Paul Krugman: Deluded New Majority in Congress Insists We're Living in an Ayn Rand Novel

Paul Krugman is not exactly optimistic about the new Congress that will be sworn in in January. That's because both houses of legislature will be dominated by the party that has essentially failed to grasp the fundamental economic realities of our day, which is that when the economy is at rock bottom where ours has been for the past six years, everything changes. As Krugman explains in today's column:

As I wrote way back when, in a rock-bottom economy “the usual rules of economic policy no longer apply: virtue becomes vice, caution is risky and prudence is folly.” Government spending doesn’t compete with private investment — it actually promotes business spending. Central bankers, who normally cultivate an image as stern inflation-fighters, need to do the exact opposite, convincing markets and investors that they will push inflation up. “Structural reform,” which usually means making it easier to cut wages, is more likely to destroy jobs than create them.

This is neither wild-eyed nor radical, despite appearances, Krugman explains. It is rather what both mainstream economic anaylsis says will happen, and what history tells us. Not that either history nor economics has swayed the Very Serious People who have influenced our policy makers. Since 2008, we've had economic policy that relies on gut feeling rather than good and careful economic analysis, Krugman writes. And Congress's insistence on cutting spending has wreaked havoc on jobs and infrastructure. Europe, meanwhile, is "flirting with outright deflation."

Thanks to the Fed, the U.S. is in marginally better shape than Europe, with a dropping unemployment rate, and the Fed is expected to raise interest rates next year.  "But inflation is low, wages are weak, and the Fed seems to realize that raising rates too soon would be disastrous," Krugman writes. We are far from being out of the woods, and the country just elected leaders who really don't get it. Will they read Krugman? He concludes:

The counterintuitive realities of economic policy at the zero lower bound are likely to remain relevant for a long time to come, which makes it crucial that influential people understand those realities. Unfortunately, too many still don’t; one of the most striking aspects of economic debate in recent years has been the extent to which those whose economic doctrines have failed the reality test refuse to admit error, let alone learn from it. The intellectual leaders of the new majority in Congress still insist that we’re living in an Ayn Rand novel; German officials still insist that the problem is that debtors haven’t suffered enough.

Not a lot of reason for optimism.

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