End This Depression Now!
by Paul Krugman (W. W. Norton & Company, 2012; $26.50)
Paul Krugman is stepping up to play the kind of role that John Maynard Keynes performed in the 1930s — arguing in clear accessible language for the government to spend to get us out of the slump. End This Depression Now! is his just-published polemic against the austerians — the powerful tribe found on both sides of the Atlantic that insists on balanced budgets. The book frequently hits the mark, but there is a crucial weakness that undermines the power of Krugman’s case.
He is so exasperated with the lack of serious arguments by the advocates of austerity that he oversimplifies his own argument. Krugman insists that getting the U.S. economy out of the ditch is just a question of adding enough government spending to make up for the shortfall in private demand. He knows, however, that sooner or later, high rates of private investment will have to kick in if a real recovery is to be sustained.
But when will this happen? One of the key elements of private investment — construction of single-family homes — has dropped precipitously and might never return to pre-downturn levels. In 2006 new single-family homes represented more than 18 percent of private fixed investment, but by 2011 had fallen to 5.7 per cent. And since further suburban and exurban growth raises deep environmental problems, it is not clear that a full recovery of this sector is desirable. But what types of private investment will rise to fill in that gap? Krugman doesn’t even entertain this question.
Krugman disconnects his policy prescriptions from his diagnosis of the causes of the crisis. Worse, he explains the downturn as the consequence of financial excesses and then immediately turns to the task of stimulating demand.
Keynes and likeminded thinkers in the United States in the thirties took a different tack; they made a structural argument about the origins of the crisis. They argued that the speculative excesses of the 1920s that produced the crash were caused by deep underlying problems, particularly the maldistribution of income. This allowed them to insist on the need for both immediate government stimulus and policies that actively redistributed income. This powerful linkage worked to insulate the reform project from right-wing counterattacks. In fact, Milton Friedman’s strategy for undoing the New Deal was to argue that there were no structural causes of the Great Depression; it was the result of policy mistakes by the Federal Reserve.
Both in End This Depression Now! and elsewhere, Krugman is an eloquent critic of increasing income and wealth inequality. Yet he is unwilling to follow Keynes on this key point. He even asks at one point: “But is there also an arrow of causation running directly from income inequality to financial crisis?” His answer is uncharacteristically timid: “Maybe, but it’s a harder case to make.”
Failing to make that case has the ironic effect of ceding the structuralist high ground to right-wing economists. Take a recent column by David Brooks, “The Structural Revolution,” which argues against a “cyclicalist” approach to the recession:
But you can only mask structural problems for so long. The whole thing has gone kablooey. The current model, in which we try to compensate for structural economic weakness with tax cuts and an unsustainable welfare state, simply cannot last. The old model is broken. The jig is up.
The fallacious conservative argument is that irresponsible borrowing by governments, individuals, and businesses caused the meltdown, so across-the-board austerity is the only solution. The biggest obstacles to recovery, in their story, are a shortage of workers with sufficient skills and investor anxieties about continuing public deficits.
Krugman effectively demolishes this right-wing version of structuralism. But people naturally gravitate to explanations of great events that invoke some kind of big and powerful causal mechanism. By treating the initial crisis as an anomaly caused by irresponsible financial behavior, Krugman fails to deliver such an explanation and leaves the Right’s story untouched. Without an alternative narrative about what went wrong, their “too-much-borrowing” fairytale will remain hegemonic.
But we do have an alternative big story — and we need Krugman’s megaphone to help get it out. One piece is the argument that Occupy Wall Street has made: when the 1 percent grabs most of the gains from economic growth, as they have over recent years, bad things happen. The 99 per cent have to either limit their consumption or increase their borrowing and go further into debt. Either way, effective demand in the economy will ultimately be restricted. At the same time, multi-millionaires think nothing of putting big sums into extremely risky investments that promise high returns because they already have more dollars than they or their children will ever need. But unlike polo or auto racing, this dangerous hobby of the rich can actually blow up the global economy. Thanks to JPMorgan Chase’s huge losses last week, we know that the biggest banks still can’t resist playing this treacherous game, especially when they’re trying to keep up with the richest kids (the hedge funds).
This runaway speculation is a sign of how our financial system has failed to direct capital in productive directions. As environmentalists have been arguing for 40 years, an economic growth path based on cheap oil and coal and urban sprawl is no longer sustainable. But entrenched interests and a dysfunctional financial system have blocked the huge public and private investments in resource-conserving technologies — renewable energy, mass-transit systems, and less wasteful patterns of land use — that would generate durable and sustainable growth.
So, yes, let’s end this depression now by new government stimulus, but let’s also make structural reforms to redistribute income and to accelerate investments in the long-delayed clean-energy economy. As Krugman makes clear, no one should listen to the austerians. After all, they are basically the same cabal of climate-change deniers and ultra-rich — think the Koch brothers — who got us into this mess.—Fred Block
Fred Block is a research professor of sociology at the University of California at Davis.
This review was first published in Dissent Magazine.