Home > The Economy > Krugman thinks we are looking at a lost decade

Krugman thinks we are looking at a lost decade

June 24, 2010 Leave a comment Go to comments

In the New York Times today Paul Krugman writes:

The case for expansionary policies in the face of a slump is intellectually difficult; Keynes described the writing of the General Theory as a painful process of discovery, and so it is. The natural instinct of almost everyone is to think that tough times require tough measures, and that if the economy is suffering, the government should tighten its own belt. It would take a clear consensus from economists to overcome that natural bias.

And that consensus has, of course, been lacking — largely because a significant proportion of the economics profession has spent the last three decades systematically destroying the hard-won knowledge of macroeconomics. It’s truly a new Dark Age, in which famous professors are reinventing errors refuted 70 years ago, and calling them insights.

On top of that, anti-stimulus appeals to a fundamental meanness of spirit that is always present in the political world. The super-asinine we shall always have with us.

May I say that I expected something like this? It’s part of the reason I was so anxious to see Obama go for the maximum stimulus possible: it seemed obvious that he would have only one shot.

And because that shot wasn’t big enough, I really do think we’re looking at a lost decade.

http://krugman.blogs.nytimes.com/2010/06/23/against-the-super-asinine-the-gods-themselves-contend-in-vain/

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Categories: The Economy
  1. Maria Negreponti-Delivanis
    June 24, 2010 at 2:18 pm | #1
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    I quite agree with the point of view of Krugman. But, I am afraid that all those sad evolutions are unavoidable as long as the neoliberals are, despite the terrible economic crisis they produced, on the top of every important decision. Look how bad is everything in Europe and how the Greek economy is on the way to destruction under the advice of the IMF. I wonder how we could react.

    • Alice
      June 25, 2010 at 11:48 am | #2
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      Maria

      Neoliberaism is (has become) a machine, an organisation, with strategies and goals, invented by the privileged for the privileged. It is sophisticated, well resourced, has media at its fingertips, and articulated self promotion (infiltrate left parties with right agendas – hence a double dose of right with no choice is what most voters now face) but ultimately neoliberalism is nothong more than the propagation of greed and selfishness by those with the marshalled resources to rip off others.

      When we, as a collective will, can get over neo liberal interests and propaganda is when we will grow in a healthy economic sense once more. It would be nice if it happened in my lifetime for my childrens sake. Unfortunaely I think there is yet more hapless destruction to come for many once sound industrialised nations before we wonder how it all went so pear shaped.

  2. Fred Foldvary
    June 24, 2010 at 4:18 pm | #3
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    An efficiency tax shift would revive the economy without austerity, but economists of both the welfare-statist left and the privilege-preserving right suppress it.

    • Paul
      June 29, 2010 at 11:44 am | #4
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      Exactly. Just increase the taxes for the wealthy and your fiscal problems disappear.
      But… there is the problem of tax evasion and tax competition. So a tax raise for the rich has to be international or you’ll need to (re-)introduce capital flow controls/restraints and in last consequence probably also tariffs. I am for it, since IMHO meanwhile the advantages of such a policy outweigh the drawbacks. But there are drawbacks, it probably means turning away from the so called “free trade”.

  3. larry martin
    June 28, 2010 at 1:44 am | #5
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    Well, `ol Krugman is voicing the party line on keynesian spending and it would remain valid if the Gov’t expense sheet were not constantly running in the red. Keynesian economics was supposed to be a deal where govt deficit spending was permitted in times when private sector stimulus was necessary, but then the debt was paid off and govt spending went back to balanced budget so as to not create a drag on the economy. The US, and most welfare states, broke that deal long ago, and unfortunately were hitting the wall along with all the other welfare states that promised more than their economies could support. This is a political economics dilemma, not something taught much in schools anymore. Simply, there is a new “neocon” idea going viral now about govt spending being out of control. Well, with so many of the decisions made over that past hundred years or so – automation, consumption based economies (are you choking on stuff yet?), off-shoring and globalism cutting the growth potential of the welfare states – well its a perfect storm and the folks who are beholden to govt largess one way or another are going to have worse than a lost decade. Krugman is right about having to cut the cost of health care, but that is only part of it – how are the welfare states going to deal with the rising expense of fuels, the unfavorable ratio of retirees to tax payers, the declining ecological services we used to take for grated and will now have to engineer…? I mean, really, Krugman is so 20th century. He and most of his colleagues are clueless (or don’t see how to discuss) the challenges really facing the welfare states.

