Paul Krugman: Super Committee Failure is a Good Thing

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Paul Krugman says we need to leave Social Security and Medicare alone, raise taxes on the wealthiest Americans, and get over our fear of government spending—which is why he's happy that the deficit reduction super committee didn't make a deal.

Welcome to Politics Bites, where every afternoon at It's A Free Country, we bring you the unmissable quotes from the morning's political conversations on WNYC. Today on the Brian Lehrer Show, Paul Krugman reviewed the failure of the Super Committee to reach a deal, the ongoing crisis in Europe and the future of the euro, and more from the world of politics and economics.

Celebrating the super committee's demise

Most Americans lamented the collapse of the congressional deficit reduction super committee, which failed to agree on $1.2 trillion in savings and/or revenue. But Paul Krugman cheered, saying "Failure is Good". Better to have no deal than one that that compromise may have wrought.

It almost certainly would have led to spending cuts way too soon...It would have been a deal basically between right-wing Democrats and very right-wing Republicans. Any deal that might have come out would have been more about dismantling Social Security and Medicare than really about dealing with long-run deficits.

Raise taxes—why not?

Baffling to Krugman, however, is that certain policies most popular with American voters are DOA on Capitol Hill. No changes to Social Security and Medicare, higher taxes for the wealthiest Americans—these options poll high with the public, but many inside the beltway don't consider them sensible.

And why not? Krugman asks.

Why exactly is it unreasonable to think higher taxes should play some role in our budget solution? One trillion dollars [in higher tax revenue] over ten years is not all that much money relative to the size of the U.S. economy. High-income people have done incredibly well these past few decades; why shouldn't they bear some of the burden of balancing the budget?

An insurance company with an army

For those who would rather shrink entitlements than raise revenue, Krugman prescribes a closer look at what the U.S. government is and what it does. He characterizes it as "an insurance company with an army."

It spends on Social Security, Medicare, Medicaid, and defense. So if you say, 'Cut government spending,' you're talking about dismantling Social Security or Medicare...It's a really scary thing that so much of our political system has now resurrected ideas that were proved wrong 75 years ago and thinks they represent great wisdom.

Krugman: myth that government can't create jobs

According to Krugman, the big idea proven wrong 75 years ago was this: government spending can't create jobs. The opposite is true, Krugman argues, pointing to the New Deal programs and infrastructure investments of the Depression era, and an economic recovery that was founded on higher taxes and greater spending.

But if this remedy is so obvious, then why is the "spending ≠ jobs" formula back in vogue among voters and politicians? Krugman says it's about what people see as the political consequences of admitting that the government can do anything good.

Even though evidence is overwhelming that in times when the economy is depressed government can in fact create jobs, there's always been a side that cannot accept that. Because if you accept that, then you believe that maybe government can do good there, and maybe it can do good in other places as well, and therefore maybe actually taxing rich people and using some of that money for social purposes is a good idea.

Reading the euro zone tea leaves

The euro zone disaster may undermine Krugman's argument at home. Generally perceived by Americans as a collection of nations with high taxes and high levels of social spending, that the euro zone seems on the verge of collapse gives new ammunition to those who favor austerity.

Krugman says that's the wrong way to look at the crisis. He holds up Sweden as an example: they have a famously lavish social safety net, and yet the interest rate on Swedish bonds remains at 1.6 percent. The economy isn't crumbling, interest rates aren't spiking like they have in Italy and Greece, and the government isn't having the same kind of trouble selling its bonds that Germany just started to have. The difference? Sweden has its own currency.

If you look at who's in trouble, it's not at all correlated with who has big welfare states, and very strongly correlated either with being part of the euro zone or having unrealistic, hard line austerity-driven leadership.