Paul Krugman:  End This Depression NOW!

By Shlomo Maital




Paul Krugman

Nobel Laureate Paul Krugman, a NYTimes columnist, was recently interviewed on the  BBC program Hard Talk, on May 31/2012.  The occasion was publication of his new book.  I bring you, concerned readers, his own words.   In brief:  The austerity imposed by European and American leaders is wrong, misguided and is prolonging the current Depression, causing immense human suffering.  It must be ended.  Only public pressure can do this. 

   “We are in a depression.  There is worse to come. None of it needs to be happening.  America and Europe should be richer than they were 5 years ago. And it won’t take much to solve the problem. They should borrow more to spend their way out of trouble. 

   “The thing to understand is that the problem is not the overall level of debt, as the fact that right now everyone is trying to pay off their debt at the same time.  My spending is your income. Your spending is my income. If we both say we need to slash spending at the same time, then we have a Depression.   We’re in a counterintuitive world.  But Keynes understood this in the 1930’s.  His recipe for recovery is still relevant.  My book End The Depression Now says, it need not be painful.  Keynes used a wonderful phrase in 1930.  “We have magneto trouble”, he said.  We have a ‘dead battery’.  We have an expensive car. It won’t run.  We may think, scrap the car.  No!  It’s just a dead battery.  A spark!  It’s easy to solve. But, if your husband thinks your car is broken, you have a problem – not with the car, but with your husband, with what he thinks!   Fix the magneto. 

   “British austerity so far has been not that much more than America’s austerity.  But what’s special about Britain (all countries are mucking up, making a hash of it),  Europeans have a common currency that doesn’t work, American has one political party that is stark raving mad…but Britain’s error is unforced. It doesn’t have to be doing austerity. It is doing so out of a fundamental misunderstanding of the situation, choosing a destructive economic policy.   Britain never showed any sign of crisis in its ability to borrow!  No advanced country with its own currency has had any difficulty borrowing.  U.S., Germany (its currency is the euro), Japan…none of these countries face immediate borrowing concerns.   If you read the IMF statement carefully, point by point, it says the Cameron Govt. policies were a terrible mistake.  They say, “if it’s not working by November, cut taxes and boost spending by 30 b.”  Why wait until November?  It’s hard for Christine Lagarde to say, we (IMF) screwed up. The IMF staff believes austerity was a terrible error.  

     “When Keynes wrote about stimulus and deficit spending, UK debt to GDP ratios were higher than they were now.  Britain has had no immediate need to slash its deficit.  We all have much to worry about in the long run. BUT NOT IN THE MIDDLE OF A DEPRESSION.       

     “Greece has a problem of not having its own currency.  Greece was seriously irresponsible during the good years.  Greece cannot print euros. That creates vulnerability. All the severe crisis countries are not fiscal crisis countries but euro crisis countries, they are suffering from being stuck with over-valued exchange rates.   What should  they do?  If you’re the Prime Minister, you have very few options, only two. One, go along with whatever the Germans are demanding. Two, leave the euro.  This is a nuclear option. This is not different from that of a governor of a US state. Gov. of Illinois has little freedom of action, too.  Europe as a whole has an option of lending more freely from the ECB, being more expansionary, adopting a higher inflation target.  If I were advising the Greek govt. now,   I would be despair. I believe Greece MUST and WILL leave the euro. There is no alternative. Whoever MAKES that decision will end his political career.  IT has to happen, but with no one person’s fingerprints on it. When? It could happen in two weeks, after the next election.  If not, it happens when the European Central Bank says we will not continue lending euros to let Greek banks fund their ongoing bankruptcy.   It is desirable for the Greeks to leave the euro.   

      “There will be interesting negotiations.  Argentina is our role model. Not entirely positive. But Argentina had a commitment, “irreversible”, (like the euro), to one peso per dollar. It left that irreversible commitment in 2001.  And its dollar debts, in pesos, ballooned.  It ended up paying those debts, 30 cents on the dollar.  It defaulted on 70 per cent.  Argentina had one terrible year, then it had a strong economic recovery. The same may occur to Greece.   No one can be certain. But their current path offers no hope for recovery,  FOREVER!  

    “Why is the 1923 hyperinflation in Germany seared into their memory,  but the 1930-32 deflation by Chancellor Bruning has not seared into their memory?  And we all know what the terrible deflation caused (rise of Hitler).  Anyone who brings Weimar Germany or Zimbabwe into the discussion should be expelled. We are talking about 3-4 per cent inflation. NOT hyperinflation.  Inflatoin at the level it was in Ronald Reagan’s second term. 

    “You cannot collectively spend less than you earn.  Everyone is trying to earn a financial surplus, while trying to earn as much as before.  It is IMPOSSIBLE.   In my book, I bring evidence – people who look at the situation my way, anti-austerity, have been more right in their forecasts, the effects of austerity, than those who favor austerity.  The prediction: Slash spending, create confidence and there will be a boom,  this has not panned out.  The Keynesian prediction – austerity brings decline – has come true.  How did we end the Great Depression? We spent our way out of it. 

    “I am proposing a stimulus for the U.S. of  $300 b. a year, and a new inflation target of 4%, not 2%.  A very modest solution.    Household balance sheets are indeed better. Recovery is not as difficult as it was.  There is growth.  America and Canada are doing better than other G8 nations. But the depression has lasted too long.  Unemployment falls because people are leaving the labor force. Do we want to have a lost decade, continuing this way?  And suffer the cumulative damage done to people?  Wait for slow slow recovery?  Why not do a forceful program to hasten the recovery? 

     “We should be angry!  The amount of human damage being done by this Depression is enormous.  We have 4 million people out of work for a year. This hasn’t happened since the 1930’s. It is destroying people’s lives. We have college graduates in a job market that has no use for them, and they have huge debts.  This is incredibly cruel, to allow this to persist.  Bernanke says it makes no sense to pursue higher inflation, just to cut unemployment, this is reckless.  To take action to bring down this high unemployment, this is reckless?  It is reckless NOT to!  Is it responsible to continue as we are, instead of trying something different?  We should have Rooseveltian resolve, do whatever it takes.  Try things. Don’t let things slide. Do you know who said these words? Ben Bernanke, writing about Japan’s policy in 2001.   Bernanke faces political constraints. I can understand he can’t be as aggressive as I would wish. I’m doing him a favor. He’s attacked from the right. I say, he should be doing more. His own writings say this.  An informed public can bring pressure. Get angry!  Even, take to the street.  The Occupy movement in the U.S. changed the conversation in a positive direction.  The inequality issue re-appeared.  The political establishment took notice.  The tone of the Obama Administration has changed, their rhetoric is more activist, though not their deeds.  

   “ It is important NOT to accept that depression is the new normal.  In the long run we are all dead.  Let’s stop this problem NOW!