Paul Krugman -- End this depression now
Aug. 30th, 2012 12:35 pmI haven't read much economics, but I was interested to read "End this depression now". Published a couple of years ago, but sadly still equally relevant.
Krugman is a columnist, blogger, and author (and nobel prize winner) about economics, and left-wing by American standards.
The book sounded convincing to me, but I don't know enough to vouch for the validity, or the correctness of my summary. I hope someone can offer a more authoritative opinion, especially including people prone to agree and prone to disagree.
The current depression in UK/US and similar countries
As I understand it, the short version is, Krugman says not every depression is based on the same underlying causes as the great depression, but this one is. He wasn't originally convinced, but he saw how this depression happened, and it was just like Keynes described in the great depression.. And that the solution, like in the great depression, is simple even if not necessarily easy: for the government to spend a lot of money.
Government creating money
In the old days, government increased the money supply by literally printing money. Since WWII, the same effect has been achieved by changing the amount of money that the central bank will lend to large banks and the regulations on how much money they're allowed to lend out, and by adjusting the interest rate.
Some people are terrified of high inflation because too much causes hyperinflation, which causes Hitler. This is a serious risk (I think hyperinflation happened in Argentina, but they recovered surprisingly well), but only if the economy is otherwise collapsing and the government chooses to GO ON printing money. In fact, the policies of the last 80 years have been surprisingly successful at keeping inflation at a small but steady rate, and we are in no serious risk of hyperinflation -- in fact we probably need HIGHER inflation, but governments are too scared to push for it.
Usually the government and central bank balance unemployment and inflation by adjusting the money supply and interest rate. This is usually but not always the biggest factor in the economy.
However, we recently had the problem that the central bank lowered the interest rate to near zero, and the government increased the amount of loans available to the large banks, but it still wasn't enough. The money theoretically available to the banks wasn't used, because they were too scared of a repeat of the housing crash, and it didn't get loaned or invested, it just got sat on. This is called a "liquidity trap".
Krugman says that the answer is to go further: if banks won't put money into the economy, the government should do it directly. This will increase government debt, but assuming the economy grows, the effect will still be negligible.
Some people think that the solution is the opposite: that we've run out of money, or that people aren't trained for the jobs we need, and the answer is massive austerity measures. Krugman says this is wrong. Unemployment hit EVERYWHERE, in a manner consistent with "people not creating jobs" not "people having the wrong skills".
Who gets the money
This is the bit that arguably is ideological. In terms of economics, it doesn't matter who gets the money as long as they spend it or invest it, not just sit on it.
So Krugman (and I would agree) says an obvious place to start would be putting back the social safety net the government did cut back on. That would (a) be humane (b) restore a status quo (c) be good the economy for all the usual reasons I think a social safety net is good (d) work, because anyone drawing any sort of benefits (work-related or not) is almost certainly going to need them, and hence spend them, creating economic activity, not sit on them.
Giving the money to large institutions which will sit on them, or use them to reduce the cuts on executive pay or dividends, the proceeds of which are likely to be saved not invested, won't help, because the money will not be used.
However, the UK government has (apparently) been giving subsidies to random companies in the form of guaranteeing loans to them for specific infrastructure projects. I think the "subsidise random companies" model has good aspects on a small scale (because it helps small businesses grow) but is a bad idea as the basis for an economy (because it encourages companies to compete on "how much can we bribe politicians to subsidise us" rather than "how much can we actually do useful stuff). However, even if it's stupidly implemented, it's equally good from an "injecting into the economy" standpoint.
However, we need a lot more of it. From what I can tell, if Krugman is right, we need to reverse the austerity and invest even more money, and many people are still arguing for further cuts.
Krugman is a columnist, blogger, and author (and nobel prize winner) about economics, and left-wing by American standards.
The book sounded convincing to me, but I don't know enough to vouch for the validity, or the correctness of my summary. I hope someone can offer a more authoritative opinion, especially including people prone to agree and prone to disagree.
The current depression in UK/US and similar countries
As I understand it, the short version is, Krugman says not every depression is based on the same underlying causes as the great depression, but this one is. He wasn't originally convinced, but he saw how this depression happened, and it was just like Keynes described in the great depression.. And that the solution, like in the great depression, is simple even if not necessarily easy: for the government to spend a lot of money.
Government creating money
In the old days, government increased the money supply by literally printing money. Since WWII, the same effect has been achieved by changing the amount of money that the central bank will lend to large banks and the regulations on how much money they're allowed to lend out, and by adjusting the interest rate.
Some people are terrified of high inflation because too much causes hyperinflation, which causes Hitler. This is a serious risk (I think hyperinflation happened in Argentina, but they recovered surprisingly well), but only if the economy is otherwise collapsing and the government chooses to GO ON printing money. In fact, the policies of the last 80 years have been surprisingly successful at keeping inflation at a small but steady rate, and we are in no serious risk of hyperinflation -- in fact we probably need HIGHER inflation, but governments are too scared to push for it.
Usually the government and central bank balance unemployment and inflation by adjusting the money supply and interest rate. This is usually but not always the biggest factor in the economy.
However, we recently had the problem that the central bank lowered the interest rate to near zero, and the government increased the amount of loans available to the large banks, but it still wasn't enough. The money theoretically available to the banks wasn't used, because they were too scared of a repeat of the housing crash, and it didn't get loaned or invested, it just got sat on. This is called a "liquidity trap".
Krugman says that the answer is to go further: if banks won't put money into the economy, the government should do it directly. This will increase government debt, but assuming the economy grows, the effect will still be negligible.
Some people think that the solution is the opposite: that we've run out of money, or that people aren't trained for the jobs we need, and the answer is massive austerity measures. Krugman says this is wrong. Unemployment hit EVERYWHERE, in a manner consistent with "people not creating jobs" not "people having the wrong skills".
Who gets the money
This is the bit that arguably is ideological. In terms of economics, it doesn't matter who gets the money as long as they spend it or invest it, not just sit on it.
So Krugman (and I would agree) says an obvious place to start would be putting back the social safety net the government did cut back on. That would (a) be humane (b) restore a status quo (c) be good the economy for all the usual reasons I think a social safety net is good (d) work, because anyone drawing any sort of benefits (work-related or not) is almost certainly going to need them, and hence spend them, creating economic activity, not sit on them.
Giving the money to large institutions which will sit on them, or use them to reduce the cuts on executive pay or dividends, the proceeds of which are likely to be saved not invested, won't help, because the money will not be used.
However, the UK government has (apparently) been giving subsidies to random companies in the form of guaranteeing loans to them for specific infrastructure projects. I think the "subsidise random companies" model has good aspects on a small scale (because it helps small businesses grow) but is a bad idea as the basis for an economy (because it encourages companies to compete on "how much can we bribe politicians to subsidise us" rather than "how much can we actually do useful stuff). However, even if it's stupidly implemented, it's equally good from an "injecting into the economy" standpoint.
However, we need a lot more of it. From what I can tell, if Krugman is right, we need to reverse the austerity and invest even more money, and many people are still arguing for further cuts.