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Krugman: GOP Trying To Push Country Over The Edge Of Catastrophe

It's been surreal, watching this whole stimulus battle play out like a train wreck in slow motion. The pointless and naive attempts by Obama to find m

It's been surreal, watching this whole stimulus battle play out like a train wreck in slow motion. The pointless and naive attempts by Obama to find moderate Republican support (I'd think the main lesson of the last three decades is that there are no moderate Republicans - they just play them on TV!), the usual gang of right-wing radio hacks whipping listeners up into an anti-stimulus frenzy, the predictable inability of Democrats to recognize and constructively channel that populist anger - it would be nice to just pull the covers over my head and go back to sleep for another ten years or so. (Oh, if only!)

The important point Krugman makes in today's column is that rapid, massive stimulus is necessary to keep the country out of a deflation trap.

Why is deflation such a disaster? Because falling demand and prices leads to a vicious circle (the so-called "trap"): wages and jobs are cut, leading to steep drops in demand and prices while the real value of debt rises, leading to a rising tide of corporate and household defaults that will only amplify the credit losses of financial institutions. The problems cycle, over and over. This will truly be the end of the American middle class as we've come to know it.

So this is why Krugman is so anxious:

We’re already closer to outright deflation than at any point since the Great Depression. In particular, the private sector is experiencing widespread wage cuts for the first time since the 1930s, and there will be much more of that if the economy continues to weaken.

As the great American economist Irving Fisher pointed out almost 80 years ago, deflation, once started, tends to feed on itself. As dollar incomes fall in the face of a depressed economy, the burden of debt becomes harder to bear, while the expectation of further price declines discourages investment spending. These effects of deflation depress the economy further, which leads to more deflation, and so on.

And deflationary traps can go on for a long time. Japan experienced a “lost decade” of deflation and stagnation in the 1990s — and the only thing that let Japan escape from its trap was a global boom that boosted the nation’s exports. Who will rescue America from a similar trap now that the whole world is slumping at the same time?

Would the Obama economic plan, if enacted, ensure that America won’t have its own lost decade? Not necessarily: a number of economists, myself included, think the plan falls short and should be substantially bigger. But the Obama plan would certainly improve our odds. And that’s why the efforts of Republicans to make the plan smaller and less effective — to turn it into little more than another round of Bush-style tax cuts — are so destructive.

So what should Mr. Obama do? Count me among those who think that the president made a big mistake in his initial approach, that his attempts to transcend partisanship ended up empowering politicians who take their marching orders from Rush Limbaugh. What matters now, however, is what he does next.

It’s time for Mr. Obama to go on the offensive. Above all, he must not shy away from pointing out that those who stand in the way of his plan, in the name of a discredited economic philosophy, are putting the nation’s future at risk. The American economy is on the edge of catastrophe, and much of the Republican Party is trying to push it over that edge.

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