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. 

Similarly, Krugman has 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. 

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, thus setting the stage for higher potential GDP growth as the immediate effect of stimulus fades. 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 would be self- financing in the longer run. 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.     

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.


  • Nice review.

    Krugman’s limitations start with his supply side Keynesian formation. To be fair, on his blog at the NYT he has mentioned declining unionisation as part of the problem. But he has remained nearly silent on the fraud that was and remains at the TDC of the financial crisis.

    If he were to take on the trade deficit and the whipsawing of the global labour supply curve he would have to come out against free trade and or capital mobility. Which is a much larger fight theoretically and practically. So I think he is making a stand where he feels most comfortable and respectable. As most of us do.

  • Great review Andrew, I hate to say this but the following is precisely why I always have problems with Krugman-

    ‘He entirely neglects the much weakened power of labour in the run up to the crisis…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.

    Maybe I am wrong but he systemically misses this point. Also, it is the precariousness of work and that lost household demand in which the totality of the housing crisis should be nailed up to the gates.

    A society of massive inequality loses its middle, and without a middle, we change- from an egg shape to an hourglass shape and then bursts into a pile of sand that most populate the bottom and form the new massive base of a pyramid. And that is precisely where we are heading under the austerity regime.

    How do we get back our egg- and potentially given the austerity vs stimulus debate- we are in a chicken versus the egg argument.

    The solution lay in your point on the environmentally targeted stimulus combined with a massive program on developing an innovation infrastructure to foster the change culture.

    Long run- focused.

  • duncan cameron

    Thanks for the cogent review Andrew. I also enjoyed reviews by Fred Block in Dissent, and Michael Hudson on his blog, reprinted on Counterpunch.
    I was struck by this statement from PMSH at Camp David:“Thanks to strong fundamentals Canada’s economy is performing exceptionally well by international standards.”
    He must not be allowed to get away with this type of statement. The strength of Krugmans book is precisely that he names the condition of the American economy as depression. How would we name the condition of the Canadian economy? Dutch disease? I think we need another way of getting at what is happening.

  • I daresay Mr. Krugman has talked some about more and less effective types of stimulus on his blog. As stated, we might expect him to stick to his own field.

  • Krugman is pushing for a massive increase in government spending and debt. More unproductive government spending and resulting misallocation of resources is what caused the problems and certainly is not the cure.

    Read this:

  • Thanks for this Andrew. How about a similar brief review of Yanis Varoufakis’s “The Global Minotaur”?

  • I think Krugman covers (and agrees with you on) a lot of the points you consider the book neglects in his blog and columns. I expect the reason they’re not in the book is it’s about getting out of the current recession, rather than fixing longer term problems with the economic recovery.

    Just saying…

  • Massive government stimulus tied to a living wage guarantee**… WOULD solve this crisis…

    **IE a fair day”s pay for a fair day’s work…

    **This is the key to middle class and working class revival***

  • Andrew Jackson

    An interesting take on the stimulus debate by Jeffrey Sachs

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