Paul Krugman Destroys Every Republican Argument for Austerity

May 26 2012 Published by under Featured News

On Bill Maher’s Real Time Paul Krugman went head to head with Arthur Laffer, and destroyed every conservative argument for austerity.

Here is the video:

Krugman said,

We are in a depression. We are actually in a classic depression. A depression is when nobody wants to spend. Everybody wants to pay down their debt at the same time. Everybody is trying to pull back, either because they got too far into debt, or because if they’re a corporation, they can’t sell because consumers are pulling back. The thing about an economy is that it fits together. My spending is your income. Your spending is my income, so if we all pull back at the same time, we’re in a depression. The way to get out of it is for somebody to spend so that people can pay down their debt, so that we don’t have a depression. So that we have a chance to work out of whatever excesses we had in the past, and that somebody has to be the government.

We ended the Great Depression with a great program of government spending for an unfortunate reason. It was known as World War II…but when the war broke out in Europe, and we began our buildup that Great Depression that had been going on for ten years. People thought it would go on forever. Learned people stroked their chins and said there are no quick answers. In two years, employment rose 20%. That’s the equivalent of 26 million jobs today, the depression was over. We had full employment, and it never came back, or it didn’t come back until 2008, because people managed to pay down those debts, and we had a durable recovery.

Arthur Laffer delivered the conservative plan to fix the economy. Laffer agreed with Krugman that we are in a depression, and said, “I don’t think we have to do it by government spending. My view is I’ve never heard of a poor person spending himself into prosperity. The government doesn’t create resources. The government redistributes them, and it redistributes them from workers and producers to people they get the resources based on some characteristic of the work effort. So what you really need to do is I think you need to incentivize producers, and what you need to go along, and my way of going would be Simpson-Bowles. Something to lower the tax rates, broaden the base, get rid of the loopholes. I mean really get a production base that officially starts, and that’s the way you really get out of this depression. The way we did in the Eighties to be honest with you.”
Krugman countered the right wing theory with reality, “We have long run budget problems, and I don’t like Simpson-Bowles, but okay it was a good faith effort, but those don’t solve our short run problems. If you tell me we have a plan to balance the U.S. budget in 2030, great. That is not going to make a corporation that can’t sell its products now, produce more now. Do you think all the households in America are sitting around thinking, hmmm, I’m worried about the state of Medicare in 2030.”

Arthur Laffer inaccurately claimed that the Republicans under Reagan got the country out of the recession in the 1980s by reducing government spending, but actually the Reagan administration did the exact opposite. From 1982-1985, Ronald Reagan increased spending by 8.7%, which is the most of any president in recent history. In fact the three biggest periods of recent federal spending increase all came under Republican administrations, Reagan (8.7%), George W. Bush 2002-2005 (7.3%), and George W. Bush 2006-2009 (8.1%).

Paul Krugman shattered the right wing argument by pointing out that cutting spending is not going to encourage consumers and corporations to spend money. The whole basis of the conservative argument is that the debt causes uncertainty, and the economy will grow once the uncertainty is removed, but federal debt has nothing to do with creating consumer demand. The average American isn’t holding off on purchases because they are concerned about the federal deficit. They aren’t buying because they are using their cash to subsist and pay off debt.

Krugman had history and facts. Laffer had theories, and the facts tell us that if we want to jump start this economy, the government has to spend more.

There are not many programs on television that could host such an interesting discussion between two economists. In the confrontational world of cable news, two economists respectfully discussing contrasting economic theory would never make it on to the air. Bill Maher gave viewers a real treat, but when you separate the facts from the theories, it is clear that a full blown austerity program would be a disaster for the U.S. economy.

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