Paul Krugman's purpose in writing this book is to:
'...go over the heads of the Serious People who have, for whatever reason, taken all of us down the wrong path, at immense cost to our economies and our societies, and to appeal to informed public opinion in an effort to get us doing the right thing instead.' (Intro, Pxii).
He starts out by analysing just what has gone wrong. Many, many writers have already done this, of course - David Harvey
, Nouriel Roubini
, Massimo Amato
to name but a few - but Krugman's analysis is still really useful. He draws exact parallels between the Great Depression and the current so-called 'Great Recession', not only in terms of cause and effect but also in the variety of responses. His central thesis, however, is that:
'...this doesn't have to be happening [italics in original]...the problem isn't with the economic engine, which is as powerful as ever. Instead, we're talking about what is basically a technical problem, a problem of organization and co-ordination.' (P22)
We have reached a 'Minsky Moment' - as an economy expands, debtors and creditors are happy to borrow and lend until, suddenly, something pops. At that point, we all look down and discover that, like Wile E Coyote running off a cliff, there is nothing holding us up, and the whole edifice comes crashing down in a 'debt-deflation spiral' (P48) Debtors are desperately trying to pay off their debts (de-leveraging) while creditors are extremely wary of lending any more - even when interest rates are virtually zero, nothing is moving. This is the liquidity trap:
'A liquidity trap happens when even at a zero interest rate the world's residents are collectively unwilling to buy as much stuff as they are willing to produce. Equivalently, the amount people want to save - that is, the income they don't want to spend on current consumption - is more than the amount businesses are willing to invest.' (P136)
And the solution is simple - print more money:
'The answer lies in depression economics, specifically in what I hope has become the familiar concept of the liquidity trap, in which even zero interest rates aren't low enough to induce sufficient spending to restore full employment. When you're not in a liquidity trap, printing lots of money is indeed inflationary. But when you are in one, it isn't; in fact, the amount of money the Fed prints is very nearly irrelevant.' (P152)
In fact, getting some inflation into the system would actually be beneficial. While deflation exacerbates the debt problem, inflation can do the opposite - and can price workers back into jobs as the real value of their wages is reduced in comparison to competitors.
There is a real sense of exasperation running through the book - to Krugman, the Keynesian solutions are there, ready and waiting. We could get out of the current depression within the space of about two years if we simply learnt from the past. But his kind of 'salt water' economics (east and west coast universities) are not in fashion and haven't been for some thirty years. Instead, the current orthodoxy is taken from the 'fresh water' Chicago school and the 'Austerians'. The battle, then, is not simply between differing macroeconomic theories, but inevitably between political ideologies too. At this point, Krugman echoes Thomas Frank
and Jeffrey Sachs
in talking about the 'revolving door' between the regulators and those they are supposed to regulate. He sounds again like Thomas Frank (Pity the Billionaire
) when he suggests that:
'...saltwater - freshwater is about pragmatism versus quasi-religious certainty that has only grown stronger as the evidence has challenged the One True Faith.' (P104)
This rather reminded me of Ronald Suskind's 'faith-based versus reality-based America'. Krugman is first and foremost a pragmatist.
Towards the end of the book, Krugman turns his attention to Europe. Again, we see the insistence on 'austerity measures' really not benefitting either the economies or, more importantly, the people of Europe:
'If you look at what Austerians want - fiscal policy that focuses on deficits rather than job creation, monetary policy that obsessively fights even the hint of inflation and raises interest rates even in the face of mass unemployment - all of it in effect serves the interests of creditors, of those who lend as opposed to those who borrow and/or work for a living. Lenders want governments to make honoring their debts the highest priority; and they oppose any action on the monetary side that either deprives bankers of returns by keeping rates low or erodes the value of claims through inflation.' (P207)
And that is precisely what we are seeing in Greece, Spain, Ireland - countries Krugman refers to as 'GIPSI's (perhaps slightly more attractive than 'PIIGS'). Prioritising the repayment of debt over the welfare of the people of Europe will simply prolong the pain and do nothing at all to promote growth.
This is a powerful and extremely timely book. Finally, we are hearing calls for growth over austerity from some quarters - but we are still, here in Europe, faced with both Swabian hausfraus and those that think that 'unemployment is a price worth paying.'
At times, the writing style is a bit irritating - I don't really need to be advised to go watch Stagecoach
to learn about bankers. But, quibbles aside, this book goes a long, long way in debunking the 'One True Faith' and provides an immediate way forward by learning from, and not simply forgetting or ignoring, the past.
The book is dedicated 'To the unemployed, who deserve better.'