Table of Contents
- a. Wild Optimism & the Deregulation Movement
- b. The Political Influence of the Financial Sector (and the Wealthy in General)
- a. Exhibit A: The Great Depression
- b. The Initial Stimulus Effort Was Too Small
- a. Stimulus Specifics
- b. Additional Federal Reserve Actions
- c. Housing Relief (et. al.)
- a. The Problem of Investor Confidence
- b. The Problem of Paying off the Debt in the Future
- a. An Obama Sweep
- b. An Obama Win, and a Divided Parliament
- c. A Romney Victory
Since the housing and financial crash of 2008, America’s economy has been stuck deep in the doldrums. Indeed, GDP has remained well beneath pre-2008 levels, and employment levels have failed to recover. In an effort to resuscitate the economy, the American government tried first to jump-start it through stimulus spending, and has now replaced this approach with greater austerity. Nothing seems to be working. For Nobel Prize winning economist Paul Krugman, though, the answer is clear: the problem is that the original stimulus effort was too small, and, since that time, the government is moving squarely in the wrong direction. Indeed, Krugman argues that America’s current situation bares a striking resemblance to the stagnation of the Great Depression, and that history has taught us what to do in such situations: the government must take an aggressive approach to stimulate the economy into recovery. This is the argument that Krugman makes in his new book ‘End This Depression Now!’
Now, Krugman is not a proponent of big government spending under normal conditions. Indeed, even in a recession, Krugman’s preferred approach is to drop interest rates in order to spur consumer spending. The problem now is that interest rates are already at zero, and this has not been enough to get consumer spending off the ground, thus leaving the economy in what is called a ‘liquidity trap’. For Krugman, the liquidity trap is actually quite common in economic downturns that follow financial crashes (as is the case with the current one, and as was the case with the Great Depression), and is why such slumps tend to be deep and prolonged.
According to Krugman, the best and surest way to save the economy from a liquidity trap is for the government to step in and undertake the spending that consumers won’t. That is, the government must stimulate the economy back into action, until consumers can get back on their feet enough to take over for themselves. For Krugman, this is precisely what happened in America during WWII, when the government’s military spending served to stimulate the economy and save it from the grips of the Great Depression.
Now, Krugman’s opponents will point out that the American government has already tried the stimulus approach during this downturn, and that this strategy did not work, thus showing that it cannot be relied upon. What’s more, these same opponents argue that the government’s debt is already enormous, and indeed dangerously high, and that further government spending at this point may well render the debt completely unmanageable, if not force the government into insolvency (which is indeed a threat that is currently being faced by several countries in the European Union). Finally, Krugman’s detractors maintain that pumping more money into the economy at this time only threatens to drive up inflation to dangerous levels, perhaps even triggering a hyperinflationary spiral.
Krugman, though, claims that he has answers to all of these objections. In the first place, as noted above, the author maintains that the failure of the government’s first stimulus effort did not prove that this approach is ineffective, but that it simply wasn’t large enough to do the trick. Second, Krugman argues that though government debt does pose a concern, America’s debt is actually not that dangerous by historical standards. What’s more, since America has its own currency (unlike the countries of the European Union), it is able to print money to turn over its debt, thus preventing the possibility of bankruptcy. Finally, with regards to inflation, Krugman contends that inflation simply cannot get off the ground in a depressed economy (as the current situation would attest to), and that when it is triggered in an upturn the government can always reverse its policy, thus keeping it firmly in check.
Here is Paul Krugman speaking about his new book (Part II of the interview is available on YouTube):
What follows is a full executive summary of End This Depression Now! by Paul Krugman.
Krugman begins by way of establishing the gravity of the problems that America’s economy is currently facing. This can be seen in the numbers. To begin with, consider America’s Gross Domestic Product (GDP). As Krugman notes, GDP indicates “the total value of goods and services that are produced in an economy, adjusted for inflation… in a given period of time” (loc. 274). As such, GDP provides a general picture of how much an economy is producing, and how quickly it is growing. Between the Great Depression and the beginning of the current recession, America’s GDP grew at an average rate of between 2% to 2.5% per year (loc. 277).
The biggest downturn during this time occurred between 1979 and 1982, when America’s economy experienced a ‘double dip’ recession—which Krugman characterizes as essentially “two recessions in close succession that are best viewed as basically a single slump with a stutter in the middle” (loc. 283). At the low point of this recession, in 1982, America’s “real GDP was 2 percent below its previous peak” (loc. 283), meaning it basically went flat. However, the author continues, the economy rebounded very quickly in the immediate aftermath, “growing at a 7 percent rate for the next two years—‘morning in America’—and then returned to its normal growth track” (loc. 283).
When we look at the latest recession, we find that the low point occurred between 2007 and 2009. When compared with the recession of the late 1970’s and early 1980’s, we find that the latest “plunge… was steeper and sharper, with real GDP falling 5 percent over the course of eighteen months” (loc. 287). What’s more, the American economy has not seen a strong recovery this time around, as “growth since the official end of the recession has actually been lower than normal” (loc. 287). All in all, the author claims, “the U.S. economy is [currently] operating about 7 percent below its potential” (loc. 295), and has lost $3 trillion in value since the slump began (loc. 299). Most significant of all, though, is that the economy shows no signs of a major come back any time soon; thus leading Krugman to conclude that “at this point we’ll be very lucky if we get away with a cumulative output loss of ‘only’ $5 trillion” (loc. 299).
While the GDP numbers are certainly telling, the more significant numbers, according to Krugman, are those concerning unemployment. As the author reminds us, unemployment statistics cover only those who are looking for work but who can’t find it, and “in December 2011 that amounted to more than 13 million Americans, up from 6.8 million in 2007” (loc. 194). This is already a staggering number, but when you take into account all of those people who have stopped looking for work out of frustration, or who have taken part-time work out of desperation, this number balloons even higher: “by this broader measure there are about 24 million unemployed Americans—about 15 percent of the workforce—roughly double the number before the crisis” (loc. 202). And since the current slump has dragged on so long, the number of people who have been out of work long-term (meaning 6 months to 1 year, or longer [loc. 224]) has risen to levels not seen since the Great Depression. Indeed, Krugman writes that “not since the 1930’s have so many Americans found themselves trapped in a permanent stat of joblessness” (loc. 228).
*For prospective buyers: To get a good indication of how this (and other) articles look before purchasing, I’ve made several of my past articles available for free. Each of my articles follows the same form and is similar in length (15-20 pages). The free articles are available here: Free Articles