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Paul Krugman: Economics Failed Us Because We Ignored Its Basic Precepts

And harmful austerity measures suited the rich and powerful just fine.
 
 
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In his latest column for the New York Times, entitled "Why Economics Failed," Paul Krugman tries to explain why, when basic economics held the solution to the country's Great Recession—namely increase spending and demand—our leaders failed to take appropriate action.

It is a depressingly familiar note that Krugman hits in the column, but it bears repeating. Certainly, recent years have provided ample opportunity for soul-searching among economists, who, after all, missed the boat on predicting the horrible crisis wrought by de-regulated financial markets and the housing crisis. But basic textbook macroeconomics, he writes, has performed pretty well. It's just that no one listened, least of all, those in charge. He writes:

But policy makers and politicians have ignored both the textbooks and the lessons of history. And the result has been a vast economic and human catastrophe, with trillions of dollars of productive potential squandered and millions of families placed in dire straits for no good reason.

The ongoing catastrophe, and refusal to come to grips with the source of the painfully slow recovery, was also not the fault of economists, who at least know the basic maxim that depressed demand is not good for anyone, he writes.

We were suffering from inadequate demand. The financial crisis and the housing bust created an environment in which everyone was trying to spend less, but my spending is your income and your spending is my income, so when everyone tries to cut spending at the same time the result is an overall decline in incomes and a depressed economy. 

Kind of seems a bit obvious when he lays out the basic theory like that, so why did politicians, and to some degree, regular Americans buy into the austerity scenario? Perhaps because it is a bit counter-intuitive, the notion of spending your way out of a recession. Most people understood the much-repeated homily, employed by both President Obama and Speaker Boehner, that the country is somehow like a family, and that belt-tightening is the solution to any economic problem.

But large complex economies are not like families, Krugman points out.

And finally, of course, slashing government spending and shredding the safety net was a popular tactic of certain powerful and moneyed interests who fully exploited the opportunity to scare people into their way of thinking. And they found their willing economists to back them up. More Krugman:

And such people have been aided and abetted by what I’ve come to think of as the trahison des nerds — the willingness of some economists to come up with analyses that tell powerful people what they want to hear, whether it’s that  slashing government spending is actually expansionary, because of confidence, or that  government debt somehow has dire effects on economic growth even if interest rates stay low. 

Deplorable and despicable, and all the more so because so many have suffered for so long, needlessly.

Read the rest of Krugman's column here