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More than economics...
on 24 April 2013
Paul Krugman is Professor of Economics and International Affairs at Princeton University and a columnist at The New York Times. He won the Nobel prize for economics in 2008. His book, `End this Depression Now!', argues that the present economic depression, dating from 2008, is not essentially different from other depressions, notably the Great Depression following the Wall Street crash of 1929. He argues that the experiences, actions and research of the 1930s and 1940s, augmented by recent research, has given us the tools to bring the economic situation under control. They are simply being ignored by governments in the USA, the UK and Euroland, or governments haven't the courage to do it.
He begins by outlining the tremendous costs of a prolonged depression, especially in human terms. His humanity comes through strongly, not something one normally associates with economists. For example, he notes research which shows that a graduate qualifying during a downturn has his or her whole career affected adversely, not just for the duration of the recession. Long recessions cause permanent, irretrievable losses that leave nations with weak industries and poor skill bases, unable to take full advantage of any recovery. They can lead to political extremism - look at Hungary and Greece today.
The lessons of the Great Depression are outlined. Krugman sees himself as a "sorta-kinda New Keynesian" and argues that depressions are essentially due to lack of demand. This can be counteracted effectively by government spending of particular types - infrastructure spending, mortgage debt relief, temporary higher target rates for inflation, and effective devaluation of the currency and "printing of money". He criticises the stimulus package of President Obama as being far too timid and small to be really effective. Krugman does not think debts should not be paid off, but this should be done when the economy is stronger.
His remedies mainly apply to America but there is also discussion of the UK and Europe. He is scathing about the economic policies of the coalition government. As the UK has its own currency and central bank, Krugman states that we could easily apply a stimulus package without causing a troublesome run on the currency (he talks about the "confidence fairy" in debunking the excessive weight given to "confidence" in the design of policy). He shows that such countries (the USA, Japan, the UK, Sweden) are much less prone to being at the mercy of the market compared to those in the Eurozone. He contrasts Sweden and Denmark with Finland: very similar economies but as Finland is in the Eurozone, has suffered much greater speculative pressure. However, he is much more pessimistic about the Eurozone as a whole. The individual countries do not have their own currency, nor their own central bank and this, Krugman maintains, makes all the difference. The only solution he can see is Germany enacting, for a time, strong inflationary policies - totally against the grain in that country - combined with general wage reduction in southern Europe, again not likely to happen voluntarily.
So far, so Keynesian, but the really fascinating parts of the book lie elsewhere. For example, the "paradoxes": the "Paradox of thrift", where everyone saves (and so spends less) leading to generally declining income and shrinking of the economy. The "Paradox of deleveraging" - the more debtors pay, the more they owe. And the "Paradox of flexibility" - lack of demand leads to a cut in prices e.g. for labour - in short, wage cuts. Across the board wage cuts, incomes all reduced, but debt remains the same. It is such things which really counter the usual objection - you cannot cure debt by more debt. Krugman says we need to change the metaphors used to describe the economy in slumps. He shows that in a slump, normal concepts do not apply. He likens it to being on the other side of the looking glass, and I then saw it as akin to quantum mechanics compared to Newtonian physics, or the peculiar properties of materials at extremely low temperatures, e.g. superconductivity. Certain states need ways of thinking that are superficially not logical and counter-intuitive.
Another strong theme of the book is the increasing inequality in Western societies since the early 1980s (the time of President Reagan and "Reaganomics"). Krugman sees this time as the one where the dominant economics changes from Keynesian ideas to those of the laissez-faire economists who believe that human beings are logical and markets always do the right thing. This has the ring of doctrine, not science, and Krugman mentions the messianic tendencies of some of this ilk. Keynesian ideas were seen by conservatives as the thin end of the wedge - socialism would surely follow. Keynes was certainly not a socialist.
It was the time of deregulation of the banking sector and failure to regulate the "shadow banks" and the repeal of the Glass-Steagall act (to legalise, retroactively, an illegal merger in the banking sector!) All this went hand in hand with the increasing polarisation of politics in American (and the UK). The rich, consisting of corporate executives and "financial wheeler-dealers" in the main, somehow monopolised any increase in the GDP, leaving the incomes of the vast majority flat-lining. The rich managed to do this by fixing thing to their advantage: "soft corruption" at a political level: they had and have more access to power, they are articulate and influence disproportionately. They even influenced which economists had the strongest voice: To quote Krugman:
"The preferences of university donors, the availability of fellowships and lucrative consulting contracts...must have encourages [economists] not just to turn away from Keynesian ideas but to forget much that had been learned in the 1930s and 1940s".
Not only this, but Keynesians were actively discriminated against at some universities. This could sound like a conspiracy theory but it is not a club of rich people colluding to do something. It is a myriad of such people acting in their own interest in a myriad of separate, disconnected actions. These actions carry more weight than that of "little people". There is a net vector to such actions.
He outlines the story of the housing bubble, the subprime mortgage scandal and the ludicrous idea that risk can virtually be eliminated from the financial sector by complex "instruments".
The scope of the book is far wider than one might think from the title. He outlines much of what has gone wrong in the Western democracies over the past thirty years or so. The "culture wars" in the USA, sadly spreading to our blessed isle. The disregard of experts in favour of pure ideology. The disappearance of calm but passionate political discussion in favour of ad hominem attacks. In his postscript, he says: "Tribal allegiance should have no more to do with your views about macroeconomics than with your views on, say, the theory of evolution or climate change...hmm, maybe I'd better stop right there". Who says Americans don't do irony?