By MATTHEW BISHOP
Published: June 15, 2012
Nearly four years on from the financial meltdown that plunged it into recession, the global economy remains fragile. The latest green shoots of recovery in the United States already show signs of turning brown. It is touch and go whether Barack Obama will enter the polls with unemployment above or below the 8 percent rate that usually means defeat for an incumbent president. Across the Atlantic, the euro zone stumbles from crisis to crisis; the continuing problems of the heavily indebted PIIGS (Portugal, Ireland, Italy, Greece and Spain) remain the basis for many a nightmare, some of the worst involving the banks around the world that own much of the debt.
Illustration by Paola Rollo
END THIS DEPRESSION NOW!
By Paul Krugman
259 pp. W. W. Norton & Company. $24.95.
Times Topic: United States Economy
If ever there was a moment for fresh thinking, this is surely it. Indeed, Paul Krugman argues in “End This Depression Now!,” without a radical change in economic policy in both the United States and Europe, the likeliest outcome is a prolonged depression, perhaps not as “great” as in the 1930s but with clear similarities, above all in the immense human cost of needlessly high unemployment. As Krugman sees it, fiscal austerity, a fashionable idea on both sides of the Atlantic, can only make matters worse. This new “austerian” conventional wisdom, Krugman says, has “completely thrown away Keynes’s central dictum: ‘The boom, not the slump, is the time for austerity.’ ”
Not surprisingly, as today’s leading interpreter of John Maynard Keynes, Krugman uses Keynes’s definition of a depression, “a chronic condition of subnormal activity for a considerable period without any marked tendency either towards recovery or towards collapse.” He attributes this to a classic Keynesian “liquidity trap,” in which an indebted private sector is so intent on rebuilding its savings that even interest rates of zero cannot tempt it to borrow and spend enough to get the economy working again at full capacity. And he offers the classic Keynesian remedy of the government making up for the lack of private spending by splashing the cash around itself. Even now, Krugman argues, full employment could be restored to the United States in less than two years, given the political will to spend a lot of money.
How much money? Ideally, enough to generate inflation of 4 percent a year, Krugman says, breaking another of today’s economic taboos by arguing that a bit of inflation would be good for us. He is particularly dismissive of the fact that the “Germans hate, hate, hate” inflation, owing to memories of the great inflation of the 1920s; in fact it was the deflationary policies of the 1930s, he tells us, that “actually set the stage for the rise of you-know-who.” One of the advantages of inflation cited by Krugman is that it reduces the real value of all that depression-inducing debt, like the mortgages people use to buy homes. On today’s current low inflation trend, Krugman anticipates prices being 8 percent higher in 2017 than today. But, he says, “if we could manage 4 or 5 percent inflation over that stretch, so that prices were 25 percent higher, the real value of mortgage debt would be substantially lower than it looks on current prospect — and the economy would therefore be substantially farther along the road to sustained recovery.”
Longtime readers of Krugman will know there are at least two of him. One is the gifted winner of the Nobel in economic science, respected throughout the academy for his mastery of the dismal science; the other, the populist polemicist and baiter of the right who writes columns in The New York Times. “End This Depression Now!” is a collaborative effort by the two Krugmen. Professor Krugman usefully contributes plenty of mainstream economics in support of his stimulus plan and in order to debunk the idea that austerity policies in today’s circumstances can boost an economy by increasing confidence. (As he points out, Britain, the leading country to embrace austerity voluntarily, is hardly setting the world on fire.) Yet no opportunity to preach to the choir is missed by the populist Mr. Krugman, nor any chance to mock those he calls the “Very Serious People” who disagree with him. This is often entertaining: during a stern speech in 2010 by Germany’s finance minister, Krugman’s wife dismissed those who regard austerity as a sort of moral purification with the whispered aside, “As we leave the room, we’ll be given whips to scourge ourselves.” But the book’s preachiness gives those politicians and economists who most need to read this book an easy excuse to ignore it.
To this Moderately Serious Reviewer, Krugman’s habit of bashing anyone who does not share his conclusions is not merely stylistically irritating; it is flawed in substance. The rise in unemployment may be largely the result of inadequate demand, but that does not mean there has been no contribution from structural changes like the substitution of cheap foreign workers and innovative technology for some jobs in rich countries. The austerians may be excessively fearful of so-called “bond vigilantes,” but that does not mean there is no need to worry about what investors think about the health of a government’s finances. Sure, ridicule those fundamentalists who believe it is theoretically impossible for an economy ever to suffer a shortage of demand, but does Krugman really need to take passing shots at Erskine Bowles and Alan Simpson, the chairmen of the widely respected bipartisan Bowles-Simpson Commission on deficit reduction appointed by President Obama? Maybe his case for stimulating the economy in the short run would be taken more seriously by those in power if it were offered along with a Bowles-Simpson-style plan for improving America’s finances in the medium or long term. Instead, Krugman suggests cavalierly that any extra government borrowing probably “won’t have to be paid off quickly, or indeed at all.”
Krugman seems to have given up on directly influencing policy makers and mainstream economists, opting instead to appeal over their heads to “an informed public.” Perhaps this makes sense. If his arguments win in the end, it may well be because, ultimately, the public does not have the stomach for prolonged austerity (perhaps after experimenting with it first by, say, electing a President Romney), and politicians will conclude that borrowing and inflating the debt away is a lot more palatable than cutting public spending and/or raising taxes.
Whether that would be as marvelous as Krugman says is debatable. Inflation imposes real costs, for instance on retired baby boomers reliant on fixed dollar annuities and on foreign investors in government bonds. How those bondholders would respond is anyone’s guess, though they might shift away from the dollar or euro to other currencies or to alternatives like gold. Inflation would certainly increase the risk of the dollar losing its status as the world’s reserve currency, with potentially serious political consequences like competitive devaluations, accusations of currency manipulation, trade wars and maybe worse (as Krugman, an expert in the economics of trade, well knows). In wanting to give top priority to helping the unemployed, Krugman’s heart is clearly in the right place. Yet it would have made for a better book if he had offered a fuller discussion of the potential consequences of his policies, rather than evading it by citing Keynes’s famous observation that “in the long run we are all dead.”