Friday, June 3, 2011

Mistake of 1937, Mr. Krugman

Sooner or later, President Obama is going to go for the long bomb to try to get his team over the goal line in 2012. With a Republican House, good luck with that, Mr. President. The economy for 2012 is probably already baked.

Conservatives have argued that the trouble with the president's economic policy is that it has boosted uneconomic things like ageing Detroit automakers and state and local governments and frank money printing instead of cutting taxes and wasteful spending, clearing away the detritus of the old boom and preparing the ground for new growth.

But liberal columnist Paul Krugman is worried about the "mistake of 1937."

For you young 'uns, a bit of history. The New Dealers cranked up a huge pre-election boom in 1935-36 that boosted the deficit and federal spending in real 2005 dollars from $72 billion in 1934 to $107 billion in 1936. The federal deficit was 4.76 percent of GDP in 1936. Then the Feds took a breather in 1937 and reduced spending to $98 billion in 1937. Combined with tighter monetary policy this brought on a nasty recession and the Dems lost 70 seats in the 1938 midterms.

So you can imagine that Paul Krugman is nervous. The Dems ran their stimulus in 2009-10 and now the stimulus is running out of gas. Maybe they shoulda waited a couple years!

The "mistake of 1937" notion misunderstands the problem. The New Deal of 1933-36 wasted billions of treasure on politically motivated crony capitalism and wars on businessmen and made the US a more expensive place to do business. They passed the Wagner Act to make union labor much more expensive. They passed Social Security and the 2 percent tax on payroll started in 1937.

The "mistake" was not in 1937. The mistake was in 1933-36.

In our case the mistake was the government-sponsored boom in housing that pumped trillions into risky mortgages that are now underwater. The second mistake was throwing good money after bad with subsidies for the wasteful and the politically connected. We are not going to get out of the mess until the housing market clears and the underwater mortgages start to float again.

In case you were wondering, that's what QE1 and QE2 and probably the QE3-to-come are all about. They are trying to devalue the dollar so that house prices will go up and "reflate" asset values.

Liberal attack dog Paul Krugman is baying at the moon. The American people are going to have to pay for the mistakes of their political leaders, and we might as well get it over now. Chances are that the cost will only get bigger the longer we put it off. And since the problem goes back to Democrat-favored economic policy mistakes, it is right that Democrats should take the blame.

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