End This Depression Now!

Paul Krugman received the Nobel Prize for economics in 2008, and he is a professor of economics at Princeton. The title of the book implies that he has a way of ending the depression and in this respect he is an unashamed Keynesian, arguing that a serious burst of government spending is the only way to jumpstart the economy. He takes the view that the Obama stimulus was too small, and yet conventional economic thinking concluded that it had not worked even though some $787 billion was involved. Keynes maintained that the boom, not the slump, is the time for austerity since cutting demand in a recession only causes a further contraction. A central insight is that your spending is my income and my income is your spending, meaning that spending is precisely what creates income elsewhere. Instead of government spending, there has been quantitative easing, which has put money into the banks who have not passed it on, but rather channelled it into the stock market and increased their own reserves. This does not create demand but pushes interest rates down to zero. Because of the housing crash, zero was not low enough and the result is a liquidity trap where there is no cost to holding more cash while overall demand remains too low.

At this point, Krugman brings in the thought of Hyman Minsky who hypothesised that rising leverage in banks eventually leads to financial instability, and the whole house of cards comes down. So far as the behaviour of banks is concerned, deregulation encouraged risk-taking rather than efficiency, leading to a situation of the survival of the most reckless, which was bound to end in disaster. The extensive historical analysis throws a good deal of light on our current situation. This is exacerbated by rising debt levels, much of which is the direct result of the 2008 financial meltdown (although, he argues, not in the case of Greece). An initial stimulus by government may create further debt in the short-term, but will bring the level down in the medium term owing to enhanced economic activity. Cutting spending puts the economy into a liquidity trap in spite of very low interest rates. Although writing primarily from the US standpoint, Krugman devotes some space to Europe, and in particular to the UK, where he uses the term Austerians. He argues that Cameron has engaged in unforced austerity, although George Osborne would respond that he was under pressure from credit rating agencies to act responsibly. Business confidence fell abruptly, along with spending, which is only just beginning to recover, but unemployment has a long way to go to return to pre-2008 levels. In the short term, Krugman's argument makes a lot of sense, but it does not address the externalities of economic growth and the environmental crisis that it has helped to bring about along with other factors mentioned in my review of 10 Billion above.