{"id":2196,"date":"2012-05-18T15:52:25","date_gmt":"2012-05-18T14:52:25","guid":{"rendered":"http:\/\/www.mmcgrath.co.uk\/?p=2196"},"modified":"2014-06-24T18:00:28","modified_gmt":"2014-06-24T17:00:28","slug":"fridays-words-of-wisdom-end-this-depression-now-by-paul-krugman","status":"publish","type":"post","link":"http:\/\/www.mmcgrath.co.uk\/?p=2196","title":{"rendered":"FRIDAY’S WORDS OF WISDOM: END THIS DEPRESSION NOW! BY PAUL KRUGMAN"},"content":{"rendered":"

\"\"<\/a>I am slightly worried, given the brightly coloured cover of this book and the snappy title (screaming exclamation mark and all), that Paul Krugman’s End This Depression Now!<\/em> (Melrose Road Partners, 2012) is going to end up in the hands of a lot of disappointed people looking for a quick fix for the their mental health problems. In fact, while Krugman does his best to be upbeat and make the case for a set of positive, quick and straightforward policies we can use to solve the current economic crisis, there’s a risk that reading about the shocking, self-interested and deliberately disingenuous decisions that have served to lengthen our current economic woes will only make those who are prone to melancholy feel even gloomier.<\/p>\n

Paul Krugman [obligatory reference to Nobel laureate goes here] is a smart guy. Back in 1999 he published a book called The Return of Depression Economics<\/em> \u2013 it was a book that I read and digested and used to parrot bits (usually without attribution \u2013 hey, I want to look smart too!) at the drop of a hat into conversations that were often only very tangentially concerned with economics. What I discovered, and I\u2019m sure Krugman has experienced this a thousand-fold, is that in the good times no one likes to be warned of the disaster that is around the corner. No one, it turns out, makes passes at Cassandras who predict losses.<\/p>\n

Thirteen years later, and four-and-a-half years into a depression that (if it isn\u2019t quite as deep) is set to last longer than the disaster of the 1930s, one might forgive Krugman if his latest book was just the phrase \u201cI told you so\u201d repeated for 240 pages in a large, sarcastic font. Fortunately, for the reader, End This Depression Now<\/em> manages (mostly) to keep a lid on the triumphalism of an academic justified. Krugman isn\u2019t content to look backwards, instead he tries to offer a practical programme to get us out of the mess were in.<\/p>\n

…it\u2019s extremely important that we take action to promote a real, full recovery. And here\u2019s the thing: we know how to do that, or at least we should<\/em> know how to do that. We are suffering woes that, for all the differences in detail that come with seventy-five years of economic , technological, and social change, are recognizably similar to those of the 1930s. And we know what policy makers should have been doing then, both from the contemporary analysis of Keynes and others and from much subsequent research and analysis. That same analysis tells us what we should be doing in our current predicament.
\nUnfortunately, we\u2019re not using the knowledge we have, because too many people who matter \u2013 politicians, public officials, and the broader class of writers and talkers who define conventional wisdom \u2013 have, for a variety of reasons, chosen to forget the lessons of history and the conclusions of several generations\u2019 worth of economic analysis, replacing that hard won knowledge with ideologically and politically convenient prejudice. (xi)<\/p><\/blockquote>\n

We shouldn\u2019t underestimate how bad things are. Unemployment has risen sharply and it is particularly bad amongst young people and the effects are likely to be long-lasting \u2013 blighting lives long after this depression has ended. Unlike past recessions, economic recovery has been (at best) sluggish. Four years after the economic crash of the 1930s the British economy had already returned to its pre-crash levels of activity \u2013 we\u2019re nowhere near back to 2007 levels today. We risk losing the future:<\/p>\n

Amid all the excuses you hear for not taking action to end this depression, one refrain is repeated constantly by apologists for inaction: we need, they say, to focus on the long run, not the short run… Focusing only on the long run means ignoring the vast suffering the current depression is inflicting, the lives it is ruining irreparably as you read this. But that\u2019s not all. Our short-run problems \u2013 if you can call a slump now in its fifth year \u201cshort run\u201d \u2013 are hurting our long-run prospects too…\u201d (15)<\/p><\/blockquote>\n

