Truthout, January 8, 2013
That headline has all the D.C. insider types rolling their eyes right now, since they know it is absurd to imagine that President Obama would pick Krugman to be Timothy Geithner’s replacement as Treasury Secretary. They aren’t wrong, it is absurd. There is no way on earth that Obama would select Krugman. This fact tells us a great deal about what is wrong with the shape of the economic policy being debated in the nation’s capital.
First of all, let’s get the obvious out of the way. No one can question Krugman’s qualifications for the administration’s top economic policy position. He is a winner of both the John Bates Clark award, which is given out every second year to the best economist under age 40, and the Nobel Prize. He has published hundreds of articles in academic journals, many of them leading to path-breaking innovations in economic theory. Arguing that he lacks the background is just silly.
Some might raise issues about his personality or temperament. While it’s probably true that he can be abrasive, if personality was a critical issue then Larry Summers would be handing out fish parts to penguins in Antarctica rather than a leading contender to be the next chair of the Federal Reserve Board.
The major reason that Krugman is not on anyone’s short list is that he has been right about most of the important issues in economic policy over the last decade. The list where Krugman has been right and the Washington insiders have been wrong is a long one.
It starts with the housing bubble, which Krugman warned of as early as 2002. Krugman correctly recognized both that house prices had grown out of line with their historic trend and that the collapse of the bubble would have a devastating impact on the economy.
In the fall of 2008 when the financial system was freezing up, Krugman called for a takeover and recapitalization of the big banks, rather than a bailout that left them largely intact. Can anyone seriously doubt that the economy would be in much better shape today if the Wall Street behemoths had been reorganized and broken up?
He also argued for mortgage write-downs for underwater homeowners both as a matter of fairness to people who had gotten caught up in the irrational exuberance of the housing bubble and also as a mechanism for boosting demand in the economy.
At the time the first stimulus was passed in early 2009, Krugman correctly warned that it would be inadequate and that its failure to restore full employment was likely to discredit the concept of stimulus in policy circles. He also said that worries about large deficits leading to high interest rates or inflation had no foundation in the context of a seriously depressed economy.
He warned against the austerity being pursued in the eurozone crisis countries and then embraced by the Conservative government in the United Kingdom in the summer of 2010. He correctly predicted that these polices would lead to recessions and higher unemployment.
It is precisely this track record of being right on most of the key policy calls of the last decade that makes Krugman unacceptable as a candidate for Treasury Secretary. To be a serious candidate for this position it is necessary to have been wrong on most or all of these issues.
This should make the public very angry. Apart from what this says about the state of meritocracy in the United States -- we like to think that people advance for being right and get demoted or fired for being wrong -- there is the more important issue of what it says about the course of our economic policy.
If Krugman were Treasury Secretary we could envision a policy that was focused on creating jobs rather than reducing a deficit that exists almost entirely because of the downturn in the economy. We could also envision a policy that sought to tame the bloated financial sector with a speculation tax that would make much of the creative finance on Wall Street unprofitable. And, we would not have to worry that cutting Social Security and Medicare is the top priority for the Obama administration.
But, Krugman is not on the short list for Treasury Secretary. This list has the names of people who are much more acceptable to Wall Street, who, by the way, have been wrong on almost everything important about the economy in the last decade. As a result, we should be very, very afraid.