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Backing Demand – Paul Krugman’s Cure for Depression

June 26, 2012 Leave a comment

Much of the developed world is in shell-shock since the ‘recession’ started in 2007/8. Job insecurity in most of the private sector is pervasive, public sector salaries and services are being cut and fear is a dominant emotion for millions of people. Consumer confidence in the US and the EU is as low as at any point since the 1930s, people who are lucky enough to have savings are scared to spend and unemployment (in the US and much of Europe) is at socially destructive and ultimately unsustainable level. Austerity, (in the hope, and from the evidence provided in Professor’s Paul Krugman’s in ‘End This Depression Now!’, it is a vain hope), is the proposed solution-de-jour and yet the jobless remain without prospects and cutting is only making things worse by reducing demand.

Which brings us to Paul Krugman. This book could easily have the alternative title of ‘The Loneliness of a Keynesian Nobel Laureate’. Anyone who has seen Krugman debate will vouch for his ability to speak clearly, cogently and not without humour; his New York Times blog and
writings on Depression economics make him an essential resource for anyone interested in bold, strategic economic thinking and his counter-views on austerity mean that he is required viewing and listening in these days of financial and concomitant emotional turmoil. The Princeton Professor is a formidable intellectual advocate for ‘Plan B’ and it’s a Plan that he sasy should be shovel-ready; ‘In the Great Depression leaders had an excuse: nobody really understood what was happening or how to fix it. Today’s leaders don’t have that excuse. We have both the knowledge and the tools to end this suffering.’ Yet, he is swimming against the tide.

As Krugman and ‘West Wing’ writers like to say, here’s the thing. In policy terms, it is ‘childish’, counter-productive and just plain wrong to treat the debt of nations as a moral issue. Nations can live with debt as long as there’s growth but austerity depresses meaningful growth. There’s a solution to this and yet from the evidence presented by Krugman (evidence, not opinion), inflation and stimulus spending is not just a possible fix for the West’s economic cataclysm, but the primary and most effective one. Blaming States for their perceived moral failures is pointless; it won’t help them recover to anything approaching an acceptable level of employment.  Better to see an a national budget as a see-saw where you counter-weigh with spending reductions and increases in a counter-cyclical manner than as akin to a household budget.

‘End This Depression Now!’ simplifies many the complexities of economics for the layperson, although as Krugman adds, there are graphs too. He argues passionately that the US (and the EU, of more shortly), should aim to live with a higher inflation target of 4%; such a level is manageable in terms of preventing an over-reach of this target and made possible through the Fed essentially printing money. This, in turn, would reduce the US debt burden. Krugman’s constant refrain is that you can not cut your way out of recession and says the evidence to the contrary simply doesn’t stack up.

Krugman is not ashamed to call himself a Euro-sceptic, but principally in reference to the way the Euro was set up; he highlights how a currency union without a political or fiscal union is unable to counter shocks and bubbles on the periphery. He decries what he sees as the ECB’s myopia with keeping down inflation (the ECB’s sole objective). While balancing the books in some of the EU is necessary, he does not want medicine that kills the patient and stimulus, growth and employment must be the primary aims for Europe as a whole. While the book doesn’t prescribe country-specific solutions, it does look for macro European fixes and proposes the following: ‘the European Central Bank to stand ready to buy government bonds of Euro nations…3 or 4 percent [inflation] for the euro area as a whole…a very expansionary monetary policy from the ECB plus fiscal stimulus in Germany and a few smaller countries…and (for the ‘deficit countries’) considerable fiscal austerity over time, [my italics]’ – the level of ‘considerable fiscal austerity over time’ is unclear from this passage and could do with at least a footnote in any future paperback edition. However, the most likely interpretation of Krugman’s point is that European-wide austerity will not lead to recovery; balancing budgets is important but hope needs to be restored first and hope means growth and jobs; he is scathing about the ‘draconian’ terms of the Troika ‘Bail-Outs’. He recently stated that the Euro has only a 50/50 chance of surviving; time, for this currency, is of the essence – only Europe can ‘save’ Europe now.

Krugman is particularly insightful when drawing links between Deficit Hawks and the Republican Party. He argues, quite persuasively, that the political Right, as witnessed in Britain and elsewhere, is using deficit reduction to shrink the size, scope and ideal of the State itself. Demand and jobs may not be out there, but hey, if you can slash social security support and drive down wages, you’ll fix the problem. Krugman is a self-confessed Saltwater Liberal (broadly ‘Keynesian’) but he is above all a pragmatist; he wants what will work. ‘Austrian School’ and ‘Freshwater’ (‘Chicago’ School) economists may beg to differ, but are their solutions working on a macro level?

While Obama has tried a stimulus approach, it has, in Krugman’s opinion, been far too little when compared to the size of the US economy; ‘the experience of Obama’s first term suggests that not talking about jobs simply because you don’t think you can pass job-creation legislation doesn’t work even as a political strategy.’ While he wears his Democrat colours proudly, the Nobel laureate sees the next three months employment figures as crucial to who will take the White House; he believes an Obama victory to be the more likely result but can’t discount a Romney win, which he thinks is a potential disaster in the waiting, unless Romney’s cutting preferences can be curtailed.

‘End This Depression Now!’ should be read by every government policy advisor, senior finance official and politicians of all creeds and none. Makes the ‘dismal science’ look considerably less dismal.

‘End This Depression Now!’ Paul Krugman, Norton, pp259, $24.95 USD

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