Long term unemployment is corrosive, making people unemployable and reducing the economy\u2019s effective workforce. Low business investment creates limits on productive capacity that will cause bottlenecks to slow or stall recovery, when it eventually comes. And \u201causterity\u201d is damaging crucial public services \u2013 cuts to education (America has laid off more than 300,000 teachers) damage future prospects for individuals and the nation, the cancellation of infrastructure projects create more bottlenecks for the future. But all this long-term damage could be reduced by short-term action to solve the problems we face today.<\/p>\n

What makes this disaster so terrible \u2013 what should make you angry<\/em> \u2013 is that none of this need be happening. There has been no plague of locusts, we have not lost our technological know-how; America and Europe should be richer, not poorer, than they were five years ago… We have both the knowledge and the tools to end this suffering<\/em>… These are terrible times, and all the more terrible because it\u2019s all so unnecessary. But don\u2019t give up: we can end this depression, if only we can find the clarity and the will. (20)<\/p><\/blockquote>\n

Krugman stresses that while the scale of the disaster is huge, the causes are relatively straightforward. The problem isn\u2019t with the \u201ceconomic engine\u201d of our economy, it is a problem of \u201corganization and coordination\u201d \u2013 we are in what Keynes called a \u201ccolossal muddle\u201d but one which can be relatively quickly solved, if we want, but many find this hard to accept.<\/p>\n

Partly that\u2019s because it just feels wrong to attribute such devastation to a relatively minor malfunction. Partly too there\u2019s a strong desire to see economics as a morality play, in which bad times are the ineluctable punishment for previous excesses… And the people who… sagely declare that our problems have deep roots and no easy solution, that we all have to adjust to a more austere outlook \u2013 sound wise and realistic even though they are utterly wrong… The sources of our suffering are relatively trivial in the scheme of things, and could be fixed quickly and fairly easily if enough people in positions of power understood the realities. Moreover, for the great majority of people the process of fixing the economy would not<\/em> be painful and involve sacrifices; on the contrary, ending this depression would be a feel-good experience for almost everyone except those who are politically, emotionally and professionally invested in wrongheaded economic doctrines. (23)<\/p><\/blockquote>\n

Unemployment is high and the economy is growing slowly because there isn\u2019t enough demand in the economy \u2013 people and businesses aren\u2019t spending money and low spending means businesses \u201cwon\u2019t produce what they can\u2019t sell, won\u2019t hire workers if they don\u2019t need them for production.\u201d (25) People are driven by the urge to reduce their debt and to build up reserves to protect themselves against the crises \u2013 \u201cthe world\u2019s residents are trying to buy less stuff than they are capable of producing, to spend less than they earn. That\u2019s possible for an individual, but not for the world as a whole. And the result is devastation all round.\u201d (30) Normally, in such circumstances, central banks deal with the problem by printing money \u2013 encouraging the circulation of cash in the economy, increasing liquidity<\/em>, and cutting interest rates <\/em>\u2013 giving people access to cash, boosting spending and getting investment back on track. That hasn\u2019t worked in this crisis. Interest rates are at, or near, zero and can\u2019t be cut further and people and businesses are still unwilling to borrow and unable to spend. We are in a liquidity trap<\/em>: \u201cit\u2019s what happens when zero isn\u2019t low enough, when the Fed has saturated the economy with liquidity to such an extent that there\u2019s no cost to holding more cash, yet overall demand remains too low.\u201d (34)<\/p>\n

A STRUCTURAL CRISIS?<\/h3>\n

Krugman dismisses the often made argument that what is wrong with our economy is structural<\/em> \u2013 that the reason our economy is idle and so many people are unemployed is not because of a failure of demand but because there are too many workers with the wrong skills or in the wrong location or in the wrong industry \u2013 that we have to suffer this depression because we need to first realign our economy. The same claims were made in the 1930s but when the recovery came, it turned out that the much touted structural problems in the economy had disappeared.<\/p>\n

