Why Krugman should NOT be the US Treasury Secretary

There was an article in the Guardian over the weekend endorsing Paul Krugman to become the next US Treasury Secretary. Apparently the initiative came from actor Danny Glover who started a petition online. 

Here are a few central points in favour of prof. Krugman's candidacy: 

"Krugman would be tough to oppose on any substantive grounds. He has a Nobel Prize in economics (also the John Bates Clark award for best economist under 40). The New York Times columnist is probably the best-known living economist in the United States, and perhaps the world."

What credentials! If only the author has explained which are these substantive grounds? Liquidity-trap economics I presume? 

He continues:

"Krugman has been right about the major problems facing our economy, where many other economists and much of the business press have been wrong. A few examples: he wrote about the housing bubble before it collapsed and caused the Great Recession..." (continued below) 

So have Shiller, Roubini, Schiff and many others, and much earlier and more precise than Krugman. Most of these are respectful economists (not Nobel Prize winning but still very good at their fields), while Schiff is an investment broker. Does this mean we should consider them for the position as well? No. 

As for Krugman's prediction on the housing bubble, here's what he actually said back then (2002):

"The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."

I can hear similar arguments now, except that today the government needs to create some sort of a spending boom to offset the lack of private sector investments. Let’s hope this doesn't cause the same effect as the previous recovery did.

Of course he doesn't admit he was wrong but claims the sentence was taken out of context; "I was talking about the limits to the Fed’s powers, saying that the only way Greenspan could achieve recovery would be if he were able to create a new bubble, which is NOT the same thing as saying that this was a good idea."

Read the text and judge for yourself. He was right btw; a housing bubble did, after all, lead to a recovery. Up until 2007 that is. 

Going back to the endorsement: 

"...he has forecast and explained that large budget deficits and trillions of dollars of "quantitative easing" (money creation) would not cause inflation or long-term interest rates to rise; and that the "confidence fairies" would not reward governments that pursued austerity in the face of recession."

Not yet they didn't. Primarily because the economy hasn't fully recovered. Of course inflation and long-term interest rates would stay low in an uncertain environment and stagnant growth in the West, where investors are looking for safe havens like US, UK or German bonds, but this doesn't mean the same situation will persist after the World starts recovering more strongly. As for inflation expectations, sure they are low now and for the next couple of years primarily thanks to the signals sent by the Fed, but we are still waiting to see how the Fed-induced monetary "bomb" will affect us in the next boom years (there's still a lot of time before it happens, so we're safe for now). 

As for the confidence fairies not rewarding tax increases and postponement of structural reforms which only further increased uncertainty (think of European and UK austerity or the US fiscal cliff), gee I wonder why?

"Most importantly, Krugman is on the side of the majority of Americans. He has written extensively in favor of policies that favor job creation, explained the folly of budget cutting in the face of a weak economy, and opposes cuts to social security and Medicare benefits."

Majority? I doubt it that the majority of Americans have any idea whether or not budget cutting is good or bad in a weak economy. As for the cuts to entitlements the country is split in half in a debate over should the US create a European-style welfare state. I would be very careful in claiming that the majority of Americans are in favour of this. If the author of the text in the Guardian and his group of friends support this, it doesn't mean that the majority of Americans does.

"Krugman has written extensively about the stupidity of the last few years of economic policy in Europe, which has been a major drag on the whole world economy. The treasury secretary would have only limited influence on Europe through the IMF, but in developing countries the US treasury department pretty much is the IMF."

Wow! I was not aware of such an important role of the US Treasury in international economics and politics. Does this mean that countries like Hungary for example now have an alternative to a stand-by arrangement with the IMF?

It's true that Krugman was opposing the "stupidity" of Europe's economic policies, but from the wrong ground I'm afraid. He opposed welfare state and entitlement reforms but was strongly in favour of large stimulus spending to "end this depression, now". This type of reasoning closely resembles the policies of Gordon Brown from 2008 to 2010, which were the crucial reason behind the UK's enormous budget deficit, unsustainable public finances, and kick-the-can-down-the-road policies aimed to close that deficit. 

However, I'm sure that Krugman would support taxing of the rich as one favourable way to close the budget deficit (if we have to do it, even though he thinks the US doesn't have a structural deficit problem at all *-see end of text). As a matter of fact, isn't this exactly the deal reached in the fiscal cliff negotiations? Higher marginal tax rates for the richest Americans, no tax reform, no entitlement reform. Krugman's only objection was that Obama has left the Republicans some leverage to repeat the same scenario in a month from now when they start the talks on the entitlement reform and the debt ceiling. He would have had none of it. 

Aside his academic brilliance that has earned him a Nobel Prize, having strong biased positions like these and the fact that some people think he makes a few good points every now and then on his blog, aren’t the credentials necessary for a US Treasury Secretary, who has to take responsibility for his actions. If Krugman was the Treasury Secretary in 2002, would he have supported Greenspan in initiating the housing bubble or would he have opposed it? These are the decisions a Treasury Secretary has to cope with every single day. 

Finally, can I make a suggestion for the US Treasury Secretary, since we're apparently allowing anyone to make important nominations? I nominate Ron Paul. He served his last day in Congress the other day so he's available. There Danny Glover, organize another petition for that. Or, instead, you should stick to what you do best. If "best" really is the most formidable word...

* He blames it all on a depressed economy - there is some truth here if you look at the short-run slump of the deficit caused by the crisis (see his graph below), but the long-run sustainability of the public finances implies that the US has to choose between dropping the welfare state idea, or supporting it by introducing a VAT, thus increasing substantially the size of its government. All this depends basically on the preferences of the population. It will be interesting to see the development of these preferences over the next few decades.

Source: Krugman blog: On the Economics and Politics of Deficits, Dec 29th 2012

UPDATE: Krugman is flattered by the candidacy but he respectfully refuses. He wishes to remain "the outside man" and criticize government policies from a safe distance that we all enjoy. Cheers Paul!