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What Would Keynes Do?
‘End This Depression Now!’ by Paul Krugman
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.
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.”
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.”
2 comments:
I bet you will read the book.
I've already read it and will post soon.
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