More broadly, if the problem is that many workers have the wrong skills, or are in the wrong place, those workers with the right skills in the right place should be doing well. They should be experiencing full employment and rising wages. So where are these people? …unemployment is high everywhere. And there are no major occupations or skill groups doing well. Between 2007 and 2010 unemployment roughly doubled in just about every category \u2013 blue-collar and white collar, manufacturing and services, highly educated and uneducated. Nobody was getting big wage increases… The bottom line is that if we had mass unemployment because too many workers lacked the Right Stuff, we should be able to find a significant number of workers who do <\/em>have the right stuff prospering \u2013 and we can\u2019t. What we see is impoverishment all around, which is what happens when the economy suffers from inadequate demand. (37-38)<\/p><\/blockquote>\n

This is crucial. Because if the problems are not structural, if \u201call\u201d we need to do to get out of this mess is to boost demand then we know how to do that. We saw how it was done in the late 1930s. We need \u201cgovernments to step up their spending to get us out of this depression… Ending this depression should be, could be, almost incredibly easy.\u201d (40)<\/p>\n

PARADOXES OF DEBT<\/h3>\n

Highly leveraged debt is a problem \u2013 it lead to the \u201cMinsky moment\u201d in which creditors panicked and stopped lending money, debtors stopped spending money and focused only on repaying their debt and the economy to came a grinding halt, potentially locking us into a debt-deflation cycle of the kind that has plagued Japan since the 1990s. In this situation a number of paradoxes appear.<\/p>\n

    \n
  • The paradox of thrift: as everyone tries to save more (and spend less) the economy shrinks faster, businesses (having no markets) invest less and so incomes fall, meaning that people end up saving less, not more.<\/li>\n
  • The paradox of deleveraging: the harder people try to clear their debts (for example, by selling heavily mortgaged property) the higher their debts become (because everyone is trying to sell their property and the value plummets).<\/li>\n
  • The paradox of flexibility: while an individual worker can improve her chance of getting a job by accepting lower wages \u2013 making her more attractive compared to workers demanding higher wages \u2013 reducing the wages of everyone simply reduces incomes and spending and leaves levels of debt unchanged, making things worse.<\/li>\n<\/ul>\n

    THE BIG LIE<\/h3>\n

    So apparently common sense approaches to tackling debt can be counterproductive. But the idea that people and governments need to \u201ctighten their belts\u201d and accept a long period of austerity remains potent. The \u201cBig Lie\u201d \u2013 that this crisis was caused by governments not unregulated markets and that it can only be solved by more deregulation of markets \u2013 suits the interests of those who have profited most from the changes that began in the 1980s and their wealth gives them power to shape both politics and the profession of economics. We are in a \u201cdark age of macroeconomics\u201d which is different from the experience of the 1930, then:<\/p>\n

    …nobody knew how to think about a depression and it took pathbreaking economic thinking to find a way forward. That era was, if you like, the Stone Age of economics, when the arts of civilization had yet to be discovered. But by 2009 the arts of civilization had been discovered \u2013 and then lost. A new barbarism had descended on the field. (92)<\/p><\/blockquote>\n

    The rejection of Keynes theories by the right is, at first, confusing for there is nothing especially radical about them. Keynes called them conservative and there\u2019s certainly nothing in them that challenges \u201ccapitalism\u201d. Krugman quotes Michal Kalecki (94) who, in 1943, argued that capitalists used the idea of \u201cconfidence\u201d to exercise control over government. Governments must never do anything to upset business because that would destroy confidence and confidence creates jobs and keeps the economy spinning. The problem with Keynesian theory is that it shows that government can create jobs without business and that the \u201cconfidence\u201d of a small group of wealthy people is not crucial after all. This weakens the position of the wealthy and makes Keynes a threat. And since the very wealthy are the same people who sponsor university professorships, fund research, sponsor conferences and provide jobs for experts, Krugman argues that they have a powerful effect on shaping shifting the attitude of professional economics away from the ideas of Keynes. The result was that \u201cat the decisive moment, when what we really needed was clarity, economists presented a cacophony of views, undermining rather than reinforcing the case for action.\u201d (108) So, even when attempts to boost the economy were made \u2013 for example, Obama\u2019s American Recovery and Reinvestment Act \u2013 they were half-hearted and only marginally helpful.<\/p>\n

    But it didn\u2019t have to be like this, and it doesn\u2019t have to stay like this. There were things policy makers could have done at any point in the last three years that would have greatly improved the situation. Politics and intellectual confusion \u2013 not fundamental economic realities \u2013 blocked effective action. And the road out of depression and back to full employment is still wide open. We don\u2019t have to suffer like this. (129)<\/p><\/blockquote>\n

