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Paul Krugman: We Could End This Depression Right Now

The Nobel laureate talks about Washington, Europe and the bizarre alternate universe inhabited by deficit fear-mongering media and political elites.

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JH: It seems like we take two steps forward with private sector hiring, and then one step back as we’re laying off public sector employees at the state and local levels. Do you have a sense of where the unemployment rate would be had we not been beset by this austerity madness?

PK: If we had had state and local governments expanding at the rate they normally do, which is by population -- which is also by the way the rate in which it expanded in Bush’s first term – then right there we’d have 1.3 million jobs more than we do right now. That’s just the public sector jobs. There’d be indirect effects. People would have more spending power and there would be private sector jobs as well. That’s something like 2 million jobs right there. When you put it all together my back of the envelope says if we weren’t doing this austerity, GDP would be around 3 percentage points higher right now, the unemployment rate would be at least 1.5 points lower, which means we’d be at 6.5 percent unemployment. That’s not great, but it’s not a depression. We’d be in vastly better shape than we are right now.

JH: I have to ask if you’re constantly banging your head against the table. Everything you write in the book strikes me as so much common sense, and yet even Democrats say the government has to pull in spending when families do. Isn’t that the reverse of the truth? Isn’t it the fact that when families are tightening their belts the government needs to loosen its belt to make up for that loss of demand?

PK: That’s right. The whole mistake that people make is that we’re all like a family. We’re not because we’re interdependent. Your spending is my income and my spending is your income. If we both tighten our belts at the same time thinking that’s going to make us better off, it actually makes us worse off. This is a fundamental fallacy.

I’m not going to complain about being me. I’ve got a good job. I’ve got a solid income. It is frustrating, but it’s frustrating because there are 4 million Americans who have been out of work for more than a year. There’s a whole generation of students who are graduating who can’t find jobs, or can’t find jobs that are making use of the education that they’ve acquired at great expense. Those are the people to be concerned about.

JH: I find it frustrating that there is such a concerted effort to create this alternative reality where Keynesian economics has failed and giving tax cuts to the wealthy will create jobs. It’s a parallel universe. Let me ask you for responses to a couple of common talking points. We hear these again and again. Speaking of wealthy people, are they job creators?

PK: No more than anyone else. In general, anyone who spends money is going to be helping to create jobs, but no more so if it’s coming from a rich person. This notion that we have to have extreme income inequality in order to have a successful, growing economy requires that you forget history that’s live in the minds of everybody over the age of 50. The best generation of economic growth we’ve ever had in America was the generation right after World War II. That was a society in which the rich were not even remotely as rich as they are now. How come we created all those jobs -- all those good jobs -- at a time when the top tax rate was as high sometimes as 90 percent? So no, this just flies in the face of all the experience we’ve had in the last half-century.

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