Interesting exchange with Krugman. The analogy is weird but the idea is true. The Great Depression did not really end until the spending increase of WWII. More spending is the Keynesian mantra if you assume that aggregate demand is the problem and do not look at the causes. We do have to get spending up but the only way to do this is through deficit spending. This will offset the borrowing from the private sector which must be paid down when balance sheets are corrected. Balance sheets will still have to be corrected and pushing the adjustment into the future will not make the problem go away accept if you inflate. If inflation is the ultimate solution, you do not want to be a creditor.
Krugman was a guest on CNN's "Fareed Zakaria GPS" on Sunday. Speaking with Zakaria and Harvard economist Ken Rogoff, he made the same case he has been making for years--that deficits are not the top economic concern of the day. Krugman noted that the effort of World War II helped end the Great Depression, and joked that something similar was needed today.
"If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months," he said. "And then if we discovered, oops, we made a mistake, there aren't any aliens, we'd be better--"
"We need Orson Welles, is what you're saying," Rogoff cut in.
"There was a 'Twilight Zone' episode like this in which scientists fake an alien threat in order to achieve world peace," Krugman said. "Well, this time, we don't need it, we need it in order to get some fiscal stimulus."
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