    DEFICITS<\/h3>\n

    One of the most common objections to Keynesian action to tackle the economic crisis is the \u201cexaggerated fear of deficits\u201d (131) but there\u2019s no evidence that deficits represent a significant threat to economies like America, Britain or Japan. The claim that \u201cbond vigilantes\u201d will refuse to purchase the debt of economies that borrow against their own currencies (the situation is different for Eurozone nations), driving up interest rates, is not supported by evidence. Even as deficits have risen, interest rates on government bonds have fallen. In America and Britain the current interest rate on ten year bonds (around 2%) is below levels of inflation (around 3.5% in the UK) \u2013 investors are paying governments to hold on to their money. And the effect of \u201cdowngrading\u201d America\u2019s AAA status by ratings agencies in 2010 was exactly the same as the effect of their downgrading of Japan a decade before: there was none. Krugman dismisses another objection to governments running deficits in an economic downturn \u2013 the idea that it \u201ccrowds out\u201d private money, money the government spends has to be borrowed and that, in effect, is taking money from those who could spend it more effectively in the private sector.<\/p>\n

    …in a depressed economy budget deficits don\u2019t compete with the private sector for funds, and hence don\u2019t lead to soaring interest rates. The government is simply finding a use for the private sector\u2019s excess savings, that is, the excess of what it wants to save over what it is willing to invest. And it was in fact crucial that the government play this role, since without those public deficits the private sector\u2019s attempt to spend less than it earned would have caused a deep depression. (137)<\/p><\/blockquote>\n

    The other common objection to higher deficits is the supposed \u201cburden\u201d it places on the future. But the truth is that the debts we\u2019re running now \u201cwon\u2019t have to be paid off quickly, or indeed at all. In fact it won\u2019t be a tragedy if the debt continues to grow, as long as it grows more slowly than the sum of inflation and economic growth\u201d (141). This sounds reckless and even cynical but it we\u2019ve been here before. The vast debts that burdened the US and UK after the WW2 weren\u2019t paid off either. Despite the \u201cburden\u201d of debt a long period of high growth and moderate inflation through the 1950s and 1960s eroded the debt as proportion of GDP as governments ran balanced budgets or slight deficits.<\/p>\n

    We won\u2019t ever have to pay off the debt, all we\u2019ll have to do is pay enough of the interest on the debt so that the debt grows significantly more slowly than the economy. One way to do this would be to pay enough interest so that the real value of the debt \u2013 its value adjusted for inflation \u2013 stays constant; this would mean the ratio of debt to GDP would fall steadily as the economy grows… The point is that debt doesn\u2019t impose any burden at all but that even shock-and-awe debt numbers aren\u2019t nearly as big a deal as often claimed. (143)<\/p><\/blockquote>\n

    Given these facts, the willingness of the right to impose the suffering of unemployment by arguing against short-term solutions seems perverse. Austerity hurts in the short-term and makes will probably make things worse in the long term. \u201cAll that we need to know is that the payoff to fiscal cuts in times like these is small, possibly nonexistent, while the costs are large. This is really not a good time to obsess over deficits\u201d (145).<\/p>\n

    And yet it can still seem counterintuitive to argue that the way to cure a problem caused by over-leveraged debt is to create more debt. But all debts are not the same. In America (and the UK) the national debt is money we owe ourselves (there are elements owed overseas, but these are modest compared to the size of our economies) and one person\u2019s debt is another person\u2019s asset.<\/p>\n

    It follows that the level of debt matters only if the distribution of net worth matters, if highly indebted players face different constraints from players with low debt. And this means that all debt isn\u2019t created equal, which is why borrowing by some actors now can help cure problems created by excess borrowing by other actors in the past. (146)<\/p>\n

    INFLATION<\/h3>\n

    The other supposed threat to our economy if we borrow too much is inflation. Deficit hawks have been predicting a sharp spike in inflation since the start of the recovery and continue to make these claims, despite continually being proven wrong. Some, like rightwing historian Niall Ferguson, have even taken to propounding conspiracy theories about how governments are covering up the \u201creal\u201d level of inflation (160), claims for which there is no evidence. Indeed the problem with the economy is not that inflation is too high, but that it is too low \u2013 this is especially obvious when volatile commodities like food and fuel are stripped out. The costs of moderately higher inflation (around 4-5% compared to current targets of around 2%) would be small \u2013 high inflation can be damaging and runaway inflation is a disaster, but moderate inflation has none of o those negative effects but it would offer three crucial benefits.<\/p>\n

