Saturday July 28, 2012
Krugman: Spend yourway out of trouble
Review by CHOO LI-HSIAN
Title: End This Depression Now!
Author: Paul Krugman
Publisher: W.W. Norton & Company; 1 edition (April 30, 2012)
KNOWN to be something of a maverick, Paul Krugman is a familiar face and fierce voice in economic circles. He is the recipient of the 2008 Nobel Prize in Economics. He is also a best-selling author, columnist, blogger for the New York Times and a professor of economics and international affairs at Princeton University.
Krugman's latest book End This Depression Now! notes that the Great Recession is more than four years old and counting, with “nations rich in resources, talent, and knowledge in a state of intense pain.” While the Obama government did try at the beginning to jump-start the economy through stimulus spending, it has now replaced this approach with austerity measures that do not appear to be working. This new “austerian” approach called for by “Very Serious People” has “completely thrown away Keynes' central dictum: The boom, not the slump, is the time for austerity.”
Krugman highlights that Obama's original stimulus effort was not misplaced. It was just too small to make a real difference and, since then, the US government has been moving in the wrong direction.
Krugman's latest outing is a little different. He tries to plot a path out of this depression instead of merely providing a post mortem on the 2008 collapse as many other books have done. Dedicated to “the unemployed who deserved better”, Krugman attempts to highlight to a mass readership that Americans (and also the rest of the struggling world) need not be helpless before the forces of the market and that millions need not be doomed to lengthy, soul-destroying periods of unemployment.
He points out that our 100-year old legacy of macroeconomics knowledge can provide the tools to tackle the problem, but national leaders need the “intellectual clarity and political will” to do so. Krugman argues that government stimulus strongly advocated by Keynesian economics has helped countries out of a much worse depression in the 1930s and that today's leaders should apply these prescriptions to current problems.
His underlying message: The US government needs to stimulate the economy back into action until its consumers can get back on their feet to take over for themselves. He shows us that this is precisely what happened in the United States during World War II when the government's military spending served to stimulate the economy, subsequently saving it from the grips of the Great Depression.
However, Krugman's critics are troubled by how a further stimulus would affect the growing US deficit. They reason that further government spending at this point may well render the already enormous debt completely unmanageable, if not force the government into insolvency (a threat that is currently being faced by several countries in the European Union). Krugman's detractors also maintain that pumping more money into the economy at this time only threatens to drive up inflation to dangerous levels, perhaps even triggering a hyperinflationary spiral.
Krugman rationalises that borrowing now is actually good economic policy because interest rates are so low, leaving conservatives to wonder when exactly Keynesians like Krugman plan to address the federal government's mounting debt. Krugman's response is that “we're in a situation now where the interest rate is zero, which means any austerity policies any cutbacks in spending just lead to unemployment. They actually do very little to reduce the budget deficit. They probably make the long-run fiscal position worse. Once the economy is recovered enough, then you'll find me turned into a fiscal hawk, but not now.”
Krugman upholds that though government debt does pose a concern, America's debt is actually not that dangerous by historical standards. In addition, since America has its own currency (unlike the countries of the European Union), it is able to print money to turn over its debt, thus preventing the possibility of bankruptcy. He also insists that inflation simply cannot get off the ground in a depressed economy. He asserts that if and when it is triggered in an upturn, the government can still reverse its policy to keep this firmly in check. He talks about how getting some inflation into the system could actually be beneficial. While deflation exacerbates the debt problem, inflation can do the opposite and can price workers back into jobs as the real value of their wages is reduced in comparison to competitors.
Though Krugman shows us that the solution to our current depression is simple macroeconomics, he also concedes that politics is never simple. However, through a series of well-reasoned views and outspoken recommendations, he firmly refutes the many fallacies that have dominated the political debate on macroeconomic policies: that policies must address long-term goals rather than short-run concerns; that unemployment has a structural component that demand-management policies do not address; that any government stimulus to influence demand will be offset by private sector action; that the crisis was caused by government interference in markets and the operations of US mortgage giants Fannie Mae and Freddie Mac; that national economies should be fearful of “bond vigilantes” and that the main criterion for policy action should be whether it restores business confidence.
While his focus is principally on his home country, there is also a very insightful section towards the end that talks about the current financial catastrophes in Europe and the unfortunate role a common currency has played.
The best thing about Krugman's writing is its readability and ability to make complicated, number-centric matters understandable to even the most macroeconomic-phobic reader. I think even laymen readers will be surprised at how much they will enjoy this educational read that provides a healthy mix of economics and politics.
Krugman does put forth the best argument in favour of the stimulus approach. You can sense Krugman's deep frustration and sheer exasperation with the system surfacing between the lines. However, whether his arguments are strong enough to assuage the fears over the negative consequences that additional stimulus could provoke remains to be seen. Nevertheless, this timely book that is an appeal to an informed public (instead of a misguided economic elite) deserves the wide readership that it has amassed and will certainly continue to garner.