And all ittakes is a friendly shove from the government along with a blizzard ofnew dollars.
In his recent book, The Return of Depression Economics, PaulKrugman makes a rather amazing claim when he says that almost anyproblem in the U.S. economy can be “solved” simply by printing money.Elsewhere in his semi-weekly column in the New York Times and in his blog, Krugman has called for “a credible commitment to fairly high inflation” as a means of economic recovery.
Now, in the country where I live, one generally does not need thegovernment to “commit” itself to inflation. Indeed, governments will dothat all on their own and don’t even need approval from economists andespecially Krugman.
But while it might seem that calling for inflation is absurd on itsface, I believe that I should try to explain the economic strategy thatis behind the call for more inflation. The term Krugman and others haveused is “traction,” but instead of being an appropriate analogy, Iwould say that this is a “strategy” to run the economy off the roadaltogether and impoverish much of the United States.If I am going to use such harsh language, however, I need to be surethat I can explain why Krugman and others have used that analogy, andwhy they believe it will work. It won’t, of course, but nonetheless Ishould be able to explain why on both counts.
I live in a place that receives a lot of snow each winter, and ourhouse is halfway up a steep hill. We used to have a rear-wheel-drivevan and in order to be able to make it to our driveway when the snowwas falling, I had to gain speed just before we hit the hill, or thevan would slide back.
Because not everyone here expertly drives in snow, once in a whilesomeone goes off the road or is stuck in a snow bank. One way to helpthat person to drive out is to throw dirt or ashes under the tires inorder to give the vehicle traction.After throwing down the material, people then push the car from behind.Once the car has some forward momentum, it usually can get out of thesnow on its own.
Likewise, Krugman and others like him (too many like him, as far as Iam concerned) believe that the problem with the economy today is thatpeople just are not spending enough money, and in their reluctance tospend, they have created a “liquidity trap.” Since the Keynesianconstruct of the “liquidity trap” has it being a self-perpetuatingproblem, the only way to steer the economy out of its present “snowbank” is to have an outside force — the government — give it a pushor throw money under the wheels (instead of ashes) and then watch theeconomy take off again.
In the case of the present downturn, creating new bank reserves willnot provide much of a push since new money cannot be created if banksare not making loans, and a period of economic uncertainty is not goingto result in a surge of new lending. Thus, if the economy is to begiven “traction,” the only way is for government to spend in a way thatfloods the economy with new
As people continue to spend, the spending sends signals to producers tomake more goods, and then the economy is off to the races. And all ittakes is a friendly shove from the government along with a blizzard ofnew dollars.