Krugman: End This Depression Now!
I am an enthusiastic reader of Krugman’s columns and, especially, his economic blog. And I certainly side strongly with him in the intellectual and political struggle against “the Austerians” and “Very Serious People” who are unnecessarily prolonging the Great Recession in America and in Europe.
That said, Krugman’s latest book “End This Recession Now” (Norton, New York, 2012) is not without its flaws.
The core argument of the book is that the US is caught in a liquidity trap, such that ultra low interest rates alone cannot prompt an adequate recovery. As Keynes argued in the 1930s, the only solution in such circumstances is major fiscal stimulus to close the gap between actual and potential output.
Along the way, Krugman convincingly dismisses fears that stimulus would cause higher inflation or increased interest rates, and assails the many mainstream economists who cannot bring themselves to abandon the discredited macro economic orthodoxies of the pre recession period. He also argues that elites, the top 1%, oppose stimulus since it would legitimate a more active government role and weaken the argument that business confidence and business confidence alone is the key to any lasting recovery.
Krugman’s analysis of the causes of the crisis stresses the importance of the housing bubble and the consequent financial crisis followed by the problem of debt deleveraging. He also argues that rising inequality played a role, most notably by helping fuel overconsumption and the growth of debt and by increasing the power of the top 1% to shape economic policy.
To my mind, however, he underplays broader background forces. He entirely neglects the much weakened power of labour in the run up to the crisis and the consequent breaking of the linkage between productivity growth and real wages. Seen from this perspective, the growth of household debt and the housing bubble postponed a crisis which was inherent in the neo liberal model which has dominated for the past thirty years.Â
Similarly, Krugman hasÂ almost nothing to say about the importance of the US trade deficit with the rest of the world, especially developing Asia, and the consequent leakage of demand from the US domestic economy and the downward pressure on working class wages. The recyling of the developing Asia trade surplus to US household debt also helped set the stage for the crisis.Â
For Krugman, the problems with the US economy have an obvious and purely technical solution on which economists should agree, namely massive fiscal stimulus. But this underplays the need for major structural changes to the neo liberal labour market and globalization model, as emphasized in Tom Palley’s recent book.
It is also disappointing that Krugman has rather little to say about what a stimulus program should look like. Unlike Stiglitz, he does not stress the importance of public investment as a way to expand demand and “crowd in” private sector investment, thusÂ setting the stage for higher potential GDP growth as the immediate effect of stimulus fades.Â He shows no enthusiasm for environmental investment, and generally just talks about the need for high levels of spending without specifying details. To my mind, the case for stimulus would be more politically effective if proposed spending increases are targetted to specific purposes which promote structural improvements in the economy and environmental and social justice.
Krugman also offers no convincing argument that a short term stimulus wouldÂ be self- financing in the longer run.Â Since he does not consider the case for monetization of deficits, one has to ask if it is really the case that debt financed major spending would stabilize the US debt to GDP ratio given the underlying trade deficit, and given low multipliers for some forms of stimulus such as tax cuts. Again, I think that he is basically right, but he would have been more persuasive if he had put forward a more detailed and focused public investment agenda.Â Â Â Â Â
All that said, this book has many fine chapters, not least a succinct analysis of the European crisis and a spirited attack on economic orthodoxy and the vested interests it serves. Hopefully, it will shift the terms of the policy debate to at least some degree.