Krugman Redistribution or Ponzi Scheme

June 22, 2012

by Chidem Kurdas

A nice thing about Paul Krugman, he does not mince his words. Thus his new book, End This Depression Now!, repeats as boldly as possible the central point he’s repeatedly made in his New York Times columns and blogs for years. Namely, governments have to spend a lot more. They have to run gigantic deficits, much more than they’re doing now. His penchant for going straight for the jugular means that the full implications of the scheme he advocates are crystal clear.

What he’s pushing is in fact an arbitrary redistribution of income and wealth. The plan is not just to suck in people’s savings but to cause the debt to disappear, as many have suspected all along. This is a scheme that would make any con man green with envy. It is as if Bernard Madoff were able to go puff! and make his customers’ claims evaporate into air, with no adverse consequence for him.

Krugman is witty, attacking “austerian” arguments for government austerity. Mario Rizzo and others have presented the “Austrian” or Hayekian reply to  the Keynesian deficit spending case made by Krugman and Brad DeLong, for instance.

So, because governments are not spending enough to get economies out of the doldrums, the pain of unemployment goes on and on, as Krugman puts it. We have to embrace inflation. It will erode the real value of all debt, including mortgages and, even better, government bonds. Let governments borrow and spend enough to push prices up at a significantly higher rate, to generate inflation of 4% or perhaps even 5% a year.

He writes that government debt likely “won’t have to be paid off quickly, or indeed at all,” with enough inflation. Of course this is what folks have suspected for a while, hence the popularity of gold as an investment. Krugman comes right out and says what officials tend to obscure, namely the temptation to destroy the purchasing power of the currency through inflation, thereby shrinking the government’s liabilities. He’s all for falling into the temptation.

Inflation will also shrink the value of retirees’ savings, pension plans’ portfolios and the income of everybody who can’t protect themselves against rising prices. It will redistribute wealth and income from creditors to debtors and from savers to spenders.  Inflation is an arbitrary redistribution mechanism. Inflation-indexed government employees will do alright while workers in competitive industries, where businesses can’t raise their prices, will suffer.

Krugman quotes Keynes: “The boom, not the slump, is the time for austerity.”  Now, I have to admit that I was somewhat in sympathy with the notion that it may be premature to reduce federal spending. Government largess acts as a quickie pick-me-up, to which economies have become addicted. I thought a debt crisis – though largely brought on by government profligacy – may not be the best time to go cold turkey.

Reading Krugman’s bald brief for an immense growth in government fueled by debt that will be made to go puff! through inflation, made me realize that there may be no other option. We probably do have to go cold turkey if we want to stop Uncle Sam from inflicting the granddaddy of all frauds on us.

12 Responses to “Krugman Redistribution or Ponzi Scheme”

  1. NevadaWolfPack Says:

    Inflation solves everything. Just ask the prominent professor(Krugman)! http://www.youtube.com/watch?v=JUvm9UgJBtg

  2. Allan Walstad Says:

    Car trouble? Just push harder on the gas pedal!

  3. Mike Rulle Says:

    Lets assume we should run greater deficits. Why does PK assume Federal Spending is better than lower taxes? Is there something special about the government’s ability to make positive present value spending decisions? What arguments does he make in this regard? At least the private sector eventually must stop dumping good money after bad. The public sector cannot even define what a successful spending program is—–therefore they just claim things like “jobs created or saved” and keep on spending. I do not believe he believes what he says.

  4. gladRocks Says:

    Krugman is stuck on stupid.


  5. so…
    deficits are a good thing, as it provides a reason for printing money, creating more inflation.

    ask krugman why he embraces deficits driven by govt spending, but cannot accept a deficit created by cutting taxes.

    he wants deficits, he wants inflation, he wants bigger govt, and yet he is concerned about people not paying their fair share in taxes? couldn’t we worry about deficits produced by tax cuts, when we start to worry about the deficts produced by the increase in govt spending?

    apparently, he wants growth too, but it would violate his religiously held tenets that the private sector not be stimulated. he can’t have people arguing that growth could possibly occur, without govt involvement.

  6. Brad Says:

    You cater to an unintelligent audience…

  7. big mike Says:

    wealth distribution began long ago and continues to this day…the current ideology of the right!!!


  8. […] Think Markets has a nice dose of sanity: Inflation will also shrink the value of retirees’ savings, pension plans’ portfolios and the income of everybody who can’t protect themselves against rising prices. It will redistribute wealth and income from creditors to debtors and from savers to spenders. Inflation is an arbitrary redistribution mechanism. Inflation-indexed government employees will do alright while workers in competitive industries, where businesses can’t raise their prices, will suffer. […]

  9. RKN Says:

    Krugman quotes Keynes: “The boom, not the slump, is the time for austerity.”

    I don’t recall any examples in American government, state or federal, during a so-called boom time, when government officials put forth austerity measures. It’s usually the other way around, “Look at all this revenue coming in! Let’s spend!”


  10. […] Krugman Redistribution or Ponzi Scheme (thinkmarkets.wordpress.com) […]

  11. John Doe Says:

    You overstate and misleadingly simplify the case by saying “Inflation will also shrink the value of retirees’ savings, pension plans’ portfolios and the income of everybody who can’t protect themselves against rising prices.” Many pension plans and savings vehicles — e.g., money market funds paying market interest rates circa 1982 — will do pretty well during inflation. But the point is even some erosion could be more than made up by increased taxes of more fully utilized production capacities through the economy.


  12. […] and threats of increasing taxes. And the push for more aggressive use of Keynesian nostrums, for greater deficits and higher inflation, are further eroding […]


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