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Book Review: Paul Krugman, End This Depression Now (WWNorton, 2012)
The best part of this book is its dedication which shows Prof. Krugman’s heart is in the right place. It reads, “To the unemployed, who deserve better.” Indeed they do, but the public policies recommended by the book have not and will not help them at all! This is a book written by a Nobel prize-winner in economics. But there is not an original thought in the book. Krugman is a Keynesian circa 1950 but Keynes, had he lived to read it would not subscribe to it. Keynes showed an ability to learn from historical reality while Krugman does not.
In the introduction, he writes: "For the most part, the mushrooming literature on our economic disaster asks, 'How did this happen?’ My question, instead, is ‘What do we do now?’ Obviously these are somewhat related questions, but they are by no means identical. Knowing what causes heart attacks is not at all the same thing as knowing how to treat them…” Maybe, but can you know how to treat them if you don’t know what causes them? In any case, a few pages later he writes that bankers went wild and caused the depression. But it was the Federal Reserve which enforced the Community Investment Act which virtually forced banks to make bad loans.
He continues: “Why is unemployment so high, and economic output so low? Because we--whereby 'we' I mean consumers, businesses, and governments combined—aren’t spending enough.” That is a mistake all Keynesians make. They equate consumer spending, business spending, and government spending as though it makes no difference to economic growth who does the spending. “It’s all about demand,” he writes. It is easy to get out of a depression according to Krugman; all the government has to do is spend, spend, spend.
“But the core insight – that what the world needs right now is for governments to step up their spending to get us out of this depression – will remain intact. Ending this depression should be, could be almost incredibly easy.” The Obama administration following recommendations of economists like Krugman passed an $800 billion dollar economic stimulus plan in 2009 which had no impact on employment at all. Why? Because the government spending consisted largely of transfer payments, subsidies to inefficient wind and solar plants, subsidies to buyers of hybrid and electric autos who bought fewer fossil fuel autos, et al. Instead of criticizing the wasteful expenditures of the government, he argues that the government was inadequate and the government should spend, spend, spend. He makes no attempt to evaluate the unintended consequences of the enormous debt. To the contrary, he writes about “The Folly of a Short-Term Deficit Focus.” He writes that “state and local governments were forced into large cutbacks as stimulus funds ran out, cutting back on public investment and laying off hundreds of thousands of teachers.” We’ve found no evidence at all for this statement.
The writes about the negative “impact of cutting spending by $100 billion when the economy is in a liquidity trap” but does not mention that the federal budget was still running a deficit of nearly a trillion dollars per year when his book went to press.
No mention about the unintended consequences of the increased debt itself worsening the international trade deficit, encouraging domestic corporations to outsource production abroad, directly leading to increased unemployment. Moreover, he is oblivious of the fact that increased government spending is at the expense of private spending as Prof. Ramey of the University of California at San Diego has shown. Krugman, as a student at MIT, was taught as I was at the University of Chicago, “Why worry about the federal debt, we owe it to ourselves.” He appears to be unaware that our trade deficits since the 1970s have converted the US from the world’s leading creditor to the world’s leading debtor and this had negative consequences for employment in US manufacturing industries. Indeed, he seems unaware that Keynes, his hero, had written about the negative economic consequences to a nation running chronic trade deficits and that he would be protectionist if necessary.”
He asserts that the Great Depression was ended by Pres. F. Roosevelt’s increased government spending as a result of WWII. From the depressed conditions of 1939, he writes, “Yet within two years¸ the economy was booming, and unemployment was plunging. What happened? The answer is that finally someone began spending enough to get the economy humming again…military spending soared as America rushed to replace ships and other armaments sent to Britain.. As businesses saw their sales growing, they also responded by ramping up spending.” No mention that when the war ended, the economy fell into a deep recession with few jobs for the tem million returning veterans and that the government had little to do with the following decades of economic growth.
We have a different thesis namely, that the federal government’s policies were responsible for the Great Recession and that the federal government’s policies of unilateral free trade, increased business regulation, foolish environmental policies, and pork barrel politics have been retarding the recovery which can only be led by increased private investment in manufacturing and buildings which the federal government has been doing everything in its power to discourage.
While many of Prof. Krugman’s observations are worthwhile reading especially his observations about the Eurozone’s policies, his book would merit having his Nobel prize rescinded.
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