      \n
    1. Higher inflation, \u201cother things being equal, makes borrowing more attractive: if borrowers believe that they\u2019ll be able to repay loans in dollars that are worth less than the dollars they borrow today, they\u2019ll be more willing to borrow and spend at any given interest rate\u201d (163). In our current liquidity trap interest rates are at zero and \u201cwant\u201d to go lower but can\u2019t (because lenders will just hold on to their money rather than lend it at negative interest rates that lose money). Higher inflation would make holding on to money less attractive as it devalues faster while being held. So, higher inflation would encourage lending and borrowing without, at least in the short-term, driving up interest rates.<\/li>\n
    2. Inflation reduces the real value of debt, and highly leveraged debt remains a burden on the private sector and individuals.<\/li>\n
    3. Inflation makes it easier for regions in difficulty to reduce wages. Employees are unwilling to accept pay cuts (partly because it is hard for them to judge whether they are being treated fairly by employers) but it is easier for them to stomach the erosion of the value of their wages by inflation \u2013 which is a general force. This is particularly important for nations like Spain and Greece whose economies are locked into the Euro with Germany and who desperately need to find ways to reduce costs to make them competitive again to stand any chance of recovery.<\/li>\n<\/ol>\n

      EUROD\u00c4MMERUNG<\/h3>\n

      Krugman\u2019s analysis of the crisis in Europe is especially interesting, not just because as a European it affects me most, but because it is so utterly counter to the prevailing narrative in politics and the media about the causes of the crisis in the Eurozone nations. Greece, Ireland, Portugal, Spain and Italy (the GIPSI nations) are, we are told, being punished now for their profligacy (if not downright corruption) in the good years. But, argues Krugman, the real problem lies not with individual government but with the structures that were created (or not created) when the euro was introduced.<\/p>\n

      Krugman identifies three key elements necessary for regions to share currency: shared trade, labour mobility and fiscal integration. European nations certainly trade extensively with each other but, despite open border legislation, labour mobility remains relatively low (barriers of culture and language remain high) and there is little fiscal integration \u2013 when things go wrong vulnerable economies like Ireland and Spain are left to meet the overwhelming majority of the costs of economic crisis out of their own diminished revenues.<\/p>\n

      The creation of the euro in 1999 created a situation where it became highly attractive to invest in nations like Italy and Spain because, where once they had seemed high risk, their debt was now treated in the same way as Germany. The cost of borrowing fell and, supported by inward investment from Germany, a huge housing bubble developed and a vast gap opened between the trade imbalances of the GIPSIs (running current account deficits) and Germany (running huge surpluses).<\/p>\n

      Then the bubble burst.<\/p>\n

      And unlike the US or UK, the GIPSI countries didn\u2019t just enter a depression, their national budgets came under severe strain. Tax revenues collapsed, unemployment rose sharply, spending on benefits soared and they found themselves burdened with the huge debts run up by private banks. Investors panicked, interest rates on bonds soared, and the crisis deepened.<\/p>\n

      But just has America has a \u201cBig Lie\u201d (that the housing crisis was caused by government intervention in \u201cfree\u201d markets) so Europe has the \u201cBig Delusion\u201d \u2013 that the European crisis was caused by governments acting irresponsibly \u2013 running deep into debt. Certainly there were problems in Greece \u2013 though it isn\u2019t simply down to Greek mismanagement \u2013 and to a lesser degree in Portugal, but before the crisis Ireland and Spain were nations with budget surpluses and low debt. And Italy had inherited high debt from the 1970s and 1980s but was steadily reducing it.<\/p>\n

      Yet many Europeans in key positions \u2013 especially politicians and officials in Germany, but also the leadership of the European Central Bank and opinion leaders throughout the world of finance and banking \u2013 are deeply committed to the Big Delusion, and no amount of contrary evidence will shake them. As a result, the problem of dealing with the crisis is often couched in moral terms: nations are in trouble because they have sinned, and they must redeem themselves through suffering. And that\u2019s a very bad way to approach the actual problems Europe faces. (179)<\/p><\/blockquote>\n

