Paul Krugman has just declared the onset of another Great Depression. To him a Depression is characterized by a long-term deflationary trap, but that’s not the reason Depressions are to be avoided. Depressions are bad because of long-term unemployment, which tears at people’s lives and at the fabric of society. So far, I’m with him. After all, to the best of my knowledge, I’m the first one to have used “Great Depression II” in print, back in autumn of 2007, when the stock market hit its all-time high and RedState readers responded by beating me up for bashing the Bush economic record.

Krugman claims the paternity of the New Depression in the name of the Keynesians. He says that it’s been triggered by the policy errors of the Europeans, who refuse to extend fiscal stimulus, and of the Republicans, who refuse to allow Congress to funnel more money to state and local governments. He’s going to be eating out on this for the rest of his life, because the long-term economic weakness facing us is the real thing, and his statement that we caused it by not stimulating enough will never be falsifiable. (When the crisis started, he was still insisting that only WW2 created enough government borrowing and spending to end the Great Depression.)

Does Krugman honestly believe that demand by state and local governments is enough to end the deflationary pressure caused by shredded balance sheets in the wake of the ongoing housing bubble? State and local governments do not invest or create value efficiently. The only thing that will realistically happen if we pump up their finances is that they’ll continue to pay public employees enormously high salaries and benefits. This won’t create the demand that Krugman wants, because the public employees who won’t need to be fired by Arnold Schwarzenegger and David Paterson will step up their saving rather than their spending. However, that’s really not bad at all, because balance sheet repair among banks and individuals is the real medicine that will end this prolonged economic weakness.

But if we really think the solution is to transfer cash balances from bond-market investors to private individuals, then why do it as Krugman demands, by feeding money from the Federal government to state and local governments? That would unfairly benefit public employees much more than private employees. Wouldn’t it be more equitable, not to mention effective, to just give everyone in the country a two-year income and payroll tax holiday, and pay for it with expanded deficits?

(I can hear Krugman now. He’s saying that the states and localities won’t just use their booty to avoid firing unaffordable, surplus workers whose value to governments comes primarily from their political activism. He’ll say that the states and localities will suddenly go off on a tear of infrastructure construction. To that, two responses: First: have you ever seen political officials try to create economic value? It takes a lot of blind faith to suggest that this is a good idea. And second: Japan actually did this. Didn’t help them in the slightest.)

And yet: what of those bond markets? Krugman (and Geithner, for that matter) is entirely willing to run the risk of a future credit crash by the US. Looked at from a market perspective, the question boils down to this: if we expand public borrowing to levels beyond all imagining, then are we *guaranteed* to have an economy that’s productive and dynamic enough to pay the real interest on the borrowing and to keep rolling it, for the next T+30 years?

The answer to that question depends on two things: First: can we grow enough in real terms to outpace the borrowing? (Keynesians say Yes, Axiomatically, because the spending itself is an investment. Anyone with direct business experience will be deeply skeptical of that.)

And second: will interest rates remain as low as they are now, to ensure that our borrowings remain affordable? To this, Krugman says Yes, Definitely, because rates are low now, and there’s no evidence investors will change their minds. Anyone with direct capital-markets experience is shaking his head at the deep delusion from which this argument is woven.

Beyond this, there’s a third point: America and the other developed economies are aging. This point is usually extended to become the idea of structural entitlement growth (which certain Republicans are deeply deluded to think we can mitigate). But more directly, aging means reduced productivity on the part of many workers. This alone is enough to make me suspicious of the argument that we can fund enough growth with borrowed money to get out of trouble.

It’s just not wise to borrow more than you can realistically hope to pay back. At the macro level, this means a certain amount of austerity. Let’s call it a Depression if we must, but let’s recognize how potentially dangerous it is to try to prevent it by maxing out our credit cards.

I’m in favor of continuing to use transfer payments to mitigate the horrible evil of long-term unemployment. But I think it’s frankly stupid to try to create a robust economy on debt-fueled public spending.

This post first appeared at The New Ledger. Follow me on Twitter.