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Krugman Predicts Painful Road if Deficit Hypocrites Prevail

Paul Krugman Vs. Alan Greenspan On Deficits

Ryan McCarthy

Nobel Prize-winning economist Paul Krugman and former Fed chief Alan Greenspan took very different approaches to the balooning Federal deficit in op-eds today.

We don't know for sure that New York Times columnist Paul
Krugman and former Federal Reserve chief Alan Greenspan had each other
in mind when they penned diametrically opposed op-eds, both of which
ran today. But, we can hope.

Start with their titles. Greenspan's Wall Street Journal
piece is dubbed "U.S. Debt and the Greece Analogy" (You can guess where
that piece is headed.) Ever the Keynesian, Krugman's piece is titled, "That '30s Feeling."

The key issue for both Krugman and Greenspan, of course, is deficits
and spending. For Krugman, the world's recent turn toward austerity,
evinced by Congress's recent refusal to extend unemployment benefits
and cutbacks in social services across Europe, is a sign that
governments are afraid to spend enough to stimulate economic growth. "Suddenly, creating jobs is out, inflicting pain is in," he writes.

Greenspan, for his part, is more concerned with looming pain than
current economic hardships. Noting that in the last 18 months, the U.S.
deficit has ballooned to 8.6 trillion from $5.5 trillion, Greenspan
argues that the world needs "tectonic shift in fiscal policy." And,
growth, he posits can't and won't come from government spending.
(Though, to be fair, other than budget cuts, Greenspan offers no
alternative to government spending to boost the economy.) Here's Greenspan:

"We cannot grow out of these fiscal pressures. The
modest-sized post-baby-boom labor force, if history is any guide, will
not be able to consistently increase output per hour by more than 3%
annually. The product of a slowly growing labor force and limited
productivity growth will not provide the real resources necessary to
meet existing commitments. (We must avoid persistent borrowing from
abroad. We cannot count on foreigners to finance our current account
deficit indefinitely.)"

Krugman -- nor any major economist following the crisis -- has ever
argued that we can continue to borrow cheaply from foreign countries
indefinitely. The larger problem, he suggests, is that here in the
states politicians are deeply inconsistent about which benefits get cut
in the continuing push to trim Federal spending. Here's Krugman.

"In America, many self-described deficit hawks are
hypocrites, pure and simple: They're eager to slash benefits for those
in need, but their concerns about red ink vanish when it comes to tax
breaks for the wealthy. Thus, Senator Ben Nelson, who sanctimoniously
declared that we can't afford $77 billion in aid to the unemployed, was
instrumental in passing the first Bush tax cut, which cost a cool $1.3
trillion. "

Greenspan warns of "growing analogies to Greece" -- a comparison
Krugman has refuted more than once. The economic recovery should, in
fact, bring the deficit down, Krugaman wrote in May, adding in an interview NPR that austerity should come only after the economy has begun to trend upward.

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