End This Depression Now! [Hardcover]

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.'

As the title to this review suggests, this book convincingly argues that America (and in most cases the rest of the developed world) needs a boost in government spending to return our economies to a healthy state. As with all Krugman's books, this is very well written in an easy conversational style, which makes it very accessible to all those whom have only recently become interested in economics due to the recent troubles.

The books I value the most are those which generate within me challenging questions and gut reactions, and reading this book has left me with a disconcerting amount of both. Can it really be that simple? Why hadn't I seriously supported this before? Could America really just government spend it's way out of a recession? Imagine how much cash it would take! . . . But then I suppose back in the 1930s perhaps the prospect of more government debt was also very scary at the time, but after a few decades of growth and inflation the debt seemed paltry. (Reader warning, homespun analogy coming up): A number of years ago I was unemployed for a few months and became very conscious of what I was spending. After I returned to work I wished I had spent a sizeable bit of money on renovating my flat, which would have been a better use of my time!

One difference between now and the last depression was that back then America had valuable manufacturing strengths and advantages, not yet developed by the majority of the world. Where as now Asia has caught up by gaining many of these positive externalities. Krugman mentions in passing that: "it's long past time to take a tougher line on China and other currency manipulators, and sanction them if necessary".p221. Generally though this book is domestic in its subject matter, and does not for me (see my profile) include enough about the subject of trade and protectionism.

However to be fair, he does counter the Chinese peril / doom mongers (of which I am a paid up member) by arguing that in fact the US "net international investment position, the difference between our overseas assets and our overseas liabilities, is in the red only to the tune of $2.5 trillion. ... of an economy that produces $15 trillion of goods and services every year."p44. I suppose if I earned say £30,000 a year, I would feel quite comfortable owing what would be the equivalent of £5,000 in net terms. He argues that most of Americans' debt's are inherently between one another and importantly in their own currency, and therefore not as economically dangerous as some would lead us to believe. He also notes that free market believers are obliged to observe, against their own preferred analysis, that the bond markets currently have very little worries about increasing government debt, as shown by historically low interest rates / yields.

This international dimension (or lack of) to the debt issue seems the key point to me. If America's debt really is mostly owed to itself, then Krugman has a point. If on the other hand the narrative is that China has lent America the money to buy Chinese made manufactured goods, then this is decadence and a route to economic dependence and decline.

One of Krugman's earlier short books was titled "A Country is not a Company" and Krugman here also warns against us falling for the "Paradox of Thrift" by applying moral housekeeping notions of prudence admirable in an open system environment, to the economics of a country which is more of a closed system, i.e. my spending is your income. But again the international dimension matters. The large American economy is mostly a closed system, but the international imbalances of trading partners like China provide leakages and distortions. If my spending is Chinese income, and too much of their income becomes not their spending on my produce, but their lending to me and purchasing of Western assets, then the Keynesian spending loop is kind of broken isn't it?

Besides the main government spending policy recommendation, Krugman also convincingly argues that increasing inflation over the next few years would be beneficial, and that deflation alongside debt is in fact the real danger to be concerned about. Krugman's treatment of the causes of the credit crunch and the section on the particular problems of the Euro are also very good. Regarding the Euro he argues for increased inflation which would allow a heating up of the German economy, resulting in higher German wages, while allowing Greek wages to stagnate, restoring their relative competitiveness. With the unlikely help of Milton Friedman he convincingly argues that currency devaluation is a better way to restore competitiveness compared to the messy unequal process of trying to reduce nominal wages, and relatively more inflation in the stronger trade surplus countries compared to the weaker ones, would be the eurozone equivalent to this. Krugman helped me to see that German economic policy, while admirably cautious and thrifty in isolation, can appear more divisive if you factor in the competitive advantages they receive from having the strength of the currency they are in pulled down by weaker members, while they still maintain their distaste for strong stimulus spending and inflation.

Even if you do not buy the book, you have to read the extract Krugman provides below from Michael Kalecki 1943, on the subject of why right wingers and business leaders don't want governments to be able to independently solve a countries unemployment issues.

"We shall deal first with the reluctance of the "captains of industry" to accept government intervention in the matter of employment. Every widening of state activity is looked upon by business with suspicion, but the creation of employment by government spending has a special aspect which makes the opposition particularly intense. Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of "sound finance" is to make the level of employment dependant on the state of confidence."p94.

This extract puts words to what many people think and feel already: right-wing economic ideology serves to make society and governments more closely follow the interests of businesses and the rich. Krugman has a point when he criticises right-wing commentators for misleadingly overlaying potent concepts of morality and profligacy on these current issues. This narrative is very powerful as it can be understood (or misunderstood) by someone who knows nothing about economics. I have spoke to people who don't really grasp the complexities surrounding the competitiveness of regions within currency blocks, but who have heard all about 50 year olds in Greece getting generous pensions, and families of doctors in Greece paying no tax.

I noticed the broad range of star ratings for this book, suggesting that its bold thesis does not sit well with everyone. Perhaps some David Cameron supporters have read it, as his austerity approach comes in for criticism. If you are to the left and work for the state, you will love this book. If you are none of the above you should still read it, and you may find it disconcertingly convincing like I did.

It is refreshing to read a nice old-fashioned polemic written with genuine passion! It the age of 'third way' Democrats and 'New' Labour there was too much collaboration by Social Democratic parties everywhere with ideas that progressives used to think were consigned to the scrapyard of economic history in the 1930s!
I agree with so much of this book that it feels somewhat churlish to criticise it...but I must because I think it underestimates the problem that faces all of us (on both sides of the Atlantic and beyond).
You see, what we face is not a simple liquidity trap in the classical sense. As the Australian (not Austerian!) economist Steve Keen has pointed out, the real obstacle in the way of a government stimulus solution to the crisis is the huge overhang of private debt. Far from deleveraging, which happens after most periods of depression, personal indebtedness continues to stay stubbornly high in countries such as the US and Britain. The late, great Hyman Minsky, although a fervent Keynesian, pointed out that when Keynes wrote the 'General Theory', the working class didn't have credit cards or mortgages. I might add student loans to this list, which in the US cannot be eliminated by declaring bankruptcy!
Keen thinks that only a universal debt 'jubilee' will solve this almighty mess. This presumably would have to be organised through a modern equivalent of Bretton Woods, with international simultaneous agreement. I think that for the medium term, there is going to have to be a serious redistribution of income in order to get any demand into the economy; a possibility, I notice, that Krugman doesn't address in any depth.