With his latest book Nobel laureate economist Paul Krugman boldly claims that the American economy is in a depression, not a recession and that, despite protestations from politicians and fellow economists, we have the power to end this depression, but we lack the political leadership to do so. The first portion of Krugman's argument is provocative enough and certainly spurs disputation with his fellow macroeconomists. Some, like Krugman, agree that we've been in a prolonged recession since 2008 with brief periods of recovery followed by relapses. By now most everyone knows what brought on our current economic malaise: consumers became over-leveraged with debt, our government ran massive deficits, and a housing bubble was allowed to develop unchecked and subsequently burst. When the housing market crashed and we all realized how overextended we all were the economy went into an intense period of retrenchment from which we have not yet recovered. Krugman offers up a summary of the crisis in a way that lay people can understand. Macroeconomics may be boring to some, but it's not impenetrable, and Krugman walks readers through it all with concise easy to follow prose. The parallels to the Great Depression are a bit ominous to say the least, especially if you've studied that period of our history. The economists and the public of that era scarcely understood what was occurring and were uncertain how to progress. Much like our current era there were points where the economy seemed to recover. Certainly not everyone was unemployed and economic activity continued on at varying levels, just as now. And that's the scary part, the parallels between the Great Depression and now that Krugman lays out. The three legs of the economy, spending by consumers, businesses, and government, all gave out at roughly the same time. An admitted Keynesian economist, Krugman argues that government must step in to prop up the economy, even if we are carrying a burdensome debt load, and that this stimulus can only be provided so long as the economy is sluggish and until consumer and business spending recovers.
Krugman's invocation of Keynesian economic policy is likely to be the most controversial argument as macroeconomists remain divided on the wisdom of Keynesian economic policy. The massive debt racked up by the U.S. government over the past decade makes arguing for increased deficit spending a hard case to advocate for. The rise of the Tea Party and deficit hawks complicates things further. The polarization of our two party system and an unwillingness to find common cause further poisons the atmosphere. Complicating things further is the general publics and politicians general and seemingly willful ignorance of the principles of macroeconomics renders them unable to comprehend what is happening and how to respond; a situation which again mirrors the 1930s. What is truly frightening is that political leaders from Federal Reserve Chairman Paul Bernanke (a scholar on the Great Depression for heaven's sake!), to the President, to members of Congress don't seem to be able to grasp even the basics of macroeconomics and how to respond to a crisis, a theme addressed quite in Robert Draper's Do Not Ask What Good We Do: Inside the U.S. House of Representatives, which I recommend and read while reading this book. The forced austerity of Greece, the United Kingdom, Spain, Portugal, and Ireland should all point to the danger of cutting off government spending at a time when consumer and business spending have been deeply entrenched, and yet we are failing to head the warning signs. The United Kingdom's recent slide into yet another recession should be the warning sign for deficit hawks that now is not the time to cut government spending, but again that is an oversimplification. The United Kingdom has a harder time offering treasury bonds and notes in the global market, something the United States is not hampered by. The question is how long will that last?
Krugman makes points that are by turns frightening, accurate, and frustrating. Pointing out the similarities to the Great Depression is a bit frightening as we linger in the fourth year of our current economic malaise. Some may argue that hypothesis as there are certainly bright spots to our economy, but if you were to read the newspapers and histories of the 1930s you'd see the same thing occurring then. It's clear that now as then we're fumbling our way through a crisis with halfhearted measures, avoiding some of the clear mistakes of the 1930s but sadly repeating others. Readers may agree or disagree with Krugman, but at least he's consistent in his beliefs and able to articulate them in a way that is approachable and understandable. Clearly Krugman is pitching this idea with an eye on the 2012 elections. Whether his ideas resonate with voters and more importantly politicians remains to be seen. I cannot help of the Rooseveltian idea of at least trying SOMETHING to end our malaise.