Paul Krugman on "the depression we're in": "We could end it both more easily and more quickly than anyone imagines"
NYRB caption: "An unemployed man selling
apples during the Great Depression, circa 1930s"
apples during the Great Depression, circa 1930s"
"The depression we're in is essentially gratuitous: we don't need to be suffering so much pain and destroying so many lives. We could end it both more easily and more quickly than anyone imagines -- anyone, that is, except those who have actually studied the economics of depressed economies and the historical evidence on how policies work in such economies. . . .
"With a boost in spending, we could be back to more or less full employment faster than anyone imagines. . . .
"[T]he experience of Obama's first term suggests that not talking about jobs simply because you don’t think you can pass job-creation legislation doesn't work even as a political strategy. . . ."
-- Paul Krugman, in "How to End This Depression,"
in the May 24 New York Review of Books
in the May 24 New York Review of Books
First, notice that Paul K carefully uses the word "depression." Indeed, later in the piece he carefully distinguishes between this depression and the recession that has gone with it: "It has been more than four years since the US economy first entered recession -- and although the recession may have ended, the depression has not."
The crux of the argument won't be surprising to anyone who has been following PK's writings:
The truth is that recovery would be almost ridiculously easy to achieve: all we need is to reverse the austerity policies of the past couple of years and temporarily boost spending. Never mind all the talk of how we have a long-run problem that can't have a short-run solution -- this may sound sophisticated, but it isn't. With a boost in spending, we could be back to more or less full employment faster than anyone imagines.
But don't we have to worry about long-run budget deficits? Keynes wrote that "the boom, not the slump, is the time for austerity." Now, as I argue in my forthcoming book [End This Depression Now; Norton, 2012] -- and show later in the data discussed in this article -- is the time for the government to spend more until the private sector is ready to carry the economy forward again. At that point, the US would be in a far better position to deal with deficits, entitlements, and the costs of financing them.
Meanwhile, the strong measures that would all go a long way toward lifting us out of this depression should include, among other policies, increased federal aid to state and local governments, which would restore the jobs of many public employees; a more aggressive approach by the Federal Reserve to quantitative easing (that is, purchasing bonds in an attempt to reduce long-term interest rates); and less timid efforts by the Obama administration to reduce homeowner debt.
Even in the quick-take, studiously nontechnical version of his case that Paul offers in this NYRB piece, he has a good deal more to say about two broad subjects:
* the evidence for his insistence "that more government spending would actually promote growth and employment," even though "many politicians fiercely reject that idea, insisting that the government can’t create jobs," and "some economists are willing to say the same thing."
* a counter to the argument that what he's proposing is politically undoable. He has different answers for the three different 2012 election scenarios: Obama reelection with Democrats holding onto the Senate and retaking the House; a Romney victory; and Obama reelection with Republicans controlling one or both house of Congress.
My favorite line concerns the Romney-victory scenario:
if Romney adhered to Republican orthodoxy, he would of course reject any government action along the lines I’ve advocated. It's not clear, however, whether Romney believes any of the things he is currently saying. His two chief economic advisers, Harvard's N. Gregory Mankiw and Columbia's Glenn Hubbard, are committed Republicans but also quite Keynesian in their views about macroeconomics. Indeed, early in the crisis Mankiw argued for a sharp rise in the Fed's target for inflation, a proposal that was and is anathema to most of his party. His proposal caused the predictable uproar, and he went silent on the issue. But we can at least hope that Romney's inner circle holds views that are much more realistic than anything the candidate says in his speeches, and that once in office he would rip off his mask, revealing his true pragmatic, Keynesian nature.
Of course, a great nation should not have to depend on the hope that a politician is in fact a complete fraud who doesn’t believe any of the things he claims to believe. . . .
My favorite political argument in the piece, one I think will resonate with all DWT readers:
[W]hat about the fairly likely case in which Obama is returned to office but a Democratic Congress is not? What should Obama do, and what are the prospects for action? My answer is that the president, other Democrats, and every Keynesian-minded economist with a public profile should make the case for job creation forcefully and often, and keep pressure on those in Congress who are blocking job-creation efforts.
This is not the way the Obama administration operated for its first two and a half years. We now have a number of reports on the internal decision-making processes of the administration from 2009 to 2011, and they all suggest that the president's political advisers urged him never to ask for things he might not get, on the grounds that it might make him look weak. Moreover, economic advisers like Christina Romer who urged more spending on job creation were overruled on the grounds that the public didn’t believe in such measures and was worried about the deficit.
The result of this caution was, however, that as even the president bought into deficit obsession and calls for austerity, the whole national discourse shifted away from job creation. Meanwhile, the economy remained weak -- and the public had no reason not to blame the president, since he wasn’t staking out a position clearly different from that of the GOP.
In September 2011 the White House finally changed tack, offering a job-creation proposal that fell far short of what was needed, but was nonetheless much bigger than expected. There was no chance that the plan would actually pass the Republican-led House of Representatives, and Noam Scheiber of The New Republic tells us that White House political operatives "began to worry that the size of the package would be a liability and urged the wonks to scale it back." This time, however, Obama sided with the economists -- and in the process proved that the political operatives didn’t know their own business. Public reaction was generally favorable, while Republicans were put on the spot for their obstruction.
And early this year, with the debate having shifted perceptibly toward a renewed focus on jobs, Republicans were on the defensive. As a result, the Obama administration was able to get a significant fraction of what it wanted -- an extension of the payroll tax credit, not an ideal stimulus but nonetheless a measure that puts cash in workers' pockets, and maintenance for a shorter period of extended unemployment benefits -- without making any major concessions.
In short, the experience of Obama's first term suggests that not talking about jobs simply because you don’t think you can pass job-creation legislation doesn't work even as a political strategy. On the other hand, hammering on the need for job creation can be good politics, and it can put enough pressure on the other side to bring about better policy too.
I should note that PK makes his case in the opposite order: the politics first, and then the economics. So that in his conclusion he's referring specifically to the shorthand case he has just made for the known soundness of increased spending to right the economy.
There’s much, much more evidence, but I hope this brief overview gives a sense of what we know and how we know it. I hope in particular that when you read me or Joseph Stiglitz or Christina Romer saying that cutting spending in the face of this depression will make it worse, and that temporary increases in spending could help us recover, you won't think, "Well, that's just his/her opinion." As Romer asserted in a recent speech about research into fiscal policy:The evidence is stronger than it has ever been that fiscal policy matters -- that fiscal stimulus helps the economy add jobs, and that reducing the budget deficit lowers growth at least in the near term. And yet, this evidence does not seem to be getting through to the legislative process.
That's what we need to change.