Too Smart For His Own Good

I'll admit I'm a fan of Krugman's writing and he does have that Nobel prize prize in economics which suggests to me he's often more right than wrong, unlike a long list of Austrian economists and those who follow their lead, who all love the shredding of safety nets and abhor deficits - no matter the cost.

Last week for example Hugo Lindgren over at Business Week - who have a standing philosophical disagreement with Krugman and what they call his "Keynesian orthodoxy" - was having issue with Krugman's disagreements with the pledges made at the G20. Krugman is famously an advocate of deficit spending which he firmly believes will ...keep the U.S. economy from death-spiraling into deflation.

Of the pledges Krugman says: The threat is not merely the dreaded "double dip." If the leaders of the developed world hold to pledges they made at the G-20 summit in Toronto and cut government spending, Krugman argues, we face nothing less than a "third depression"—perhaps not as singularly devastating as the Great Depression, which ripped the U.S. economy in half, but comparable to the Long Depression that followed the Panic of 1873, a grinding period of chronic social need and dissension. That is indeed a dire warning.

Then, in a tone that's best described as mocking, Lindgren points to a speech given at the London School of economics (as if this means he couldn't possibly be wrong) noting that the ...speaker was not a decorated academic with visions of 1873, he was a profit seeker, pure and simple: John Paulson, the hedge-fund manager on whose behalf Goldman Sachs cooked up those killer collateralized debt obligations designed to pay off handsomely in the event of a housing crash. He was right about that one, you'll recall. "We're in the middle of a sustained recovery in the U.S.," Paulson declared in London. "The risk of a double dip is less than 10 percent."

The question then is, who are you going to bet on? The Nobel Laureate or the guy who's good at making profits come rain or shine? (paraphrase) After all Paulson's got real money on the table, and Krugman is likely to be just another too-smart-for-his-own-good academic with no feel for animal spirits.

Well some early returns are already in and guess what? Mr. Paulson’s $9 billion Advantage fund lost 4.4 percent in June, leaving it down 5.8 percent for the year so far, The Financial Times reported. That comes on top of a 6.9 percent drop in May. Paulson & Company’s Advantage Plus fund, meanwhile, fell 6.9 percent in June, bringing it to an 8.8 percent loss in the first half of the year, according to Bloomberg News. Not that Krugman couldn't still be wrong in the long run - even he hopes he is - but at the very least his arguments should be taken seriously.

So today as he describes Obama's dilemma and what went wrong - the stimulus package was much too small - and the need for a second round of cuts and spending. With the unlikely prospect of getting that done as there will not be enough votes for anything major after the mid-term results are in, it occurs to me that the mid-terms have to be seen in a different light by Democrats. They need to take the same approach and urgency that existed in 2006 and 2008 elections. If Americans feel that the country overall is still headed in the wrong direction it is absolutely because of the Republicans. More Democrats in Congress not less will better help to solve that problem.