Economist Paul Krugman, in his latest NY Times opinion piece, suggests that the reason the economic stimulus is not working (unemployment is still high, consumer spending is muted, and new capital investments continue to be low) is because not enough has been spent by the government. Comparing 2010 to 1938, he argues for the kind of stimulus spending equivalent to the deficit spending brought on by World War II or 30 trillion in today's dollars. In the light of the new $50 billion prime pump campaign just announced by the President in his Wisconsin labor day address, largely against the will of the people, such opinion must be encouraging to the White House.
The problem with this type of thinking is found in the fourth to the last paragraph of the piece, 'it is possible — indeed, necessary — for the nation as a whole to spend its way out of debt: a temporary surge of deficit spending, on a sufficient scale, can cure problems brought on by past excesses." [italics are mine] The reason we landed in this predicament is precisely, as Mr. Krugman notes, our past excesses. The idea that by creating more excess we will magically balance the books not only defies good sense but is morally irresponsible.
The little detail Mr. Krugman did not mention is that spending in WWII was redirected from butter to guns. Households tightened belts and factories made tanks instead of cars. Household debt was a tiny fraction of the colossus that now faces every man, woman and child in this country. In 1938, the relative potential of the economy's productive capacity, from recent innovations in manufacturing and mining, meant that we could borrow freely from our future; which we did through the massive issuance of war bonds. Today, our relative productivity advantage is small and the national capacity to sustain additional debt, which would be necessary to fund Mr. Krugman's program, is essentially zero.
Fundamentally, Mr. Krugman and his ilk think that we can out get of this mess without sacrifice - spend our way out of debt. They do not call for the kind of national sacrifice and unified response to reduce consumption as in 1938. Instead, they believe quite the opposite. They want our government to print more money, or worse, borrow from the Chinese or Arabs, to forcefeed us trillions of dollars. For what? More cars, houses, calories...?
No, this is not 1938 in 2010. This is more like 1978 in 2010. We know what happened then.