      The easiest way (not easy, but easier) for the GIPSI nations to get out of trouble would be for a Germany to pursue and aggressive policy of fiscal stimulation, creating full employment an enduring moderately raised levels of inflation (an anathema to Germans) that would raise German prices while GIPSI costs remained stable. \u00a0The alternative for the crisis nations \u2013 if they are to stay a part of the euro \u2013 is a long, ruinous period of unemployment and deflation (increasing the already crippling burdens of debt).<\/p>\n

      If the euro is to be saved, and Krugman (like me) believes that the political benefits of a closely linked European Union (decades of peace and a force for stable democracy in a continent too often prone to dictatorship and violence) are worth a significant price to preserve, then three things need to be done.<\/p>\n

        \n
      1. Europe need to guarantee liquidity for all nations \u2013 setting in place structures that will prevent governments running out of cash because of market panic relating to national debt. The European Central Bank needs to demonstrate that it will, when necessary, buy the bonds of euro nations.<\/li>\n
      2. Europe needs an expansionary monetary policy. The wealthy nations of the EU will need to abandon austerity and become a strong source of demand for the exports of the crisis nations \u2013 accepting, as a price, moderate increases in inflation.<\/li>\n
      3. There will continue to be pressure on the crisis countries to reduce their deficits and debt levels, but this can be done at a sensible rate and in a way that maintains a path to economic growth.<\/li>\n<\/ol>\n

        While there has been much browbeating of the GIPSI nations for their moral failings, nothing has been done to give them a plausible path to restored competitiveness. Austerity, rather than guiding them away from crisis, is simply prolonging their torture. Why has Europe responded so badly to this situation?<\/p>\n

        …much of the continents leadership seems determined to \u2018Hellenize\u2019 the story, to see everyone in trouble \u2013 not just Greece \u2013 as having gotten there through fiscal irresponsibility. And given that false believe there\u2019s a natural turn to a false remedy: if fiscal profligacy was the problem, fiscal rectitude must be the solution. It\u2019s economics as morality play, with the extra twist that the sins being punished for the most part never happened. (187)<\/p><\/blockquote>\n

        AUSTERIANS<\/h3>\n

        Since 2010 we have seen the growing dominance of the \u201cAusterians\u201d \u2013 those who believe in the need for immediate austerity. Krugman argues that while the Austerians are clear on what should be done \u2013 tightening belts, fighting imaginary inflation, raising interest rates \u2013 it was much harder to work out why. On interest rates he notes:<\/p>\n

        I often felt as if the advocates of higher rates were playing Calvinball \u2013 the game in the comic strip Calvin and Hobbes<\/em> in which the players are constantly making up new rules… various economists and financial types seemed quite sure that rates needed to go up, but their explanations of just why they needed to go up kept changing. This changeability in turn suggested that the real motives for demanding tightening had little to do with an objective assessment of the economics. (191)<\/p>\n

        The most common cause for their concern appeared to be the \u201cfear factor\u201d \u2013 fear that nations that didn\u2019t pursue austerity would meet a debt crisis of the sort facing Greece. As Krugman noted \u201cGreek debt was sui generis even within Europe\u201d but it proved useful as a tool \u2013 the spectre of the consequences of profligacy was used to justify \u201capocalyptic warnings about imminent disaster if we didn\u2019t move immediately to cut the deficit\u201d (192).<\/p><\/blockquote>\n

        But despite their predictions, interests rates in nations like the UK and US have not spiked, the downgrade of America by ratings agency S&P had no effect and \u201ceven if one took warnings about a looking debt crisis seriously, it was far from clear that immediate fiscal austerity \u2013 spending cuts and tax hikes when the economy was already depressed \u2013 would help ward that crisis off\u201d (194).<\/p>\n

        Undermining growth in an already weak economy might actually make deficit reduction harder.<\/p>\n

        THE CONFIDENCE FAIRY<\/h3>\n

        The Austerians, however, ignore worries about economic contraction caused by cuts and, instead, invoke the \u201cconfidence fairy\u201d arguing that \u201cimmediate cuts were necessary to restore confidence \u2013 and that restored confidence would make those cuts expansionary, not contractionary\u201d (194). To succeed the confidence fairy argument relies on the idea that cutting government spending can increase demand. There are two ways in which this might happen:<\/p>\n

