Krugman on Keynes: No time to duck

A collaborative network activity such as World Streets needs to find its own best combination of Sir Isaiah Berlin’s variant on the Greek parable of the Hedgehog and the Fox (“the fox knows many things, but the hedgehog knows one big thing”). Given the huge information overload with which we live in this highly strung twenty-first century, it is absolutely critical that we play the hedgehog and stick rigorously to our topic. But… at the same time the many sided reality is that our topic by its very nature requires us also to be a fox. Thus are the contradictions and challenges of maturity.

At the crux of our dilemma and challenge is the economic factor, which is to say that if we do not find and deploy the resources that are needed to accomplish the important tasks before us, well then these will simply not get done — or at the very least, if done, done poorly. Here’s the simple truth. The economic realities with which we are confronted today relate not only to the sheer quantities of resources which are available, but above all to the enormous poverty of thinking of many of the economists, policymakers, politicians and financiers who are leading public policy and budgetary practices in many parts of the world. We live in a time in which one of our highest priorities is to find the ingenious balance between austerity and ingenuity, that of using less money but using it more wisely so that our city streets can become safer, more efficient, less polluting, less dangerous, quieter, fairer and everything else that it takes to create a beautiful and livable city.

It is almost exactly 20 years after US presidential candidate Bill Clinton told the American public that “it’s the economy stupid”, and here we are once again trying to figure that one out in these new circumstances. From this end it is our firm belief here that the appropriate response to the economic turn-down and turmoil that we are facing pretty much across the world today, is not to climb into the drab bomb shelter of the absolutely dreadful combination of austerity, heartlessness, forced poverty and accelerating social injustice which is presently being peddled as policy throughout most of the developed and developing world today. This is exactly the wrong thing to do at this time — and to support this position let us share with you what the Nobel prize-winning economist Paul Krugman has to say on exactly this topic in today’s New York Times.

Keynes Was Right

- Paul Krugman, New York Times, December 30, 2011

“The boom, not the slump, is the right time for austerity at the Treasury.” So declared John Maynard Keynes in 1937, even as F.D.R. was about to prove him right by trying to balance the budget too soon, sending the United States economy — which had been steadily recovering up to that point — into a severe recession. Slashing government spending in a depressed economy depresses the economy further; austerity should wait until a strong recovery is well under way.

Unfortunately, in late 2010 and early 2011, politicians and policy makers in much of the Western world believed that they knew better, that we should focus on deficits, not jobs, even though our economies had barely begun to recover from the slump that followed the financial crisis. And by acting on that anti-Keynesian belief, they ended up proving Keynes right all over again.

In declaring Keynesian economics vindicated I am, of course, at odds with conventional wisdom. In Washington, in particular, the failure of the Obama stimulus package to produce an employment boom is generally seen as having proved that government spending can’t create jobs. But those of us who did the math realized, right from the beginning, that the Recovery and Reinvestment Act of 2009 (more than a third of which, by the way, took the relatively ineffective form of tax cuts) was much too small given the depth of the slump. And we also predicted the resulting political backlash.

So the real test of Keynesian economics hasn’t come from the half-hearted efforts of the U.S. federal government to boost the economy, which were largely offset by cuts at the state and local levels. It has, instead, come from European nations like Greece and Ireland that had to impose savage fiscal austerity as a condition for receiving emergency loans — and have suffered Depression-level economic slumps, with real G.D.P. in both countries down by double digits.

This wasn’t supposed to happen, according to the ideology that dominates much of our political discourse. In March 2011, the Republican staff of Congress’s Joint Economic Committee released a report titled “Spend Less, Owe Less, Grow the Economy.” It ridiculed concerns that cutting spending in a slump would worsen that slump, arguing that spending cuts would improve consumer and business confidence, and that this might well lead to faster, not slower, growth.

They should have known better even at the time: the alleged historical examples of “expansionary austerity” they used to make their case had already been thoroughly debunked. And there was also the embarrassing fact that many on the right had prematurely declared Ireland a success story, demonstrating the virtues of spending cuts, in mid-2010, only to see the Irish slump deepen and whatever confidence investors might have felt evaporate.

Amazingly, by the way, it happened all over again this year. There were widespread proclamations that Ireland had turned the corner, proving that austerity works — and then the numbers came in, and they were as dismal as before.

Yet the insistence on immediate spending cuts continued to dominate the political landscape, with malign effects on the U.S. economy. True, there weren’t major new austerity measures at the federal level, but there was a lot of “passive” austerity as the Obama stimulus faded out and cash-strapped state and local governments continued to cut.

Now, you could argue that Greece and Ireland had no choice about imposing austerity, or, at any rate, no choices other than defaulting on their debts and leaving the euro. But another lesson of 2011 was that America did and does have a choice; Washington may be obsessed with the deficit, but financial markets are, if anything, signaling that we should borrow more.

