget deficits to clean up afterwards. Budget deficits that will likely be addressed with significant spending cuts in the very services Krugman boasts the government was able to provide in the teeth of the recession. Budget deficits that will bring about tax increases not only on the rich, but on the middle class, especially after one factors the cost of health care reform into the mix.
How is Big Government looking now?
I wouldn’t disagree with the general contention that injecting large amounts of cash into the economy helped save it from disaster. But Krugman doesn’t mention the chief cash-injector responsible for having brought the economy back from the brink; the Federal Reserve. In response to the recession, the Fed has slashed interest rates to zero, and has injected nearly $1.6 trillion to provide stimulus for the financial sector. Unlike TARP and the stimulus package passed by Congress, the Fed’s actions were immediate, do not add to the deficit, and help combat the danger of deflation, which really could have brought a second Great Depression about. Defending himself from an attack launched against him by Berkeley economist Brad DeLong, University of Chicago economist and Nobel Prizewinner Robert Lucas points out that from the very outset, he believed that Ben Bernanke and the Federal Reserve were all the stimulus that we needed. Quoting from Lucas’s Wall Street Journal column in December of last year:
The Federal Reserve’s lowering of interest rates last Tuesday was welcome, but it was also received with skepticism. Once the federal-funds rate is reduced to zero, or near zero, doesn’t this mean that monetary policy has gone as far as it can go? This widely held view was appealed to in the 1930s to rationalize the Fed’s passive role as the U.S. economy slid into deep depression.
It was used again by the Bank of Japan to rationalize its unwillingness to counteract the deflation and recession of the 1990s. In both cases, constructive monetary policies were in fact available but remained unused. Fed Chairman Ben Bernanke’s statement last Tuesday made it clear that he does not share this view and intends to continue to take actions to stimulate spending.
There should be no mystery about what he has in mind. Over the past four months the Fed has put more than $600 billion of new reserves into the private sector, using them to discount — lend against — a wide variety of securities held by a variety of financial institutions. (The addition is to be weighed against September 2007′s total outstanding level of reserves of about $50 billion.)
[. . .]
There are many ways to stimulate spending, and many of these methods are now under serious consideration. How could it be otherwise? But monetary policy as Mr. Bernanke implements it has been the most helpful counter-recession action taken to date, in my opinion, and it will continue to have many advantages in future months. It is fast and flexible. There is no other way that so much cash could have been put into the system as fast as this $600 billion was, and if necessary it can be taken out just as quickly. The cash comes in the form of loans. It entails no new government enterprises, no government equity positions in private enterprises, no price fixing or other controls on the operation of individual businesses, and no government role in the allocation of capital across different activities. These seem to me important virtues.
As Lucas points out, the Fed’s actions were more immediately anti-recessionary, and helped push back against the economic downturn significantly more quickly than did TARP or the stimulus package. Doubtless, Krugman does not like the fact that the Fed’s actions “entail[ed] no new government enterprises, no government equity positions in private enterprises, no price fixing or other controls on the operation of individual businesses, and no government role in the allocation of capital across different activities,” but there are some of us who believe that checks on government expansion are a feature, and not a bug. To be sure, people like Anna Schwartz, who place themselves (quite honorably) in the Milton Friedman school of economics, worry that the Fed’s balance sheet has grown too much, and state that the current economic crisis represented a crisis of confidence, more than it did a crisis of liquidity. I disagree with Schwartz, but I think that she most certainly would agree with Lucas’s estimation that at least, the Fed’s actions have the virtue of not constituting a permanent increase in the size and scope of government. The downside to this confluence of beliefs–limited though it may be–is that neither Schwartz nor Lucas is likely to get a holiday card from Paul Krugman, but them’s the risks of being a freshwater economist.
Of course, no Krugman column is complete without snide remarks directed at Republicans, whom Krugman views as almost uniformly stupid and venal. He tells us that we should be pleased that government is being run by people who like government. This is a recent favorite bromide against Republicans; presumably, if you dislike government, you can’t be expected to run it. This talking point is merely intended to ensure that those who want to ensure that government keeps its appointed limits should not be elected or appointed to positions of political and administrative responsibility where they can implement their program. I’m sure that advocates of Big Government would love to find and use a cheap rhetorical device with which to win elections and personnel appointment battles, but they shouldn’t be able to achieve their ends in so dishonest a fashion. Krugman’s argument is silly; one need not like government in order to be placed in a position of responsibility in government, and not liking government can be a useful thing; it helps provide checks against government.
Another Krugman claim is that Republicans have been “demanding that the government stop standing in the way of a possible depression,” and cites a statement by John Boehner calling for the government to tighten its belt as proof. This really amounts to weak tea in terms of indicting Republicans for supposedly wanting to bring on a recession. Republicans have called for tax cuts that would have done more to stimulate the economy than would or will TARP and the stimulus package. Krugman’s claim against Republicans does little more than echo Barack Obama’s claims that the choice in crafting our economic policies was between adopting his package, and the supposed Republican plan of “doing nothing.” The President got called out repeatedly for that kind of misleading rhetoric. There is no reason why fact-checkers should hold back on Paul Krugman for engaging in the same kind of rhetorical excess the President has indulged in.
I doubt that I can or have done much to dissuade Paul Krugman from his belief that no sparrow takes flight without government having helped it to flap its wings. His intelligence is matched only by his monomania on the subject. If only intensity of belief could equate accuracy in belief, Krugman would rightly be considered infallible in his claims that Big Government is Teh Awesome. Alas, however, stubborn facts continually conspire to undermine his conclusions.
Read more at Pejman Yousefzadeh’s blog.