May 29, 2012
Our economy faces depression-like conditions, according to Paul Krugman, in its alarmingly high unemployment rate. It needn’t be that way, though, Krugman says – a few simple steps could quickly solve our problems.
His premise is correct; the devastating toll inflicted by high unemployment is a crisis of depressionary proportions. But Krugman’s diagnosis of the cause of unemployment is flawed and his solutions are misguided.
Krugman is the 2008 Nobel Prize-winner in economics and a professor at Princeton. His newly published book, End This Depression Now!, draws together previously published op-ed pieces in The New York Times and longer essays from its Sunday edition. You will find little new material here if you are a regular of his (and you should be – even if you vehemently disagree with him – because he is highly influential). But it is worth the read.
Krugman says in the preface that his goal was not to focus on the causes of the financial crisis, as others have done. Instead, it was to focus on solutions and answer the question, “What do we do now?”
But in the first 200 pages he does exactly the opposite, and rehashes what led to the crisis. You’ll read chapters about the pernicious effects of modern conservatism, how a belief in efficient markets was ruinous to the economy, why wealth inequality is destructive to society, and how a buildup of debt bred financial instability.
Only at the end of the book does he present his solutions. I discuss them below, but first let’s look at what Krugman says caused the great recession.
Cyclical versus secular problems
Krugman has an exceptionally polarized political view: Few good ideas emanate from Republicans, and he faults Democrats mainly for bowing to pressure from them. If you’re willing to divorce yourself from his politics – whether or not you agree with him – you’ll find his economic narrative informative and reasonably accurate.
Indeed, I agree with most of Krugman’s diagnosis, with one important exception.
Krugman claims that our economy has a problem that is “relatively trivial and quickly and easily fixed” in a way that would not be painful for most people. The problem is that we are “suffering from a severe lack of demand,” he writes.
Krugman says we have the equivalent of what Keynes called “magneto trouble.” In the 1930s, Keynes wrote that lack of demand in an economy is the equivalent of a faulty magneto (which today we call the alternator) in a car. You don’t need to buy a new car or overhaul the engine if only the magneto is faulty.
According to Krugman, those who say our problems have deep roots and no easy solution are “utterly wrong.”
The deep roots that Krugman referred to are what others call structural problems in the economy. Krugman denies that there is a structural problem in unemployment, citing, for example, that “only” 1.1 million construction workers lost jobs in the great recession.
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