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Liberal Wrongheadness on Greece

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In his column yesterday, New York Times columnist Paul Krugman demonstrates how wrong-headed liberal thinking on economics can be.

Pointing to the fiscal problems being experienced by Greece, Krugman correctly points to the core of the problem: excessive spending and borrowing by the Greek government. Although he doesn’t point out that all that spending and debt is to pay for the ever-growing expenditures of Greece’s welfare state, at least he recognizes that a government can spend and borrow too much. Indeed, he even recognizes that the situation can become so dire that investors don’t want to invest anymore in a government’s bonds because they fear a default, which is precisely what is now happening in Greece.

But then Krugman goes awry, finding another culprit to blame for Greece’s debacle: deflation or even “excessively low inflation.”

What he’s alluding to is that because Greece doesn’t have control over its money supply, the Greek government cannot do what the U.S. government and other governments do to pay off excessive debt — simply print the money and paying off creditors in debased dollars.

Krugman says that one possible solution to Greece’s problems is to slash spending and raise taxes. But of course slashing spending would involve major reductions in welfare benefits for the Greek citizenry, who are, by the way, protesting against any reductions in their dole. They take the same position as American dole-recipients: that they have a right to their dole, come hell or high water, even if the government doesn’t have the money to continue paying them their dole. As Krugman observes, raising taxes will put more businesses out of business, raising unemployment and thereby aggravating the overall problem.

Krugman suggests that another possible solution is to have other European countries guarantee Greece’s bonds. But as he suggests, German taxpayers are not excited about having their money taken from them so that Greek taxpayers can continue receiving their “free” welfare-state dole.

So, the obvious solution to his quandary, one that the U.S. government’s Federal Reserve has long used, is simply to crank up the printing presses and pay off all that debt in depreciated, debased currency.

But there’s one big problem, one that Krugman deeply laments: Since Greece is part of the Euro zone, it doesn’t have the power to crank up the printing presses without the approval of the other EU countries, which are not likely to want to debase the Euro for the sake of saving the welfare-state dole for Greek citizens.

That leaves Greece with the option of withdrawing from the Euro zone and resorting to its own monetary system. But as Krugman points out, that might not be successful given that would likely be a rush of people to get their money out of the banks, along with a refusal by investors to buy bonds issued in the new currency.

Needless to say, Krugman deeply laments the inability of the Greek government to inflate itself out of the crisis. Never mind that paying off creditors in debased currency constitutes an intentional default. That doesn’t seem to bother Krugman one whit. All that matters, obviously, is that the Greek welfare state be saved from collapse.

Unfortunately, by not surprisingly, Krugman draws the wrong lesson for America from this Greek tragedy. He says that while the U.S. government needs to be “fiscally responsible,” it should also “steer clear of deflation, or even excessively low inflation.”

In the final analysis, Krugman gets it wrong. What has collapsed in Greece is the welfare state, and hanging onto this anchor is what is sending Greece to the bottom of the ocean.

Americans need to take what has happened in Greece as a warning: Get off the dole-road before it’s too late. Dismantle and repeal (that is, don’t reform or reduce) all welfare (and warfare) programs and departments, along with the taxes that support them.

Moreover, don’t do what the Federal Reserve has done for decades — that is, don’t inflate. In fact, abolish the Fed, America’s engine of inflation, and restore sound money to America.

This post was written by:

Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was born and raised in Laredo, Texas, and received his B.A. in economics from Virginia Military Institute and his law degree from the University of Texas. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education. He has advanced freedom and free markets on talk-radio stations all across the country as well as on Fox News’ Neil Cavuto and Greta van Susteren shows and he appeared as a regular commentator on Judge Andrew Napolitano’s show Freedom Watch. View these interviews at LewRockwell.com and from Full Context. Send him email.