Has Paul Krugman Gone Too Far This Time?

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By James Picerno :

If you're looking for fresh insight into the dysfunctional thinking that impairs policy debates in the U.S., which in turns gums up the machine for doing the right thing on the federal budget in a timely manner, read Paul Krugman's column from late last week. The title says it all: Let's Not Make a Deal.

I'm shocked, frankly, that one of the most influential economists on the macro scene-and a Nobel-prize winner at that-is recommending that the President of the United States put politics over policy at a vulnerable moment with the economy hanging in the balance. Krugman's advice for Obama comes down to this:

So President Obama has to make a decision, almost immediately, about how to deal with continuing Republican obstruction. How far should he go in accommodating the G.O.P.'s demands?

My answer is, not far at all. Mr. Obama should hang tough, declaring himself willing, if necessary, to hold his ground even at the cost of letting his opponents inflict damage on a still-shaky economy. And this is definitely no time to negotiate a "grand bargain" on the budget that snatches defeat from the jaws of victory.

It's no secret that Krugman is, well, shall we say, a Democratic partisan in the extreme. I say "extreme" in the sense that the Princeton professor isn't shy about mixing his political views with his policy recommendations, as his latest column makes clear in no uncertain terms. That's fine, and everyone's entitled to their opinions. But advocating a political strategy that risks throwing the economy into a nasty recession, at a time when we've never really recovered from the 2007-2009 contraction, is ill-advised, to say the least.

Normally, this wouldn't be worth writing about, but these aren't normal times, at least as far as the economy goes. Let's be clear: the risks are substantial. As a new report from the Congressional Budget Office reminds, the fiscal-cliff risk that's fast approaching will dramatically raise the odds of a new recession if the politicians in Washington don't defuse this ticking time bomb. The CBO projects that "the significant tax increases and spending cuts that are due to occur in January will probably cause the economy to fall back into a recession next year…."

Many economists agree. For example, Mark Zandi, chief economist at Moody's Analytics, told CBS News that "if you tote up all of the things that will happen on January 1st -- all the tax increases, all the spending cuts, everything -- it actually totes up to $728 billion in calendar year 2013." If these cuts and tax hikes are allowed to strike in January, "it's very, very likely that we suffer a very deep recession, and I don't think that's the way we want to go here."

Krugman recognizes the risk and that there will be a price to pay if this scenario plays out. As he admits,

I don't mean to minimize the very real economic dangers posed by the so-called fiscal cliff that is looming at the end of this year if the two parties can't reach a deal. Both the Bush-era tax cuts and the Obama administration's payroll tax cut are set to expire, even as automatic spending cuts in defense and elsewhere kick in thanks to the deal struck after the 2011 confrontation over the debt ceiling. And the looming combination of tax increases and spending cuts looks easily large enough to push America back into recession.

Nobody wants to see that happen. Yet it may happen all the same, and Mr. Obama has to be willing to let it happen if necessary.

If necessary? It's hard to imagine a "necessary" rationale for allowing the economy to slide into a new recession, particularly if you had to explain the reasoning face-to-face with the average working man or woman on the street. The reasoning that Krugman offers amounts to an argument for teaching the Republicans in the House a lesson. Sorry, professor, that's not good enough.

We can have a healthy debate about who's to blame for all the gridlock. From my perspective, there's plenty of blame to go around. But the election is over, and it's time to negotiate on behalf of the American public, even if that means giving up cherished political goals of the moment. Recommending more intransigence may play well to a political base, but there's simply too much at stake to let political considerations dominate the days and weeks ahead. And, yes, the same advice goes for the Republicans, who should be willing to bend a little more. News flash to the GOP: Obama was re-elected--act accordingly.

I'm guessing that anyone of modest means, who relies on economic growth for their livelihoods, will agree. Maybe it's me, but it seems that one of the leading voices in the dismal science can do better than recommend politics as usual-before the negations between Republicans and the White House have really started. That's a plan that's dead on arrival. It's also the type of thinking that brought us to the brink in the first place, and staying on this course is sure to push us over the edge. Can't we at least try to imagine another roadmap? If only for our economic survival? Or are we really a nation that's so short-sighted, so caught up in the political debates du jour, that we can't see the forest for the trees? I guess we'll find out soon enough.

It may be naïve on my part to assume that productive negotiations in Washington are possible, but we can still ask-demand-no less. If not now, when? The bottom line: this is a time for leadership, true leadership, as opposed to the flimsy fair-weather notions of leadership that too often are thrown about in political brochures. This much is clear: if Washington fails to avert this crisis, and the economy does sink into a self-inflicted recession, there will be a price to pay, in both economic and political terms. Call me crazy, but it seems that now is the time to promote genuine political compromise. Advocating political warfare, which will fall most heavily on the working poor in terms of the price paid, seems like an incredibly poor choice at this moment.

See also Omega Healthcare: Is The Highest Paying Dividend REIT In The Health Care Sector Sustainable? on seekingalpha.com



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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