The 1970s and Paul Krugman

Economics seemed so simple in the 1960s. There was a strong relationship between inflation and unemployment. If unemployment got too high then all that government had to do was crank up inflation and it would automatically drop. Similarly, a rise in unemployment meant that inflation would automatically fall. The trick for government was finding the balance point where both inflation and unemployment were low enough that voters were satisfied.

Then the 1970s came and economists were presented with a new phenomenon - stagflation. This meant a stagnant economy with high unemployment accompanied by high inflation. A lot of economics texts had to be tossed in the trash after that and new economic theories formed.

Apparently Paul Krugman held on to his old books. A recent column makes this statement:

What about inflation? Amid the inflation hysteria of early 2009, the inadequate-stimulus critics pointed out that inflation always falls during sustained periods of high unemployment, and that this time should be no different.

I suppose that he would explain this away saying that inflation did eventually drop in the early 1980s. The whole argument is strange. He is arguing that future inflation will not happen because of current unemployment and his proof is that high unemployment in the past has caused high inflation to drop.

The Fed has also bought into the idea that rising inflation will reduce unemployment. Most of their moves should have been inflationary but instead fell flat.

Krugman is laying the groundwork for more stimulus. He insists that what was already spent was insufficient, even though it was greater than the cost of the seven years we spent in Iraq. This is nothing new. He has insisted all along that the government needed to spend trillions on stimulus.

This call for additional stimulus is based on a simplified version of Keynesian economics but the Progressives are not really Keynesians. They are merely using Keynes as an excuse. If they were real Keynesians they would would never consider a tax increase during a recession but they have already passed a few tax increases with more being proposed. Most Progressives want to close the deficit by raising taxes on the rich - something Keynes would never agree to in the current economic climate.

The quote about never letting a crisis go to waste has been overused but it certainly applies here. In the name of stimulating the economy, the Obama administration focused on long-term goals rather than actual stimulus. The Progressives are beginning to admit this and wonder if that was why the stimulus didn't stimulate.

Germany has taken the opposite route and embarked on a policy of fiscal restraint. It's economy seems to have responded. Krugman scoffs at this pointing out that most of the austerity is in the future. He promises that a future fueled by extravagant sending will be brighter but refuses to recognize that this policy leads to crushing debt and austerity.