Wednesday, May 02, 2012

The Depression They Believe In

Paul Krugman has a new book with a very provocative and timely title: End This Depression Now!  I haven't yet read it but here are the major points he's making in interviews:

We may no longer be in an economic recession, but we are functionally in a depression, though not as great as the Great Depression of the 1930s.  Krugman points out that within the Great Depression period were years when the U.S. economy grew, just not enough to rebalance the economy and in particular, not enough to re-employ enough people and otherwise end the misery.  This is the state of things now.

The stock market crash precipitated the Great Depression, and the financial crash of 2008 precipitated this one, though in both cases there was a long period of preparation.  One of the factors was the growing gap between the very rich and everyone else, with a commensurate rise in real poverty at the other end. 

While figuring out all the right moves to make in 2009 in order to get the U.S. economy back on track was complicated, the way to pull the U.S. out of its current depression now (Krugman says) is relatively simple.  Government spending to stimulate the economy is what works, and smart government spending works better.  It might have been difficult in 2009 to identify what this money should be spent on, but now the situation makes it pretty clear.

State and local governments have been savaged during the Great Recession, and have shed about 600,000 jobs, most of them serving a public good, if not utterly essential to civic well-being and to both the short and long term economic future.  In this period, the natural growth in government jobs (responding to population growth etc.) would be an additional 700,000 jobs.

That adds up to 1.3 million jobs, and if the federal government would simply sign those paychecks for awhile, it would in itself generate enough economic activity to lower the unemployment rate to under 7% in 18 months.  This might well be enough to start the "virtuous circle" of people spending, and business responding to new demand by employing more people, who will spend that money, etc.  This would End This Depression Now!

What makes this especially possible now, Krugman said, is that some of the other weaknesses in the economy are healing.  Household debt was a huge problem, and it is down substantially.  The housing market is poised to come back because of pent-up demand.  Those additional paychecks and the economic activity they generate would likely to go spending (rather than paying down debt) and the pent-up demand for housing would be a natural place for some of that spending to go.  Since the housing market is a particular drag on the economy, that would be good.

What we cannot do, he says, is follow the European example and go for austerity.  Those governments that have cut back spending substantially have further weakened their economies.  The U.S. debt is manageable, and although federal spending on "entitlements" is an issue that may well need to be addressed, it doesn't require that spending be cut now or in the near future. 

Here's the Reuters report on Krugman's book that gives some of the economic background concerning Europe.

I'm sure Krugman makes fact-based arguments in favor of this thesis, but even without reading his book (and unfortunately not reading his column as much as I used to), all of this makes a lot of sense to me.

With high unemployment over the past three plus years and dropping slowly, the income of the very rich growing fast, and the incomes of the 99% stagnating or dropping, and especially with the extent of poverty in America--the highest percentage the Census Bureau has measured in 52 years--it's not much of a stretch to conceptualize this as a depression.

As for the solution, I've been noting the drag on the employment figures each month by continuing job losses in state and local governments.  Here in California, austerity in state government is crippling education, and ruining the state university system, a process over years that I've watched up close and personally.  Unemployment and insecurity for teachers, police, fire, EMTs, etc. is truly depressing to communities in all senses of the word.  And clearly these are overwhelmingly jobs that are necessary to the public good, and necessary to the short and long term economy.

I'm not sure if Krugman goes into the politics of this, but that's what's driving this.  Our current political polarization tracks neatly with the growing income inequality (as graph-happy Rachel showed on Tuesday.)  GOPers promoting federal austerity and trying to panic people about the deficit (which they by the way created entirely in the Bush years) are not just serving a high-sounding ideology.  Nor are they only trying to keep taxes low for the very wealthy (since that's where voters would want the government to look for the money necessary to pay for 1.3 million government workers), although that is certainly a mighty motivation.

No, there's very clear and present party- political motivation.  It should be remembered a day after May Day, the international workers day, that the once powerful economic and political force of labor unions have faded to almost nothing in the private sector.  The strongest unions represent workers in the public sector, especially state and local government employees.  Rabid Right GOPer legislatures and governors have been busy trying to end union rights for public sector unions quite directly in several states.  But the indirect method--or maybe it's the more direct method--is just as effective: get rid of the employees altogether, at least until you can get rid of the unions.

And in fact, that's where the biggest drops in government employment have been--in these very red states (doing nothing for their economies except weakening them, or or their state budgets, since they typically lower taxes for corporations and rich people.)  Unions of course are the largest financial backers of Democratic candidates, and their members provide a lot of political organizing.  It's another partisan political attack without conscience, without regard for other consequences, like the laws to make voting and registering harder for certain people.

Krugman's book comes at a fascinating moment--just as the Obama campaign is gearing up, and as President Obama is providing the rationale for the government's role.  It will be interesting to see if proposals like Krugman's become an explicit part of the President's agenda this summer.    

One more point.  Krugman mentioned that he hoped the entitlement problem (Medicare & Medicaid) can be addressed in the long run largely by bringing down health care costs themselves.  This was a major intention of the Affordable Care Act.  Even before the Act takes full effect, there are signs that health care costs are stabilizing, as cost containment mechanisms begin to take hold, and thousands of seniors are seeing billions in savings on their medicines.  

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