Krugman Agonistes

"Well yeah it's bad, but we need it, so I'll say it ain't really so bad."

In yesterday's post, "The true fiscal cost of stimulus," Paul Krugman writes:

So fiscal expansion is good for future growth. Still, it does burden the government with higher debt, requiring higher taxes or some other sacrifice in the future. Or does it? Well, probably — but not nearly as much as generally assumed.

Y'know, I like the guy. I like a lot of what Krugman says. But he's desperately trying to make an argument here in favor of debt. When I read it I was sympathetic, but I don't buy the argument. He's waffling, and he's trying to weasel around the problem of insurmountable debt.

Krugman should stop agonizing over his bipolar views on debt long enough to figure out why we have all this debt. Yeah I know, everybody says we have all the debt because we had all that spending. Even Krugman buys that explanation. It just ain't so.

Spending doesn't create debt. The use of credit creates debt.

The guiding principles of economic policy have not changed since the end of World War II. Those principles are:

• Encourage the use of credit to promote growth; and
• Withdraw non-credit money from circulation to fight inflation.

The result of these principles is that the quantity of M1 money (money in circulation) declined relative to output, while the quantity of credit-in-use increased. The makeup of our money changed. Credit-use used to be a small part of our spending. Now, it's a big part of our spending. So when we spend -- just normal spending -- we generate a lot of debt. It didn't used to be this way.

This change in our spending habits is the result of economic policy. Whenever the Fed takes money out of circulation, Congress creates new incentives to use credit instead. As a result, debt has increased. Inflation-fighting has become ineffective. The financial sector of our economy has grown. And the factor-cost of using money has grown along with it.

It's pure insanity. It is blind adherence to dogmatic, knee-jerk policy. Not even Krugman can see it. But the solution is so simple!

Inflationary pressures increase when credit use expands. The simple, necessary, and obvious solution to the inflation problem is to pay off some debt. We need closure. We need to complete more of our credit-use transactions. We need a policy that accelerates the repayment of debt.

Paying off debt drains money out of circulation. It is a method of fighting inflation. But it is a method we do not use. All it would take is for Congress to set up some tax-incentives that accelerate the repayment of debt. Gimmie a tax break for it, and I'll make an extra mortgage payment this year. Gimmie a tax break for it, and I'll be happy to reduce my credit-card debt. Gimmie a tax break. Help me reduce my debt.

The question is not whether the debt associated with fiscal stimulus is a big problem, or a small problem, or no problem at all. The question is: When will we start changing the policies that drain money from the economy while encouraging the use of credit?