Paul Krugman: We Could End This Depression Right Now
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The central message of Paul Krugman's new book, End This Depression Now! is simple: It doesn't have to be like this. No external dynamic is keeping unemployment at more than 8 percent and consigning a generation of young workers to an economy in which risk is plentiful and opportunities scarce. It is only a failure of political will -- and an almost universal embrace of conservative voodoo economics – that is keeping us mired in this dark economic moment.
Of the 2009 stimulus, Krugman writes, “Those who had more or less the right ideas about what the economy needed, including President Obama, were timid, never willing either to acknowledge just how much action was required or to admit later on that what they did in the first round was inadequate.” Instead of treating the dismal jobs picture as a crisis requiring their full attention, Washington “pivoted” to talking about the deficit – a phantom menace -- at precisely the wrong time. “People with the wrong ideas,” Krugman writes, “were vehement and untroubled by self-doubt.”
This week, Paul Krugman appeared on the AlterNet Radio Hour to discuss his book. Below is a lightly edited transcript of the conversation (you can listen to the entire show here):
Joshua Holland: Let me ask you first about a somewhat provocative word in your title, the D-word. What makes this a depression rather than a so-called “Great Recession” that we’ve heard so much about?
Paul Krugman: A recession is when things are going down, when the economy is heading down. A depression is when the economy is down, and stays down for a long time. We have the Great Depression, which was more than a decade. There were two recessions in there and there were two periods that were recoveries in the sense that things were getting better, but not much better. The whole period was a period that was really terrible for America and for the world. We’re in a period like that right now. Not as bad as the Great Depression, but that’s not much to recommend it. It’s a sustained thing. We’re now in year five of very high unemployment with terrible prospects for young people. It’s a depression.
JH: I wonder if it’s similar to the so-called Long Depression in the late 19th century. It was kind of two recessions sandwiched around a period of growth. The reason I ask that is because median wages really did not recover after the so-called tech bubble burst in 2000 before we hit this crash. Isn’t that right?
PK: There is an argument that even the so-called “Bush boom” – that period of the middle years of the last decade – was still not very good for most Americans. There is that, but clearly things got an order of magnitude worse after 2007. That’s mostly what I’m focusing on in End This Depression Now.
JH: I want to encourage people to read the book, but can you just give readers a sense of what you think is the most important thing policy makers should be thinking about doing right now?
PK: The moral of the book is: this doesn’t have to be happening. This is essentially a technical process; it’s a small thing. It’s like having a dead battery in a car, and while there may be a lot wrong with the car, you can get the car going remarkably easily, if you’re willing to accept that’s what the problem really is.
First and foremost, what we have is an economy that just doesn’t have enough spending. Consumers are hobbled by debt, corporations don’t want to spend if they don’t see consumer demand. Somebody has to step in and spend, and that somebody is the government. The government could – and by all means let’s talk about forward-looking, big projects -- right away get a big boost in the economy just by reversing the big cutbacks that have taken place in state and local governments these past three years. Get the schoolteachers rehired and get the policemen and firefighters back on the beat. Fill those potholes that have been developing in New Jersey and I believe all over America. We’d then be most of the way back to a decent economy again.
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.
JH: It seems like humans are supposed to accumulate knowledge, but we haven’t done a very good job in this respect. Is there any chance that we might come to look like Greece?
PK: It’s pretty hard for us to look like Greece. The thing about Greece is that they don’t have their own currency. That makes you vulnerable to a lot of stuff in a way that having your own currency insulates you. Now what we could have is political dysfunction, and we’re working on that, but the people who are working on that are the ones who say because of Greece we must not only slash spending and cut social programs, but also for some reason we must slash taxes on rich and the corporations.
We are nowhere near having a Greek scenario. It’s much more likely that we’re going to find ourselves looking like ourselves in the 1930s or Japan. We’re actually well on our way to a Japan-type long-term stagnation. Greece is the wrong country to be afraid of. They are not a model for us.
JH: It’s the politics. Last year when our credit was downgraded it wasn’t downgraded because of any economic reality, but because Congress couldn’t get it together to lift the debt ceiling.
What about the bond markets? We’re hearing again and again that they’ll punish us if we don’t cut Social Security or if we don’t transfer healthcare costs onto elderly retirees. Have we seen any evidence for this? Is there anything behind this assertion?
PK: Gosh, if you believe the people saying that you would have lost a lot of money. I know people have lost a lot of money doing that. The bond markets are willing to lend America -- the US government -- long-term money at about 1.7 percent as of right now. That’s ridiculously low. The index bonds that are protected from inflation actually have a negative interest rate. The bond markets are saying they’re worried about economic stagnation. They’re worried there aren’t going to be investment opportunities because the demand is so weak. So they’re going to park their money in US government debt, which is considered safe. The last thing you should be worrying about, at least according to the bond market, is those deficits. Those are not the problem right now.
JH: We’re not the only ones who have been afflicted by this scourge of irrational deficit hysteria -- the idea that we should cut spending when private sector demand is deep in a hole. Let’s talk about Europe. Are we headed toward the end of the European economic union? Basically, as I understand it when you look at the very heavily indebted countries, they’ve essentially created a gold standard. They can’t devalue their currencies and can’t do any of the monetary tricks that one would logically pursue in these circumstances.
