End This Depression Now!
A popular joke went viral recently about a Wall Street hedge fund manager, a supporter of the Tea Party and a Mexican immigrant sharing a table in a diner. The waitress brings a plate of ten cookies, nine of which the hedge fund manager immediately seizes and wolfs down with relish. Flicking the crumbs from his expensive suit, he then whispers to the Tea Partier: "Watch out - that Mexican is trying to steal your cookie!". Like all good jokes, the humour is serious. America and Europe are enduring economic hard times, and many people worry about how many cookies they are going to get from the plate in the years to come, or even if there will be a plate. People are also asking how we got here, and the joke implicitly gives some pertinent advice on this matter: don't just note who is getting the blame. It's also a pretty good idea to think about who is directing the blame.
In his new book, End This Depression Now!, the Nobel Prize winning economist Paul Krugman advocates practical measures to end the pain. His key point is that the crisis is both worse than many think, and not as bad. Worse, because the long term consequences could be horrific - recessions are dynamic, and the longer they continue the more serious their consequences. But also potentially not as bad, because it could be ended relatively quickly with political will and rational policies. In order to make his case, however, he must first rehabilitate one set of ideas and condemn another. This makes him a player in the blame game, swinging deftly from defence to attack. For Krugman, the crisis we are in is not only economic, but also political and intellectual. To put it bluntly: we have made little to no progress in climbing out of the hole in the past four years because those taking the major decisions are prisoners of the very thinking that got us into the hole in the first place. Rome is burning, and Nero is running the fire department.
Krugman is a disciple of the influential 20th century economist J M Keynes, most famous for his advice for dealing with recessions: government stimulus. Recessions such as the one we are experiencing are caused by the collapse of demand, in which blood metaphorically no longer circulates in the veins of the free market. The only way out of this is for government to step in and do the things that the private sector temporarily cannot - stimulate, invest, and re-boot the economy. Only once that is done and the economy has returned to growth, jobs are being created and tax receipts are healthy again, should we turn to the problem of paying down deficits. One common critique of Keynsians is that they are in denial about the challenges of excessive deficits. Krugman replies: not true; we simply believe in paying deficits down when the time is right. Austerity, he asserts, makes no sense in an economic downturn - and more than that, is positively destructive. Choose your metaphor - bleeding the patient back to health; digging yourself out of a hole.
He cites a recent study by the IMF that analysed 173 separate cases of national austerity programmes over the past 35 years and found that every single one of them had failed. Yet leaders from David Cameron to Angela Merkel continue to cover their ears to the oceanic roar of facts and demand more austerity - for his own country on Cameron's part; for other countries on Merkel's. With evidence this overwhelming, Krugman asks, how can political leaders continue to advocate such a course in defiance of proven experience? The answer, he suggests, can be found in a web of politics, ideology, rhetoric and self-interest.
Keynes has been out of favour in recent decades because his association with "big government" spending has made him a bête noir in the "neoliberal" era which began with Ronald Reagan and Margaret Thatcher, and since when those who advocate an unrestrained free market rolling back the frontiers of the state have been dominant voices in economics and politics. As Krugman sees it, it is precisely their policies of financial deregulation, "unleashing the market" and acceptance of extreme inequalities of income distribution - what he terms "a relaxation of the outrage constraint" - that hold the lion's share of responsibility for the mess we're in. He sees the present moment as one in which we are governed by ideas that are intellectually discredited but remain politically powerful, and it is the unwillingness of decision makers to admit that they did the wrong things in the past that is stopping them from doing the right things now. To make his point he quotes the famous observation of Upton Sinclair, that "it is difficult to get a man to understand something when his salary depends upon his not understanding it".
Krugman played the role of Cassandra during the years before the crash - loudly predicting what was coming, and resolutely being ignored. Some may be irritated by his smart kid "I told you so!" demeanour, but ... well, he told us so. Nor is he narrowly party political - he finds much to criticise in the Obama administration, has good things to say about some of Mitt Romney's economic advisers and is entirely in agreement with British conservatives who warned that the euro was structurally flawed at the point of conception. His book is hot-off-the-press relevant to this morning's headlines, is written is a warm and engaging style, and makes complex economic arguments in an easy going and accessible manner without resorting to over-simplification. Anyone who wishes to have an informed opinion on current events will benefit from reading it, and I particularly recommend the chapter dissecting the Merkel administration's approach to the euro crisis to some of my German friends who worry about southern Europeans stealing their cookie.