Krugman and the 1930s: One Step Forward, One Step Back
In his recent NYT op ed Krugman reaches a new low in his distortion of the 1930s:
We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.
And this third depression will be primarily a failure of policy…
In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets.
Often Krugman et al. have been misleading when they talk about central banks during the Great Depression, but that statement is flat out false. In response to the financial crisis, the Fed cut rates down to record lows. Now it’s true, when faced with an outflow of gold in the fall of 1931, the Fed finally reversed course and starting raising interest rates. But it is flatly false (I won’t say “lie” because Krugman may very well not realize it) to say that in the Great Depression, central banks responded to the initial crisis by hiking interest rates. (Look at the chart of the Fed’s actions in this article.)
Although he reached new lows in his discussion of interest rates, Krugman is marginally better when talking fiscal policy. For he now says:
As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence.
To my knowledge, that is the first time Krugman has ever publicly volunteered the fact that Herbert Hoover raised taxes. (It’s true, you wouldn’t realize how MASSIVELY Hoover jacked up tax rates–e.g. raising the top income tax rate from 25 to 63 percent in one year!!) Several times Krugman has said that Hoover tried to balance the budget during the Great Depression, without (a) mentioning that this was only after letting the deficit explode, and (b) that Hoover didn’t focus exclusively on spending cuts.
So you win some, you lose some.
It’s often said that winners write history, but I think it’s more likely that those who write the history win. Krugman is only drawing upon the mainstream econ history of the Great D, which depends heavily on Friedman and many socialist writers. They have succeeded in convincing the majority of people of their truthfulness of their false history, so most people are convinced that if the state doesn’t save us we’ll all die.