I just got through reading a recent talk given Paul Krugman in England. As someone who is trying to be open and receptive to all channels of economic thought, I must say, he is pretty smooth and eloquent. Having said that, the following passage really jumped out at me:
"Suppose, in particular, that the government can borrow for a while, using the borrowed money to buy things like infrastructure. The true social cost of these things will be very low, because the spending will be putting resources that would otherwise be unemployed to work. And government spending will also make it easier for highly indebted players to pay down their debt. If the spending is sufficiently sustained, it can bring the debtors to the point where they're no longer so severely balance-sheet constrained, and further deficit spending is no longer required to achieve full employment."
I am troubled. If I think back to my earlier post about Keynes and his theory, what I am reminded of is the notion that the government is put in a position to pick winners and losers -- they are assumed able to allocate money in an efficient manner. Krugman's scenario also reeks of moral hazard. If you keep reading after the quote above, he objects to the notion of having people face up to their bad decisions (particularly those that were levered) as it will be the mechanism by which it takes far longer to reach recovery. So, in the end, there is no true cleansing of the problem. Instead, we inflate, which strikes me as setting us up for the next crisis. And, through all of it, it seems beyond possible to him that eventually the federal government will face its own funding crisis in the picture he's painted. But, hey, what do I know -- he's a Nobel laureate and I'm just a guy who's read a couple of books on economics.
