Krugman Again

I'm starting to think my co-worker (and loyal reader) Alexander just likes to link me Krugman articles for the sake of an argument when work is slow. The article in question today was Krugman's Sunday headliner comparing government spending during the "Morning in America" Reagan recovery and today's current recession. Krugman rightly points out that Reagan's government actually increased spending more than Obama's if state and local spending are included.  What Krugman neglects to mention is that the majority of difference comes only AFTER the federal reserve turned on the monetary spigot, increasing NGDP growth to above 12% over the course of a single year.  For comparison sake, here is the government spending graph that Krugman links to followed by NGDP and RGDP growth following both recessions.

Notice that it wasn't until after Volcker allowed for a year and half period of "catch up" in both real and nominal GDP that the divergence in government spending happened. While Krugman is right to lament the loss of teachers and firemen, his proposal of using the federal government to borrow at record low interest rates to alleviate the layoffs is politically unfeasible.

If Krugman were really serious about increasing growth and returning people to work, he should be pushing the Fed for a make up period of NGDP above the long term trend over the next two years.  This would allow the market to determine where the extra money is best spent (and which areas need more workers).  Which in turn will increase employment and tax revenues, allowing state and local governments to rehire the laid off teachers and firemen all while not increasing the federal deficit and reducing overall debt levels.

Yet, in light of Bernanke's full embraceable of opportunistic disinflation, I'm afraid this idea is as big of a pipe dream as Krugman's.