Nobel-Prize-winning Princeton University economist Paul Krugman contends that we could get out of the current economic doldrums fairly quickly—not overnight, but in less than two years—were it not for the fact that so many politicians here and in Europe have adopted questionable economic notions.
Krugman is an excellent writer with a gift for making the complicated understandable, and I recommend this brief book to anyone with a serious interest in what might be done to get us out of the current economic mess.
Incidentally, the term “depression” may seem disturbing, but it’s technically correct. Strictly speaking, a recession is a period of declining—receding—economic activity. We were in a recession from late 2007 until early in the Obama administration, and since then the economy has been growing, just not fast enough to get us back to where we were, let alone where we’d be if we’d managed to avoid downturn to start with. The economy remains depressed, both in the U.S. and in Europe, and in some European countries it’s in recession as well.
Krugman has been warning about the sort of situation we’re in for more than a decade. In 1999 he published a book titled The Return of Depression Economics (updated in 2008) cautioning that Japan’s experience demonstrated that not all downturns can be cured with the usual trick of lowering interest rates and putting more money into circulation.
Like Japan in the 1990s, the U.S. now has short term rates essentially at zero, and as I write this even long-term U.S. Treasury bonds are yielding lower than the 2.5% inflation rate we’ve been running the past couple of years. And this isn’t just true of government debt; interest rates on corporate bonds, mortgages, bank CDs—pretty much everything but credit cards—are about as low as they have ever been. If businesses want to invest in new capacity they can do so now essentially for free. But there’s little reason to do that as long as demand remains weak. Roughly speaking, too many consumers are unemployed or worried about their jobs or trying to pay down their debt. Businesses aren’t buying as much as they might because they aren’t selling enough. That leaves the government to take up the slack.
Unfortunately, a lot of people have bought into the idea that since excessive debt caused the crisis—which is partly true—taking on more debt at the level of government will just make things worse. The argument isn’t as simplistic as that, and there are empirical studies that supposedly demonstrate that countries who adopt austerity emerge more quickly from downturns after the initial shock. But as Krugman points out, the studies in question have not stood up well to critical analysis, and a lot of sound recent work suggests that austerity is not the answer. This is underscored by the recent experience of Ireland, for a while held up as model by austerity fans but now in terrible shape, and also the United Kingdom, whose austerity cure has put it back into recession.
Krugman publicly worried before Obama took office that he would propose an inadequate stimulus. The day after it was passed, Krugman’s friend and fellow Nobel laureate Joseph Stiglitz wrote, “I think there is a broad consensus but not universal among economists that the stimulus bill that was passed was badly designed and not enough.” Krugman blames this on combination of things, including Obama’s enthusiasm for bipartisan compromise and a naive belief among his advisers that should the stimulus prove insufficient it would be possible to pass another one.
The stimulus was successful in reversing private sector job losses and restoring economic growth, but as Krugman, Stiglitz, et al predicted, the results were and still are anemic, in part because it was offset by greatly reduced state and local government spending that resulted from falling tax revenues. By late 2009 the private sector was adding jobs but government employees were still being laid off, including a staggering number of teachers.
Rather than acknowledge that the slow recovery proved that the economists had been right about its being too small, some politicians and pundits have tried to claim that it really demonstrated that stimuluses don’t help.
Krugman concludes by calling for an FDR-style approach of trying multiple things even if we’re not sure any one of them will be a total success. For example, one continuing drag on the economy is the fact that so many people with mortgages have trouble making payments. If they could refinance at today’s lower rates they’d be a lot less likely to default and go into foreclosure, which is bad for everybody, creditors included. But the mortgage lenders won’t let them refinance because they treat it as a new loan, which looks risky given the reduced market value of the house. But the refinanced loan would still be safer than the existing one. There are a number of potential ways to fix that, but unfortunately, the programs touted by Obama to deal with the mortgage crisis have been timid and completely inadequate. Krugman makes a lot of other sensible suggestions, including giving states temporary aid to rehire teachers, since sacrificing schools is a terrible thing to do in the long run.
Unfortunately, as Krugman admits, the current political climate is not likely to permit doing what’s needed and the public is too uninformed or outright misinformed to press for it, so while he tries to sound optimistic, there is every reason to fear that things may get worse here as in Europe.