Again, this wasn’t supposed to happen. We entered 2011 amid dire warnings about a Greek-style debt crisis that would happen as soon as the Federal Reserve stopped buying bonds, or the rating agencies ended our triple-A status, or the superdupercommittee failed to reach a deal, or something. But the Fed ended its bond-purchase program in June; Standard & Poor’s downgraded America in August; the supercommittee deadlocked in November; and U.S. borrowing costs just kept falling. In fact, at this point, inflation-protected U.S. bonds pay negative interest: investors are willing to pay America to hold their money.

The bottom line is that 2011 was a year in which our political elite obsessed over short-term deficits that aren’t actually a problem and, in the process, made the real problem — a depressed economy and mass unemployment — worse.

The good news, such as it is, is that President Obama has finally gone back to fighting against premature austerity — and he seems to be winning the political battle. And one of these years we might actually end up taking Keynes’s advice, which is every bit as valid now as it was 75 years ago.

A version of this op-ed appeared in print on December 30, 2011, on page A23 of the New York Times edition with the headline: Keynes Was Right.

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About the author:
Paul Krugman is a Times columnist and winner of the 2008 Nobel Memorial Prize in Economic Science. His latest book is “The Return of Depression Economics and the Crisis of 2008.” You can read his Conscience of a Liberal blog at www.krugmanonline.com/. And as you see here he can also ride a bike (at least he could back in 1973 when this picture was taken.)

# # #

Editor’s notes:

In our sector the behavior of policy leaders in most places it is nothing short of scandalous.

“The bottom line is that 2011 was a year in which our political elite obsessed over short-term deficits that aren’t actually a problem and, in the process, made the real problem — a depressed economy and mass unemployment — worse.”

On one hand necessary investments in sector are being curtailed by politicians at far higher cost to the economy and society than the leaders’ short-term out-of-pocket arithmetic would suggest. Essential services are being cut, access to jobs and vital social services is being seriously constrained, good programs are being shut down, talented people providing important social as well as specific operational functions are being eliminated and thrown on to the unemployment rolls, whole parts of the population are being locked out of the economy and society, all while ill thought-out calls for privatization of important and complex social and operational functions are being given priority — as if that were going to help us cope with the exigencies of the moment. We are making ourselves voluntarily impoverished and in the process creating a Depression mentality that can do no good to anyone.

That is already bad enough but there is worse yet to come. As opposed to this “cut it at all costs” mentality, we are still facing some of the overhang of the old thinking back from the days when we thought we were fat and rich — and thus find ourselves in a ridiculous position where some egregious and unnecessary mega projects are still being contemplated or even advanced which are far too costly, as well is almost always ineffective in terms of the fundamental objectives of sustainable transport, social justice and, while we’re at it, a productive and engaged population.

The tragedy is that while a number of the most qualified economists and social scientists on this planet are in broad agreement with Prof. Krugman concerning the need for a more aggressive and creative economic policy based on attack rather than defense, based on investment and job creation versus deficit fixation and debilitating reductions, the fact is that feckless politicians, above all at the levels of national governments and international agencies, are consistently getting it terribly wrong. This is a time for greatness and not for short-term political expediency.

Over the course of 2012 we shall be seeking out examples of governments at these various levels who are starting to get it right in our sector where there is enormous potential for using relatively small amounts of money cleverly to get very large benefits all the way down the line. We invite our readers to keep us informed of examples of best practices under these difficult circumstances, and we can guarantee that we will do our bit to spread the message.

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2 thoughts on “Krugman on Keynes: No time to duck

  1. Thanks so much Ann, even if it’s for the rotten news. I react immediately.

    As an economist, I keep trying to make the point that ours is above all a moral science, and that as such it requires not only the understanding of what this or that person or this or that school has chosen to put into numbers at some point in time, but also all a deep discernment of and sympathy for all that is human and social that resists easy quantification. Think of it as the human and social envelope of the thin numbers.

    Thus when you take away the postal workers in rural and small communities, you are not only dealing with the mail, but also these’ people’s important social functions. You take away the school or train station and the rest of economic and social fabric of that place shrivels and eventually disappears. We know that, but the politicians and the chorus of bright eyed half trained economists and financial specialists continue to support these suppressions.

    The great Albert Hirschman made this point again and again, and Joe Stiglitz, Amartya Sen, Paul Krugman and others continue to give this their best go day after day. This is the main challenge of 21st century economics.

    We cannot afford to give up. Actions like that of the Los Angeles Unified School District deserve high profile public debate and our support.

    We need to take on and win this war one battle at a time.

    Or of course we can just wait and see what happens. To lose is to chose.

    Eric

    Reply

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