Fix The Economy

Krugman: How To Fix The Economy? Do The Exact Opposite Of What We’re Doing

4/30/2012

By Henry Blodget | Daily Ticker

Over the past five years since the Great Recession began, economists have been waging a religious war over the best way to fix our problems.
On one side are so-called "austerians" who argue that the problem is a lack of confidence caused by runaway government spending and deficits and, therefore, the best way to revitalize the economy is to radically cut government spending.
On the other side are Keynesians, who argue that the problem is lack of demand, and, therefore, the best medicine is for the government to radically increase spending to drive the economy until the private
sector heals.
The most visible champion of the latter view is professor Paul Krugman of Princeton, who has just published a new book called "End This Depression Now!"
Krugman has long maintained that the government's policy response in recent years has been either weaker than, or the opposite of, what it should have been.
The original Federal stiumulus, for example, wasn't big enough, Krugman says. And the recent moves of Republican-controlled states to cut spending have made the problem worse, not better.
Why?
Because the spending cuts have led to job cuts, which have led to further spending cuts. And so on. Europe, Krugman observes, is charging down the same disastrous path, and it is now plunging into another recession.
But what about those who say that we can't afford additional stimulus--that we're already so overloaded with debt that if we don't immediately start cutting the deficit, interest rates will soar and the currency will collapse.
Just look at the reality, Krugman says. People have been predicting hyperinflation and runaway interest rates for years, and they're just not happening. The best way to fix our problem, Krugman adds, is to grow our way out of the problem and to generate modest inflation to gradually reduce the real (inflation-adjusted) burden of debt. But instead of focusing on these two goals, Krugman observes, our government keeps cutting spending and obsessing about 2% inflation.
Based on his conversations with the Obama administration, Krugman says, the White House understands what the problem is and how to fix it. But the sudden Republican concern about the deficit has forced the White House into a disastrous compromise, and the country is paying the price.