Krugman vs Obama

The liberal economist who's become Obama's chief critic

Forget the Republicans, the biggest thorn in the President's side is Paul 
Krugman. Stephen Foley reports

Saturday, 4 April 2009

Paul Krugman On the bank bailout: 'The plans are a classic exercise in 
'lemon socialism': taxpayers bear the cost if things go wrong, 
stockholders and executives get the benefits if things go right

EPA

Paul Krugman On the bank bailout: 'The plans are a classic exercise in 
'lemon socialism': taxpayers bear the cost if things go wrong, 
stockholders and executives get the benefits if things go right

     * Photos enlarge

His apocalyptic warnings have sent readers flocking to his blog. A viral 
video of a Californian man literally singing his praises is a hit on 
YouTube. Tickets to a lecture he was giving in California last night were 
going for $135 (91). Newsweek magazine just put him on the cover and 
dubbed him the head of "the loyal opposition". Paul Krugman is the man of 
the moment. And Team Obama is rattled.

While the US leader has been entrancing foreign statesmen on a whirlwind 
tour of Europe and trying to craft an era of bipartisanship back home, his 
staunchest opponent has appeared from very close quarters  from the left 
threatening a crisis of confidence that could capsize his infant 
presidency.

The Obama administration has been blindsided by the emergence of Mr 
Krugman  not even a politician, but an economist  as a focus for 
dissidents who believe it is not doing enough to repair the economy.

On both pillars of Mr Obama's economic strategy  the $800bn package to 
stimulate the economy and the $1 trillion bailout for the financial sector 
the bearded Princeton university professor has been the President's most 
coruscating critic.

Mr Krugman has been doing his New York Times column for a decade. He has 
long been a staple on political talk shows and gained new respect last 
year when he won the Nobel prize for economics for his work on 
international trade. But in the past few months, he has tapped into the 
anxiety of a wider audience, which is asking the question of the moment: 
will the Obama recovery plan work?

His answer is no. The economic stimulus Bill was far smaller than required 
to combat soaring job losses, which yesterday passed five million since 
the start of the US recession. Worse, the plan to repair the banking 
system  lending private investors up to $1 trillion to buy toxic mortgage 
assets from the country's ailing banks, in the hope of freeing them up to 
start lending again  is doomed, because it is based on the flawed notion 
that the major US banks are fundamentally sound.

"Why am I so vehement about this?" he asked in a blog post. "Because I'm 
afraid that this will be the administration's only shot  that if the first 
bank plan is an abject failure, it won't have the political capital for a 
second. So it's just horrifying that Obama  and yes, the buck stops there 
has decided to base his financial plan on the fantasy that a bit of 
financial hocus-pocus will turn the clock back to 2006."

Mr Krugman is hardly the only economist arguing the US is making the same 
mistakes as Japan in the 1990s, when it kept dead banks walking, resulting 
in a decade or more of economic stagnation. But he is the de facto 
spokesman for a movement that argues the worst banks  Citigroup, Bank of 
America, et al  should be nationalised and the federal government should 
funnel more borrowed money to the unemployed or into infrastructure 
projects to keep the economy from shrivelling.

Because of all his heavyweight economic credentials, it is not often noted 
that the basis of Mr Krugman's current appeal is an emotional one.

He speaks to that nagging voice inside the millions of liberals swept up 
in the Obama phenomenon. Their hope is a brittle thing at the altitude to 
which it soared last year and his words are little hammers, tapping away 
and threatening to shatter their optimism.

The economist's columns are at their most devastating when they portray 
his own emotional response to the Obama presidency  and invite one from 
the reader, too. "I don't know about you, but I've got a sick feeling in 
the pit of my stomach," he wrote, three weeks after the inauguration, "a 
feeling that America just isn't rising to the greatest economic challenge 
in 70 years."

At the root of the problem is Mr Obama's nave attempt to woo a Republican 
party still dominated by headbanging free marketeers, Mr Krugman often 
suggests. The President "compromised in advance" and is "alarmingly 
willing to settle for half-measures".

Mr Obama first began having to respond to the economist's accusations of 
timidity during the battle over the economic stimulus.

"If Paul Krugman has a good idea in terms of how to spend money 
efficiently and effectively to jumpstart the economy then we are going to 
do it," he said at the time.

The President's increasingly frustrated circle now seems to be publicly 
debating Mr Krugman on a daily basis. Larry Summers, the President's chief 
economic adviser, professed himself surprised and confused by the critique 
of the bank bailout plan. Quotes from critical columns are thrown at Tim 
Geithner, the Treasury Secretary, in every interview he undertakes.

Earlier, Rahm Emanuel, the White House chief of staff, lashed out when Mr 
Krugman damned the compromise deal made with three Republican senators 
that got the stimulus Bill passed. "How many Bills has he passed?" Mr 
Emanuel told a journalist for New Yorker magazine, thumping the table.

Compromise was vital when the Senate still hadn't seated Al Franken, the 
Democrat winner in Minnesota, whose wafer-thin election faces legal 
challenge. "Write a fucking column on how to seat the son of a bitch. I 
would be fascinated with that column. OK?"

Despite his decade in the commentariat, Mr Krugman is not used to the 
ferocity of this debate. The 56-year-old son of Russian immigrants, who 
grew up a shy boy on New York's Long Island, is standing his ground, 
though, and plans to scale back the university teaching in favour of more 
time on the lecture and TV circuit.

So if the Obama administration hopes that Mr Krugman is going to fall 
happily into line when the current emergency subsides, they are likely to 
be disappointed.

The economic lines are being drawn in ways similar to those during the 
early period of the Bill Clinton presidency, when left-wingers argued for 
more government spending to juice recovery from the first Bush recession 
and deficit hawks from the centre (and the Republicans in Congress) urged 
priority for the repayment of the country's huge debt.

Mr Obama is promising aggressive deficit reduction as soon as the US is 
over the worst; Mr Krugman said last weekend that "advanced countries with 
stable governments can run up a lot of debt and be forgiven by markets".

He is set to remain a thorn in the President's side for a full term. Mr 
Krugman himself, though, is wryly modest about it all. In a blog post the 
day before Newsweek hit the stands, he said: "I've long been a believer in 
the magazine cover indicator: when you see a corporate chieftain on the 
cover of a glossy magazine, short the stock.

"There's even empirical evidence supporting the proposition that celebrity 
ruins the performance of previously good chief executives. Presumably, the 
same effect applies to, say, economists. You have been warned."

The thoughts of Paul Krugman

*On the stimulus package: "There's still time to turn this around. But Mr 
Obama has to be stronger looking forward. Otherwise, the verdict on this 
crisis might be that no, we can't." (2009)

*On the bank bailout: "The plans are a classic exercise in 'lemon 
socialism': taxpayers bear the cost if things go wrong, stockholders and 
executives get the benefits if things go right." (2009)

*On the Bush economy: "The problem isn't that people don't understand how 
good things are. It's that they know, from personal experience, that 
things really aren't that good." (2005)

*On fraudulent business practices: "I predict that in the years ahead 
Enron, not September 11th, will come to be seen as the greater turning 
point in U S society." (2002)


http://www.independent.co.uk/news/world/americas/the-liberal-economist-whos-become-obamas-chief-critic-1662253.html