End This Depression Now!, by Paul Krugman (Norton, 272 pp., $24.95)
Paul Krugman’s new book should come with a disclaimer: there is no relation whatsoever between the ideological assertions of the New York Times columnist and bestselling author and the other Paul Krugman, who received a well-deserved Nobel Prize in 2008 for his scholarly research on international trade. Winning a Nobel Prize in economics doesn’t grant legitimacy to everything an economist writes, and Krugman’s book, like most of his newspaper columns, shows little connection with his past academic work.
To be fair, Krugman acknowledges that he has become a “pundit,” an implicit admission that his book is informed by his liberal views as much as by his economic knowledge. End This Depression Now! is essentially a pamphlet pretending to offer scientific answers to the U.S. economic slump. Its argument is easy to summarize: we have the knowledge and tools to revive the economy and provide jobs to millions of unemployed Americans. Consequently, those in positions of power who refuse to put Krugman’s advice into practice, themselves motivated by ideology, are the enemies of the unemployed. They want Americans to suffer for their past sins of excessive borrowing and spending. As if to emphasize that he sees the economic debate as a morality play, Krugman dedicates his book to the unemployed.
“Ending the depression should be incredibly easy,” Krugman asserts. The government must simply spend more, because the American consumer is spending less. Borrowing from Keynes, Krugman argues that the crisis, having been provoked by a decline in private demand, can only be solved by an increase in public demand. This is “a moral imperative” (the book constantly zigzags between ethics and economics). Public spending would be not only efficient, Krugman contends, but ethical.
This inflationary solution, which Krugman calls “a feel-good experience,” has been tried before. It worked, he claims, during World War II, when arms-building programs lifted the U.S. economy out of the Great Depression. Half-jokingly, Krugman says that the threat of an alien invasion should suffice to motivate more government spending. But he knows well—or should—that President Obama has already tried to rekindle growth this way. He admits that the results were not impressive, but only because public spending didn’t go far enough and wasn’t sustained.
The argument is dubious. All economies are built on confidence. An increase of the public debt now, as Krugman urges, would create a crisis of confidence, not a quicker recovery. Robert Lucas, the originator of rational-expectation theory, has shown how and why consumers and entrepreneurs reject Keynesian policies: in essence, the marketplace is wiser than the government. Entrepreneurs and consumers alike understand that an increase in public demand is artificial and short-term. Consequently, public demand leads not to increased consumption or investments but to price hikes. This unintended consequence of Keynesian demand has been repeatedly demonstrated in theory and practice. Milton Friedman and the late Anna Schwartz, in their Monetary History of the United States, showed that excessive money printing, which Krugman strongly recommends, always leads to inflation, not growth.
Krugman does not even mention these fellow economists, Nobel Prize winners all. He acts as if they did not exist, hardly a scientific attitude. Nor is it scientific to ignore that the only time Keynesian theory was truly applied—after the recession caused by the 1974 “oil shock,” when petroleum-producing countries formed the OPEC cartel and sent fuel prices soaring—it produced “stagflation,” a mix of inflation and economic stagnation. Krugman ignores this feel-bad experience, as well as the supply-side policies, based on monetary stability, that sparked the 1980s recovery. He hardly mentions the success of so-called austerity policies (which basically means balancing public accounts) in nations like Germany, which has seen strong economic growth. Krugman’s pithy dismissal: “It will not last.” His attitude calls to mind a quip from Paul Samuelson, a Keynesian himself, who observed that doomsday prophets could predict five crises for every three that actually happen.
Krugman also ignores the political consequences of the inflation he supports. Inflation may not create growth, but it does redistribute incomes. In an inflationary situation, one’s wealth depends less on what one does than on where one stands. Those able to cope with price hikes—a shopkeeper charging more, a banker raising interest rates—may become inflation’s beneficiaries. But wage earners and pensioners usually fall behind when prices rise, becoming poorer by the day. All those who lent their money at a fixed rate, usually by buying treasury bonds, are bankrupted in an inflationary era. This well-known pattern destroys all faith in government and leads to political upheaval. Throughout the twentieth century, inflation has been the death of democracy.
A modest knowledge of economics and of recent history, then, reveals that Krugman’s “feel-good experience” would not reduce America’s long-term unemployment: it would only cause more damage. With any luck, the cynical ideologues he vilifies will ensure that his solutions are not adopted. Common sense, which the author dismisses, rejects so simplistic a solution. An honest review of American history offers ample proof that economic growth does not obey government’s decrees, because the engine of growth has always been innovation and entrepreneurship. Stimulating the economy through the financing of “shovel-ready” projects and the like might sound attractive, but it has no record of success in the American experience. Paul Krugman lives in an unreal world: his book could even qualify him for another Nobel Prize—in literature.