          \n
        1. Investors, believing that lower deficits will mean lower future borrowing and, therefore, lower future interest rates may cut long-term interest rates today leading to higher investment and spending.<\/li>\n
        2. Consumers, seeing government cuts, may assume that future taxes will be lower and thus feel richer and spend more.<\/li>\n<\/ol>\n

          So, it is possible<\/em> that austerity might increase spending and therefore increase economic growth, but is it plausible<\/em>?<\/p>\n

          It is not enough for these confidence-related effects to exist<\/em>; they have to be strong enough to more than offset the direct, depressing effects of austerity right now. That was hard to imagine for the interest rate channel, given that rates were already very low at the beginning of 2010 (and are even lower at the time of writing). As for the effects via expected future taxes, how many people do you know who decide how much they can afford to spend this year by trying to estimate what current fiscal decisions will mean for their taxes five or ten years in the future? (196)<\/p><\/blockquote>\n

          THE BRITISH EXPERIMENT<\/h3>\n

          While most governments adopting harsh austerity policies in a time of high unemployment have done so under duress (Greece, Spain, Ireland, etc.) only one has done so willingly, because of its belief in the power of the confidence fairy: David Cameron\u2019s Conservative\/Lib Dem coalition.<\/p>\n

          George Osborne\u2019s economic policy was built around the claim in his \u201cemergency budget\u201d in 2010 that\u00a0 without austerity Britain would face \u201chigher interest rates, more business failures, sharper rises in unemployment, and potentially even a catastrophic loss of confidence and the end of the recovery\u201d (200). British interest rates have stayed low, but they also stayed low in the US and Japan \u2013 nations with higher levels of debt and no sharp austerity programme.<\/p>\n

          What about the confidence fairy? Did consumers and business become more confident after Britain\u2019s turn to austerity? On the contrary, business confidence fell to levels not seen since the worst of the financial crisis, and consumer confidence fell even below the levels of 2008-9… there is a real sense in which Britain is doing worse in this slump than it did in the Great Depression: by the fourth year after the Depression began, British GDP had regained its previous peak, but this time around it\u2019s still well below its level in early 2008. And at the time of writing, Britain seemed to be entering a new recession. One could hardly have imagined a stronger demonstration that the Austerians had it wrong. (201)<\/p><\/blockquote>\n

          WHY AUSTERITY?<\/h3>\n

          Krugman offers four reasons why austerity seems so popular despite the evidence that it is not helping and may be making things worse.<\/p>\n

          First, he notes Keynes\u2019s comments on the dominance of Ricardian economics in his era and suggests that the notion that \u201cit could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority\u201d rings especially true today.<\/p>\n

          Second, he returns to Kalecki\u2019s notion that the appeal to confidence is a means by which capitalists exercise control over government and that Keynesian alternatives threaten that source of power.<\/p>\n

          Third, he asks who do the Austerian policies serve?<\/p>\n

          If you look at what Austerians want \u2013 fiscal policy that focuses on deficits rather than on job creation, monetary policy that obsessively fights even the hint of inflation and raises interest rates even in the face of mass unemployment \u2013 all of it in effect serves the interests of creditors, of those who lend as opposed to those who borrow and\/or work for living. Lenders want governments to make honouring their debts the highest priority\u2019 and they oppose any action on the monetary side that either deprives bankers of returns by keeping rates low or erodes the value of claims through inflation. (207)<\/p><\/blockquote>\n

          And, finally, he suggests that the \u201ccontinuing urge to make economic crisis a morality play, a tale in which a depression is the necessary consequence of prior sins\u201d appeals to those people, like central bankers and financial officials whose \u201csense of self worth is bound up with the idea of being the grown-ups who say no\u201d (207)<\/p>\n

          END THE DEPRESSION<\/h3>\n

          We can get economies out of depressions, we\u2019ve done it before and we can, if we want, do it again. The last time, in the run up to WW2, we delivered two generations of nearly full employment and dramatically reduced inequality. And not only can we end this depression, but we can do it quickly.<\/p>\n

