There is no economist I respect more than Paul Krugman, and Krugman’s new book, End This Depression Now! tells us in clear language exactly why and how we can end the crippling economic depression that has plagued us for four years. Everyone who wants to understand the current economic mess and how to get out of it should read it.
Krugman’s End This Depression Now!
tells us exactly how we can end the depression.
The primary tool government uses to manage the economy is controlling the interest rate for short-term loans. Reducing that rate causes more money to be released to the economy, which in turn encourages economic activity. But when that interest rate is reduced to zero and cannot be reduced further, we are in a liquidity trap. The tool loses its effectiveness. And that’s where we are. No more money can be released into the economy by that route.
But the national debt is out of control, say the Austerians, and we will make no progress until we get our budget and debt under control. And we must do that by reducing government spending and paying down the debt. So we slash, slash, slash, and the result is millions of people without work, hundreds of thousands of teachers fired, and our future terribly compromised. The biggest research effort on austerity, by the International Monetary Fund, showed that, everywhere they were imposed, austerity policies were always followed by economic contraction.
The total failure of austerity is clear
to everyone but austerity ideologists.
Despite this evidence, austerity is the primary tactic being used in Europe, much of it imposed by Germany, the European powerhaus. After three years of austerity budgets, unemployment is 50% in some places and national budgets are in worse shape every month. Emergency plans for withdrawing from the euro currency are being drawn up. The ongoing collapse of the English and European economies over the past three years shows that austerity makes everything worse. The total failure of austerity is clear to everyone except austerity ideologists, and Europeans are starting to revolt.
Fortunately, austerity in the US is somewhat tempered, and as a result, our GDP is above pre-crash level, and better than Europe’s best, whereas it is still in negative territory in many parts of Europe.
What should we be doing instead? We should be stimulating the economy with government spending, not killing it by slashing everything in sight. But doesn’t that increase our debt? Yes, it does, but that is not nearly as important as we think, because (in a nutshell) debt for one person is asset for another, and government debt is not the same as household debt. The huge debt we faced after WWII was never actually paid off, and we experienced the longest period of economic stability and affluence in our history.
OK, if we’re going to spend, what should we spend on? There is one obvious way we can create a whole lot of jobs, says Krugman, which in turn pumps tax revenue to the government: restore federal funding to the states.
The most important step is to
restore federal funding to the states.
Most states are legally compelled to balance their budgets, so when federal money dried up, they began laying off people. Hundreds of thousands of teachers, millions of people whose wages had been paid by the states. Simply rehiring all those people would make a major difference, if not solve the entire problem. But we should create more work, and another way to do it is to begin catching up on all the maintenance of infrastructure we have deferred for years, all the thousands of bridges large and small, the highways, electric grid, communications, and so on.
Krugman leads us through it all step by step, showing us why funding these things will almost immediately reverse the depression we find ourselves in.