“We are not a household. We are an economy. Your spending is my income, and my spending is your income.”
With this comment, Paul Krugman, a Nobel Laureate in Economics, firmly demolished the analogy raised by the Tory MP, Andrea Leadsom, that an economy is like a household. Mr Krugman went on to explain the problems caused by the lack of demand that plague Western economies today. This exchange, which appeared on Newsnight in May 2012, left many observers in awe, as Krugman firmly refuted the claims of Ms Leadsom and the private equity mogul, John Moulton, that the devastating economic crisis has been caused by purely structural problems and thus requires painful long-term solutions. Those scratching their heads at the possibility of a quick and painless recovery need only to delve into Mr Krugman’s latest book, End This Depression Now! to find not only the components of such a recovery, but a viable alternative to the self-destructive, ‘belt-tightening’, fiscal-austerity policies that are currently in place.
Mr Krugman devotes the bulk of his clear, forthright book to a discussion of the core economic concepts embedded at the heart of the new-Keynesian school of thought, and analysis of the abandonment of conventional wisdom that resulted in the current crisis (that government intervention and investment in the depressed economy can resolve the lack of demand and thus, reduce unemployment and spur growth). He successfully adapts tales such as that of the ‘baby-sitting co-op’ (first told in a 1977 article in the Journal of Money, Credit and Banking, written by Joan and Richard Sweeney), and the concept of the ‘paradox of thrift’ to accentuate the necessity of government spending to create demand in a depressed economy. Application of the lessons of the past would resolve the depression we are facing, quickly and painlessly. “This doesn’t have to be happening”, Mr Krugman says.
Unfortunately, those who are in position to act decisively have chosen to ignore the lessons of the past and the repeated warnings against slashing government spending of academics such as Joseph Stiglitz, Christina Romer and Mr Krugman, himself. Even President Obama, who upon assuming the Presidency in January 2009 proclaimed the need for government stimulus as vital for economic recovery, shifted the focus towards reducing the budget deficit, in the wake of growing cross-party pressure. The preachers of balanced budgets, deficit slashing and belt-tightening have gained momentum and subsequently, an audience (no doubt partially due to their numerous connections with Wall Street in New York and The City in London). These are the infamous ‘Austerians’, who appear to view economics as a morality play, suggesting that those who are overwhelmed with sinful debt must now face a prolonged period of harsh austerity. While the United States assumes his central focus, Mr Krugman also immerses himself in the economic situation of others, such as the Eurozone nations, with particular disdain for the austerity enforced by the German and British governments, and the European Union. Mr Krugman not only refutes the arguments presented by Austerians, namely that the state must drastically rein in spending in order to increase the confidence of private investors (Krugman likens this myth to the tale of the ‘confidence fairy’), but also emphasises how such views and policies have adverse effects on the economy and society as a whole.
It doesn’t need to be this way, however. Mr Krugman argues that the solution to this crisis that has caused the superpower economy to grind to a halt is relatively simple. Given private investors’ desire to cut costs and lay off employees, the economy is depressed due to lack of demand; therefore the government must intervene to create demand through investment and spending. The crisis, as an economic matter, is not hard to solve; there could be a quick and powerful recovery if only the intellectual clarity and political will to act could be found. The Obama Administration’s stimulus of 2009 fell far short of what was needed; therefore there must be a far more ambitious spending campaign if this depression is to be ended.
Mr Krugman’s proposals for recovery begin with the reversal of austerity measures forced upon local and state governments, in the wake of inadequate stimulus money. A stimulus of $300 billion would allow these governments to employ well over a million people. He argues for new projects and innovation, such as investments in roads, rail upgrades and water systems, reversing the damage done to public programs by austerity. Chairman of the Federal Reserve Ben Bernanke must take a commanding position and target a moderate rate of inflation – 4%. This could be highly beneficial, Mr Krugman argues, for it would loosen the constraints imposed by the fact that interest rates can’t go below zero, which would make borrowing more attractive. Moreover, higher inflation erodes the real value of debt, thus reducing the burden imposed by its excessive overhang on debtors. These are only a few of the numerous proposals that Mr Krugman suggests would pave the way for the US economy to roar back into life, lifting much of the global economy with it.
Somewhat predictably, conservatives pounce upon arguments, such as those given by Mr Krugman, that the state must assume a more active role in the economy. Proposals of a Keynesian dimension are now denounced (in the US at least) as part of a ‘liberal conspiracy’ to expand the reach and size of government. This view however, displays a mixture of ignorance, distortion and vested interest on the part of those who cling to their parties’ failing policies, rather than accept the evidence-based alternatives (exemplified by Ms Leadsom and Mr Moulton’s ‘small state’, conservative rhetoric in the Newsnight debate mentioned earlier). Readers must acknowledge that there is nothing inherently ‘left-wing’ about Mr Krugman’s proposals (a point which was persuasively made by Samuel Brittan in the FT recently). Despite often being accused as part of this ‘liberal conspiracy’ (an idea which he frequently mocks), Mr Krugman simply argues that the lessons of recovery that policymakers learned in the aftermath of the Great Depression must be applied today. Further refutation of claims that Mr Krugman’s economic arguments are the result of mere ideology comes from his lambasting of the Democratic Party and more specifically, the Obama Administration’s approach to recovery. Given the remarkable clarity of Mr Krugman’s writing and his exceptional ability to transform concepts and statistics that belong in the most intimidating of textbooks, into an engaging story for even non-expert minds, it is made apparent that recovery is not a battle of ideologies – that is, between left and right. It is one between right and wrong.
Many readers may then be asking: if recovery can be attained, why hasn’t it? Why hasn’t more been done? The answer lies in politics. Mr Krugman seems optimistic about what the future holds, however. The Obama Administration’s shift in focus from deficit reduction, to job creation (as noted in the 2012 State of The Union address) and the growing discontent with austerity measures worldwide, are signs for the better. Now, he argues, there must be adequate political will to engage in a sufficient spending campaign that is at the heart of economic revival. Despite the obvious intransigence he faces from Republicans and some Democrats, alike, President Obama must not allow the centre of attention to be altered. Now is not the time for compromise, if failure is the inevitable result. The stakes are too high.