PK: They created something that’s actually worse than the gold standard. If you’re serious about economic history then you know the gold standard was a major reason that the Great Depression got as bad as it did. But at least countries had their own currencies. All they had to do was say all right, enough of this gold standard business, and they could escape. Now it’s much harder.
I don’t see how Greece stays in the euro. Leaving will be terrible, but staying is a no-hope situation. They will leave. Once people see that can happen, there will be in effect bank runs in Spain and Italy, which are much bigger players. That can only be contained if European elites start to behave very differently. They have to say, wait a second -- punishing people for their alleged fiscal sins is not the priority now -- saving the euro is. That means open-ended lending to the banks and the governments of those countries. It means having a much more expansionary and somewhat inflationary monetary policy. Maybe that will offer enough hope to save the system. It’s moved pretty fast now. I think you can see that there’s quite a large chance that there will be no euro a year from now.
JH: Let me turn you to another topic. We’ve seen stagnant middle-class wage growth for basically a generation. There are all sorts of theories popular in conservative think tanks about why this is either a myth or a really good thing. You wrote a piece recently about how income inequality is driving what one might call “political inequality” -- one follows the other. Can you unpack that idea for us?
PK: First it starts with an observation. Inequality has had its ups and downs. We were a very unequal society before the Great Depression. We became a much more equal society during the 1930s and especially during the 1940s. We stayed middle-class for a while, then became unequal again. Political polarization, which you can actually measure using various statistical things on congressional voting, also has had its ups and downs. They track each other perfectly. Political polarization and income inequality march hand in hand. There’s every reason to believe that relationship is not an accident.
What happens is when the wealthy are very wealthy they can in effect buy political support. The way that’s worked in practice in the United States is that the Republican party moves with the interests of the super elite. Not the 1 percent, but the .01 percent. So the extraordinary explosion in incomes of the .01 percent relative to everybody else has pulled the Republican party far to the right to the point where there is no center. The center did not hold, it dissolved and turned into a chasm. That’s not because Democrats moved to the left, because they didn’t; they moved right. It’s because the Republicans moved off into the Gamma quadrant. That is at the root of our political paralysis right now.
JH: They not only spend money directly on campaigns, but they also fund these networks of what I call alternative information infrastructure. If you look at for example billionaire Pete Peterson he’s put $1 billion of his own money into a network of think tanks and media projects to help us understand that the greatest threat that we face are deficits, far-off deficits projected 30 or 40 years out.
I just want to turn quickly to trade. You won your Nobel Prize for your new trade theory. You were a vocal free trader in the 1990s. You got the New York Times column and I think you started to think more about politics. It's my long-held belief that the purely economic arguments about the benefits of trade are somewhat irrelevant in the real world, because when they go to negotiate these trade deals the US trade representative -- like its counterparts in Europe and Japan -- is heavily influenced by corporate lobbying. So while we may have a theoretical idea of the benefits of trade, when we’re talking about the actual treaties being negotiated behind closed doors under a barrage of lobbying, can they actually yield those theoretical benefits?
PK: I would say that the first 50 years of post-war trade negotiations were a good thing because they produced a world with relatively low barriers, especially to exports of manufactured goods from poor countries. That’s really important because you have success stories, countries that have moved their way up into becoming decent places to live through those exports, and countries that keep their heads above water through exports. If Bangladesh couldn’t sell their exports of cheap clothing through the world market they would be a disaster area.
A lot of trade agreements in the last couple of decades haven’t really been trade agreements. They’ve been agreements about protecting various kinds of interests. I teach a course on and off about this stuff. You look at something like the Central America Free Trade Agreement and that wasn’t really a trade agreement. That was actually an intellectual property agreement largely about making sure our pharmaceutical companies had their monopoly power. So that’s the sense in which you’re right. A lot of what passes under the banner of free trade is actually something else and is often detrimental to the interests of workers both here and abroad.
JH: That was actually a trade protectionism agreement then?
PK: It was in effect. If you really look through it you found out that basically workers in those countries were gaining only a little bit more market access, but pharma companies here and in Europe were gaining a lot more in the ability to basically enforce their monopoly position.
JH: Now you have this elite discourse about the deficit and that elides the success that we’ve seen over generations in terms of Keynesian economics. Do you think the fact that we have a half-dozen countries in Europe have gone back into recession -- and a couple more are teetering on the brink of going back in recession as a result of this austerity madness -- is that changing people’s minds in terms of policy makers?
PK: Well, some. Not enough, but I think we’re making progress. I’ve been writing columns for a dozen years and my first principle is that to a first approximation nobody ever admits that they were wrong about anything. But you can see that, clearly, the tone of the discussion has changed quite a lot over the last six months -- that we are moving back towards sanity. Whether it’ll be time enough to avoid catastrophe I don’t know. I think hammering on these points and pointing to the evidence does seem to work, which is why I published the book. It’s in the hope we can get the debate to move a little bit further in the direction of doing the right thing.
JH: It’s been interesting to watch your progression as a blogger. You're obviously a leading public intellectual, but you're not above posting silly cat videos, are you?
PK: Well, that’s what you’ve got to do. That’s a great medium for somebody who thinks the way I do. It’s kind of a scratch pad for things that end being in columns and books. I find it an all-around fulfilling exercise, although it’s taking up too much time everyday.