Bad Ideas -- even for Paul Krugman

In his latest column in the New York Times, Paul Krugman is promoting ideas to cut unemployment. First, of course, he laments that "fact" that no one cares about the unemployed and reducing their numbers. He points out the the Obama administration is doing nothing to cut unemployment. He then dismisses Republican calls to lower taxes and regulation to spur the economy as just meaningless "rituals". Of course, this is Krugman talk for saying that he disagrees with them. Then we get to the point of the piece. Here are Krugman's ideas for lowering unemployment:

"[W]e could have W.P.A.-type programs putting the unemployed to work doing useful things like repairing roads — which would also, by raising incomes, make it easier for households to pay down debt. We could have a serious program of mortgage modification, reducing the debts of troubled homeowners. We could try to get inflation back up to the 4 percent rate that prevailed during Ronald Reagan’s second term, which would help to reduce the real burden of debt."

Let's look at these three ideas. First, he wants to expand government employment dramatically with those shovel ready projects that were supposed to be part of the Stimulus package. Of course, we found with the Stimulus that there just were not enough of these projects to make much difference. In other words, the plan sounds nice, but it does not and cannot work. Second, Krugman wants those who could not pay for their mortgages to be forgiven much of their debt. This would cause hundreds billions of dollars of losses to the banking industry and it would reward many who borrowed over their heads to acquire homes that they could not afford. Oh, and it would not create even one job. So, Krugman's plan would further damage the already shaky banking system without helping lower unemployment, the purported reason for the plan. Third, Krugman wants to ramp up inflation further in order to help people pay off their debts. Inflation is an insidious destroyer of prosperity for many, particularly those who live on fixed incomes. So those retired elderly folks who live off of social security and their pensions would see their real incomes decline. So would those who own bonds or real estate. In other words, a big chunk of the populace would have lower real incomes and would spend less, thereby reducing economic activity. Further, those who work would also see their real purchasing power reduced. A salary of $50,000 per year would be worth only $48,000 if there were 4% inflation as Krugman wants. Nevertheless, since there is such high unemployment, the likelihood that raises would keep up with inflation is low, so these employed folks would also cut their expenditures and further decrease economic activity. The end result is likely higher unemployment, not the creation of more jobs.

Of course, unlike Krugman, I never won the Nobel Prize for economics. Nevertheless, I do know a ridiculous scheme when I see one. Krugman should be ashamed to have proposed such nonsense and the New York Times should know better than to put it out there into the public discourse.