Talking about “war” (again)

From Krugman:

The big rise in prices during and after WWII arguably did a lot to eliminate the debt overhang, making it possible for the economy to enter a sustained, non-inflationary boom. And this is the relevant history we should be looking at: this isn’t your father’s slump, it’s your grandfather’s slump. Volcker, I’m sorry to say, is worrying about refighting the 1970s when we’re actually refighting the 1930s. And fighting the wrong war is a good way to lose the one we’re in.

And he shows a version of this graph.

But let´s generalize a bit. Krugman also says that the government has to spend more, but in his showcase period government consumption relative to NGDP plummeted!

Yes, all the dis and re locations immediately after the war were responsible for the big drop in RGDP. But note, NGDP (spending) kept its “head above water”, facilitating the adjustments, quite the opposite of the present experience (or should I say “war”), where spending goes for a “deep water dive”!

So let´s stop talking about inflation before Paul Volker has a heart attack and focus on targeting spending!

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