Krugman: ‘We are repeating the mistakes of the 1930s,’ Value-added tax plausible solution

Jeff Poor Media Reporter
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In his Monday New York Times column, Paul Krugman criticized President Barack Obama for compromising with congressional Republicans on a debt ceiling agreement that includes cuts to government spending.

In an appearance on Bloomberg TV’s “Street Smart” Monday, Krugman elaborated on why he was disappointed, explaining that the money cut from the government would ultimately detract from the United States’ overall gross domestic product (GDP).

“[I] have been poring over the CBO analysis,” Krugman said. “And there are significant discretionary spending cuts taking place in fiscal 2012, which starts in October of this year, and fiscal 2013, which starts in October of 2012, which are — we are still going to have a deeply depressed economy at that point.”

Emphasizing his point, Krugman said, “So, these are cuts that are going to hit while the economy really can’t take them. And notice there is a lot of stuff that everybody sort of assumed would be taking place that is not in this bill, like the extension of unemployment benefits. So what we’re going to be seeing is actually a sharp, sharp fiscal tightening, sharp move to austerity. I think JP Morgan is estimating about four points of GDP over the next four years in an economy which is exactly the kind of economy you do not want to be doing that in.”

Krugman contends that these austerity measures mean the federal government is repeating the same mistakes of the Great Depression.

“So, no, it is not OK. This is — it is true, the only thing you can say is that the drift of policy was already in the wrong direction,” Krugman continued. “So if you sort of take this relative to where it seems to be going already, it is not as bad. But the fact is we are doing a terrible thing. We are repeating all the mistakes of the 1930s. We seem to be doing our best shot at recreating the Great Depression.”

Later in the interview with “Street Smarts” host Carol Massar, Krugman said if it were up to him and political considerations were not a factor, he would increase spending and that could be financed at a relatively low interest rate.

“If I can wave away the political constraints, right, because if I talk to the president right now I say, ‘Don’t sign that deal you just signed,’” Krugman said. “But realistically he is not going to be getting anymore stimulus or anything like that. But no, if you look at what the economics say, we ought to have some serious infrastructure spending. The federal government can borrow. It can borrow with inflation-adjusted bonds at an interest rate at three-tenths of a percent. So this is a really good time to borrow for infrastructure spending, which we badly need and which would create jobs at a time when we badly need jobs.”

Krugman warned that current economic policy would not allow for health care or entitlement spending to which many Americans have become accustomed.

“We should definitely be continuing unemployment benefits and other things, both to alleviate hardship and to sustain spending power,” he said. “Longer term, we are going to need more revenue. There is no plausible story by which we maintain anything like the kind of society we now have without finding at least three or four points of GDP in the form of revenue. And I am pretty much open on where they should come from. It does not necessarily have to be from taxing the wealthy. It probably cannot be. It can be a variety of sources. I am willing to talk about a value-added tax. If people say ‘No, no more taxes’ or, ‘We have to freeze the size of government as a share of GDP,’ it’s basically based on pretending the arithmetic doesn’t operate. You cannot do anything that looks like the kind of society we have with basic medical care and basic retirement guarantees for seniors.”