NEW YORK (Reuters) - Economists and politicians bewitched by the self-righteous allure of budget “austerity” are ignoring history, imperiling the fragile recovery in the U.S. and suffocating Europe, Nobel prize-winning economist Paul Krugman writes in his new book, “End This Depression Now!”
“In the Great Depression leaders had an excuse: nobody really understood what was happening or how to fix it,” Krugman writes in this rallying cry for government-backed stimulus. “Today’s leaders don’t have that excuse. We have both the knowledge and the tools to end this suffering.”
Krugman, a Princeton University professor and columnist for the New York Times, argues forcefully that the U.S. government should reverse austerity measures imposed on state and local governments to give the economy “a large boost,” while funding infrastructure investments and a temporary increase in unemployment insurance and other social safety net programs.
As the book’s title suggests, key to Krugman’s argument is his assertion that the U.S., despite some encouraging economic data in recent months, is in fact in a depression, albeit not one as severe as the Great Depression.
What irks him is his steadfast belief that the country does not need to be mired in one and, further, could get out of it easily: in fact, he argues that the U.S. could achieve full employment in less than two years if it followed “time-honored economic principles.”
“Ending this depression should be, could be, almost incredibly easy,” Krugman writes.
The book’s release is timely, with austerity a catchword in the headlines as the November election campaign heats up.
In Europe, a backlash is brewing against austerity, the theory that dramatically reducing government spending is necessary to restore fiscal health.
The Dutch government last week collapsed after talks on austerity measures failed, while in France the socialist candidate for president Francois Hollande has pledged to reverse austerity measures.
In the U.S., cracks even surfaced among austerity-minded Republicans in Congress recently when the House of Representatives abandoned long-term federal highway funding in favor of two 90-day extensions, despite Republican House Speaker John Boehner’s preference for the long-term solution.
Following the collapse of Lehman Brothers in 2008, Krugman says, most major governments followed the “hard-earned lessons of the Great Depression,” and turned to expansionary fiscal and monetary policy to offset the collapse in private spending.
“But a funny thing happened in 2010,” Krugman writes, in a typically acerbic turn. “Much of the world’s policy elite — the bankers and financial officials who define conventional wisdom —decided to throw out the textbooks and the lessons of history, and declare that down is up.”
Known for his feisty op-eds — his New York Times blog is called “The Conscience of a Liberal” — Krugman throws many a sharp elbow in the book’s 238 pages. While passionately defending the theories John Maynard Keynes, he rails against economists such as Eugene Fama, Robert Barro and Robert Lucas, who argued against economic stimulus.
“In case you’re wondering, all the economists I just mentioned are political conservatives,” Krugman writes. “So to some extent these economists were in effect acting as spear-carriers for the Republican Party.”
Krugman says that the $787 billion 2009 stimulus bill, the American Recovery and Reinvestment Act, was “the biggest job-creation program in U.S. history,” but “woefully inadequate to the task,” a lament familiar to his column readers.
“Worse yet, the failure of the stimulus to deliver clear success had the effect, in the minds of voters, of discrediting the whole concept of using government spending to create jobs,” Krugman writes.
For those who believe more stimulus would now be politically impossible, Krugman offers several scenarios, including a second Obama administration using reconciliation, a Congressional legislative maneuver.
He also notes that two of Mitt Romney’s economic advisers, N. Gregory Mankiw and Glenn Hubbard, though Republicans, are “quite Keynesian in their views about macroeconomics.”
Thus, under a President Romney, Krugman writes, half in jest, “we can at least hope … that once in office he would rip off his mask, revealing his true pragmatic/Keynesian nature.”
Throughout the book, Krugman lambasts those he deems “Austerians,” who practice “new liquidationism.” Theoretically, Krugman concedes, cutting government can increase demand. But so-called “expansionary austerity” was unrealistic given the state of the global economy in 2010 and today.
“It’s not enough for these confidence-related effects to exist,” Krugman writes. “They have to be strong enough to more than offset the direct, depressing effects of austerity right now.”
He also suggests there are sinister motivations driving Austerians. In a section exploring why austerity has appealed to influential Republican policy makers, he quotes a long section from Keynes’s “The General Theory of Employment, Interest, and Money.”
“The part about how the economic doctrine that demands austerity also rationalizes social injustice and cruelty more broadly … rings especially true,” Krugman concludes.
Editing By Peter Bohan