Bring Back Keynes
In December 2000, with electoral campaign passions subsiding, the Bush presidential transition teams attempted to inoculate the incoming administration against blame for the inevitable bust end of the longest running boom in U.S. history by invoking the R-word, “recession,” to which the Clinton White House replied with another R-word, “ridiculous.” Now comes the Nobel laureate in economics and New York Times columnist Paul Krugman with a D-word, “depression.” Should we respond with the D-word “disagree”?
At a recent briefing I attended, Krugman himself seemed fully aware of the impact of calling an economic situation a depression. He admitted sheepishly that the book title was an attention-getting device; yet only in part. As the reader will discover, when Krugman calls our national economic condition a depression, he draws on the definition used in the 1930s by the British economist John Maynard Keynes.
In 1936, just as deficit hawks in Congress had won the day and federal cutbacks were beginning to pull the economy into a second recession that prolonged the Great Depression by five years, Keynes published his magnum opus, The General Theory of Employment, Interest and Money. The work set in motion the final New Deal push that saved the United States and launched a school of macroeconomic thinking that bears its author’s name. Keynes explained the word depression, saying it was “a chronic condition of subnormal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse.”
Given recent Bureau of Labor Statistics reports showing that in the three full summer months national unemployment remained stuck at 8.1 percent or higher, Krugman’s use of Keynes’s term is hardly the showboating of a brilliant economist. Indeed, unemployment has remained at more than 8 percent for 42 months.
Does Keynes’s description sound vaguely familiar to our wallets today?
A depression need not be called “great.” In an op-ed column in The New York Times last July, Krugman suggested replacing “Great Recession,” an utterly inadequate term for the events that began in 2007, with the mischievously teasing term “Lesser Depression” for the condition that remains even after the National Bureau of Economic Research declared the latest recession over in 2009. In fact, the Great Depression designates a period that included two recessions, one caused by the Crash of 1929 and its aftermath, the other caused by the Republican démarche on the New Deal spending that by 1936 was beginning to yield weak signs of recovery.
Krugman’s book is not about how our depression came to happen, but about the urgency to end it now. “The depression we’re in is essentially gratuitous: we don’t need to be suffering so much pain and destroying so many lives,” he argues.
The Princeton professor makes his case in droll, nontechnical terms, as did Keynes, whose legacy includes the dictum that “in the long term we are all dead.” And there are only a dozen charts (on average one every 20 pages), a remarkable achievement for a man who delights in every fluctuation of a trend line.
The teacher in Krugman brings out all the humor he can manage, and it is extensive, to illuminate complex ideas from the dismal science and debunk myths that have blocked effective countermeasures. In doing so he battles with “the Confidence Fairy,” sings an aria from the “Eurodämmerung” and lumps a certain Wisconsin Catholic boy, chair of the House Budget Committee and an unsuccessful vice-presidential candidate, with members of the tribe known as the Austerians, whose federal belt-tightening Krugman sees leading to a slump similar to that of 1937.
The reader will also learn that the term Minsky Moment aptly describes the realization in 2008 of the level of risk in existing debt that precipitated the continuing crisis. Or, in more Krugmanesque terms, “The moment is also called the Wile E. Coyote moment, after the cartoon character known for falling off cliffs, then hanging in midair until he looks down—for only then, according to the laws of cartoon physics, does he plunge.”
The message, however, is deadly serious, and Krugman is no longer in the minority decrying the puny dosage of the Keynesian cure, given the dimensions of the crisis, both in the United States and Europe.
Krugman alludes to the fact now well known to close observers of policy that the chair of the Council of Economic Advisers at the time, Christina Romer, urged President Obama to ask Congress for a $1.4 trillion stimulus package, rather than what was requested: half that amount, a figure that diluted hundreds of millions into tax breaks that yielded the expected extremely small payoff.
Even the hidebound International Monetary Fund surprised the public in midsummer by warning against cutting back on public spending in the United States. The club of advanced nations called the Organization for Economic Cooperation and Development issued a few days later a call for broad measures of social insurance to deal with record levels of long-term U.S. unemployment. Krugman even suggests that some of Mitt Romney’s advisers might silently agree with him, even though it may be too much of a gamble to hope that, should Romney win, he will “rip off his mask, revealing his true pragmatic/Keynesian nature.”
Indeed, to Krugman the Keynesian solution makes detailed policies obvious. When the private sector hoards money as it is doing, choking productive capacity (and jobs) out of the economy, the answer is for government to spend. Balancing budgets is for another time, for a future boom when Clintonian federal surpluses can be made to blossom again.
One easy fix: rehire all the teachers and firefighters laid off by state and local governments when stimulus money began to run out. Such a measure alone, Krugman calculates, would bring unemployment down to 7 percent. Another: raise safety net spending to match needs, not merely costs, of current services. The payoff lies in the proven fact that the poor spend money right away on necessities.
Still, to Krugman the key point is to keep in mind why a massive and vigorous government moves to alter the economic environment for the better is needed: because government is the spender of last resort, and no other sector is increasing its spending.
This article also appeared in print, under the headline “Bring Back Keynes,” in the November 26, 2012, issue.