In which I defend Paul Krugman
I think Paul Krugman is the modern day Grand Shaman leading the giant village known as the "USA" to financial ruin. Having said that, I must now defend him. Gonzalo Lira, an excellent commenter on the economy, wrote a blog post taking apart Krugman's fallacious argument that deficits got the US economy out of the Great Depression.
The prosperity the United States experienced in the two decades after World War II had nothing to do with deficit spending, and everything to do with the fact that it was the only industrialized nation still standing after a total world war—so the rest of the world was forced to buy from the U.S. because there was no one else left to buy from.
Deficits had nothing to do with it.
(italics in original)
I agree with Lira that Krugman's arguments are wrong. I just don't think Lira's argument is right.
Suppose that there are only two small neighboring villages in the world. Your village, Twin Peaks, has a grocery store, hardware store and a computer store. The other village, Cicely, has a grocery store, clothing store, and car dealership.
People from Twin Peaks and Cicely generally buy groceries from their villages' own grocery stores. However, if you as a resident of Twin Peaks, want some clothes, you travel to Cicely to buy them. If someone in Cicely wants plywood, they travel to Twin Peaks to buy it.
If by chance Cicely's grocery store blows up due to a gas leak/fire, then an argument can be made Twin Peaks's grocery store will benefit. Its direct competition is out of the picture. Residents of both villages will now have to buy from Twin Peaks's grocery store.
But say the entire village of Cicely burns down. Now where will the people of Twin Peaks get their clothes and cars? Current productive resources will have to be shifted from groceries, hardware, and computers into clothes and cars. This is a net negative because the division of labor has taken a step back.
So, are countries more like directly competing stores or complementary specialized villages? I would argue they are the latter. The rest of the world being blown up during WWII was a net negative for the US as we could no longer trade for a lot of the stuff we used to. That's my argument and I'm open to counter-arguments.
So why do I say I defend Krugman? Because a prior article about Krugman in the New Yorker attributed to him a similar point:
Krugman’s tribe was academic economists, and insofar as he paid any attention to people outside that tribe, his enemy was stupid pseudo-economists who didn’t understand what they were talking about but who, with attention-grabbing titles and simplistic ideas, persuaded lots of powerful people to listen to them. He called these types “policy entrepreneurs”—a term that, by differentiating them from the academic economists he respected, was meant to be horribly biting. He was driven mad by Lester Thurow and Robert Reich in particular, both of whom had written books touting a theory that he believed to be nonsense: that America was competing in a global marketplace with other countries in much the same way that corporations competed with one another. In fact, Krugman argued, in a series of contemptuous articles in Foreign Affairs and elsewhere, countries were not at all like corporations. While another country’s success might injure our pride, it would not likely injure our wallets. Quite the opposite: it would be more likely to provide us with a bigger market for our products and send our consumers cheaper, better-made goods to buy.
In this case, Krugman is correct. Simply put: division of labor and specialization raise the standard of living; blowing up capital lowers it. Post-WWII prosperity was not a result of the rest of the world being blown up.