Kudlow, Forbes Debunk Krugman's 'Third Depression' Call

June 29th, 2010 10:10 AM

It's hard to imagine an economist being provocative, but Paul Krugman, a Nobel Prize winner, has managed to do so.

In his June 28 New York Times op-ed, Krugman argued that since governments around the world aren't willing to double-down on Keynesian policies meant to stimulate the global economy, the United States and the rest of the world are facing a third depression. But on CNBC's June 28 "The Kudlow Report," host Larry Kudlow asked if Krugman's premise were true, how come none of the measures being applied, which Krugman advocates more of, have failed to have any effect on the current economy.

"Steve Forbes, I want to focus this, coming out of G-20," Kudlow said. "Paul Krugman's remarkable op-ed today in The New York Times - he says, we are already in the early stages of a depression. He calls it the third depression in U.S. history. He says that it's primarily a failure of policy. But, Steve, the so-called spending cuts or tax increases or deficit reduction hasn't happened yet. In the last two years, we've had gargantuan spending and ultra-easy money which is what Professor Krugman has been advocating the whole time. And he still thinks we're in a depression. So I need to ask you, maybe his policies are what threaten the depression."

Forbes magazine CEO Steve Forbes argued the pro-growth approach was the proper means - a stronger dollar and low tax rates. 

"Well, it's like the old physicians who continue to bleed the patient and wonder why the patient isn't getting better and then bleeds the patient even more," Forbes explained. "What we should be doing, yes, we should be cutting back spending because it takes money from productive citizens. But as you know, Larry, two other things have to be done, reducing tax rates or at least not increasing tax rates and stabilizing the dollar. So people can trust it again. Sound money, low tax rates, that's the cure."

However, Dean Baker, a liberal economist and the co-director of the Center for Economic and Policy Research in Washington, D.C. argued the U.S. dollar was strong enough, because as investors flee from other currencies, they are seeking safety in the U.S. dollar and treasuries. But against gold, as Forbes pointed out, the U.S. dollar has taken a dive.

"Well, Steve must have not been following things very closely because people have a lot of faith in the dollar," Baker said. "That's why it's been rising so much."

"Not against gold, which is the best barometer of the dollar," Forbes fired back.

Nonetheless, Baker continued to make Krugman's case - that this was analogous to a forest fire with only a few buckets of water to put it out, which aren't working meaning there was a need for more so-called medicine from the government.

"That's fine, every other currency in the world," Baker said. "Interest rates are at near-record lows, so that's not keeping people from investing. Low tax rates - well, tax rates were higher back in the 90s when the economy was growing at a record pace. So none of that really fits. Krugman's on the mark here. And the point here is that it's sort of like if we had a big forest fire and we got a few buckets and you go ‘hey that didn't put it out.' Well, water's not going to work. I mean we lost over a trillion dollars a year in annual demand. We tried to replace it with the stimulus that it came to from the federal sector about $300 billion a year, you subtract out the cuts at the state and local level, that's $150 billion a year. Where I come from $150 billion isn't going to make a loss of a trillion. That's simple arithmetic."