          Everytime you hear some talking head declare that we have a long-term problem that can\u2019t be solved with short term fixes, you should know that while he may think he sounds wise, he\u2019s actually being both cruel and foolish. This depression could and should be ended very quickly. (209)<\/p>\n

          Krugman sets out a range of policies that could be pursued and enacted quickly to meet the current need to get economies growing and people back to work.<\/p>\n

          Spend now, pay later<\/strong>
          \nIf the private sector can\u2019t or won\u2019t spend enough to make full use of or national productive capacity and employ the millions who are unemployed, then government should spend the money instead. We don\u2019t even need to come up with vast projects to spend the money on, simply reversing the cuts that have already taken place (or are planned) would pump significant amounts of extra cash into the economy \u2013 cutting unemployment and boosting growth. Infrastructure projects should also be pursued, putting more people back to work, and (again) these don\u2019t have to be vast new undertakings \u2013 reinstating those projects that have been cut (from road repair to rail links) could be done quickly. And new projects should also be started.<\/p>\n

          But what if these projects end up taking a while to get going, and the economy has fully recovered before they have finished? The appropriate answer is, so? It has been obvious from the beginning of this depression that the risks of doing too little are much bigger than the risks of doing too much. (215)<\/p><\/blockquote>\n

          We should also put money into the hands of those who are most likely to spend it \u2013 the poorest \u2013 temporarily increasing benefits to the unemployed and those on safety net programs.<\/p>\n

          Print money<\/strong>
          \nWe should learn from the failures of the Japanese to respond to their deflation crisis by pursuing aggressive monetary policies. Measures such as printing money to buy private debt or to pay for temporary tax cuts, intervening in currency markets to reduce the value of our currency to encourage exports and setting higher inflation targets might all help and, even if they don\u2019t they demonstrate a willingness to do anything to get the economy back up to speed: \u201cThe point is to try, and keep on trying if the first round proves inadequate\u201d (219).<\/p>\n

          Debt relief
          \n<\/strong>Consumers are burdened with heavy debts incurred in the housing boom \u2013 a concerted effort to introduce debt relief could help the economy \u201cand this should trump concerns that some of the benefits of relief might flow to people who behaved irresponsibly in the past\u201d (220)<\/p>\n

          And more<\/strong>
          \nAnd the possibilities don\u2019t end there. Action of foreign trade \u2013 and particularly a focus on China\u2019s lack of openness \u2013 or a concerted effort to promote investment in environmental technology might also help. The details don\u2019t matter, what matters is the determination to take positive action.<\/p>\n

          What\u2019s crucial, beyond any specifics, is a determination to do something, to pursue policies for job creation and to keep trying until the goal of full employment has been achieved. (222)<\/p><\/blockquote>\n","protected":false},"excerpt":{"rendered":"

          I am slightly worried, given the brightly coloured cover of this book and the snappy title (screaming exclamation mark and all), that Paul Krugman’s End This Depression Now! (Melrose Road Partners, 2012) is going to end up in the hands of a lot of disappointed people looking for a quick fix for the their mental […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"jetpack_publicize_message":"","jetpack_is_tweetstorm":false,"jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":false,"jetpack_social_options":{"image_generator_settings":{"template":"highway","enabled":false}}},"categories":[111],"tags":[69,59,101,133],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p27AP7-zq","_links":{"self":[{"href":"http:\/\/www.mmcgrath.co.uk\/index.php?rest_route=\/wp\/v2\/posts\/2196"}],"collection":[{"href":"http:\/\/www.mmcgrath.co.uk\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/www.mmcgrath.co.uk\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/www.mmcgrath.co.uk\/index.php?rest_route=\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"http:\/\/www.mmcgrath.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=2196"}],"version-history":[{"count":6,"href":"http:\/\/www.mmcgrath.co.uk\/index.php?rest_route=\/wp\/v2\/posts\/2196\/revisions"}],"predecessor-version":[{"id":2606,"href":"http:\/\/www.mmcgrath.co.uk\/index.php?rest_route=\/wp\/v2\/posts\/2196\/revisions\/2606"}],"wp:attachment":[{"href":"http:\/\/www.mmcgrath.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=2196"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/www.mmcgrath.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=2196"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/www.mmcgrath.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=2196"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}