  4. purple
    June 28, 2010 at 10:37 pm | #6
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    Europe looks pretty good compared to the US now. Lower unemployment in the core states and a better social safety net.

    The US looks to be in big trouble economically. Little to export besides weapons and IP (good luck enforcing that) and a domestic market in shambles.

  5. Ken Zimmerman
    June 29, 2010 at 2:26 am | #7
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    Neo-liberalism is indeed a set of tools, theories, arrangements, institutions, etc. intended to support, expand, and protect private markets as the foundation for an economy. Despite what many say, or scream it is not evil. It is just one possible way to organize and operate an economy. Its supporters have made it hegemonic by political maneuvering, control of economic strong points (banks, regulation, etc.), economic education, government, etc. It is not correct in any transcendent sense. So despite actions and statement by its supporters it is neither always correct nor always successful. In fact, it has failed quite often and quiet dramatically. Those who support its overthrown must be as smart, determined, and attentive as its supporters if they want to displace it. Despite what many economists on both sides would like to believe this is primarily a political battle (in the broadest sense of politics) – a part of the struggle to build and re-build the world we occupy together. Its all about how we live together.

  6. J
    June 30, 2010 at 12:51 pm | #8
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    Krugman’s thinking, like that of most so-called Keynesians, is rotten to the core. Keynes himself, that great FREE MARKET economist, would turn in his grave.

    Keynes advocated Government to step in as a consumer-of-last resort, when the private sector was so fearful as to threaten deflation. He advocated infrastructure projects, spending which could take place through private sector channels in order that the tap could as rapidly be switched off when times were good again. Only in the context of the paradox of thrift did Keynes comment that “in the long run, we’re all dead”.

    Just a few differences with today’s “Keynesians”
    – Keynes would have called for government surplus when the economy was booming in the mid 2000s. “Keynesians” were happy to see the state sector grow, and with it the structural deficit.
    – Keynes knew that the business cycle was an unavoidable characteristic of the market. Only “Keynesians” assumed that they had “beaten boom and bust” (Gordon Brown).
    – Keynes would not have called for fiscal stimulus when inflation was (as now) 5% (writing in UK) – he would have recognised that what was required was simple correction within the market system, painful though it might be.
    – Identifying the need for fiscal stimulus in 2008-early 2009, Keynes would have insisted that public cash be funnelled into constructing bridges, hospitals and schools. He most definitely would not have advocated ever-growing levels of public sector employment (which constitute the structural deficit, in contrast with cyclical stimulus which can be turned off).

    Krugman’s line “anti-stimulus appeals to a fundamental meanness of spirit that is always present in the political world.” gives the game away. Many of today’s so-called “Keynesians” are motivated by moral, redistributive and statist urges, not by Keynes’ original and startling insights into management of boom and bust in a market economy. These urges can be defended (and attacked) under the label of socialism, but they have absolutely nothing to do with Keynes.

    • Alice
      July 1, 2010 at 8:42 am | #9
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      J

      You have it all wrong
      with this comment
      ” Keynes would have called for government surplus when the economy was booming in the mid 2000s. “Keynesians” were happy to see the state sector grow, and with it the structural deficit.”

      I was in my bed hoping and praying Greenspan would put the brakes on that out of control economy in the US …..BUT NO…he let it go on and on…in the name of the free markets Friedman minimal government intervention…lower mine and thine taxes crowd of mistaken neoliberal fools…

      “”It was Keynesians that were happy to see the state sector grow”"”".. No it wasnt AT ALL – but neoliberal free marketeers who hid the growth of the state in contracts to their mates, a war we didnt need, a profiteering racket people didnt need in govt contracts awarded to mates of Bush like Halliburton (oh yes – privatise Congress with donations and award your mates defence contracts of taxpayers funds).

      Your statement is such FALSITY – and people (like the 1 million plus unemployed and running out of benefits in the US, and the one in three house sales that are forecosures, and the sagging consumer confidence and the sagging dow jones…..)

      and people can see straight through the lies J. It wasnt Keybnesianism that failed us all…but Monetarism and Milton Friedmans unique sort of conservative “free individual choices”..taken WAY too far.

      Time to go.

      • J
        July 1, 2010 at 9:24 am | #10
        Quote

        Greenspan was responsible for the monetary levers. Government had control of the fiscal levers. You confuse the two.

        Your suggestion that free marketeers were happy to see state expenditure rocket is frankly absurd. Free marketeers were shouting about the need to reign in the structural deficit – as, indeed, Keynes would have done. If only we’d listened, we might have more of Keynes’ ammunition to pump-prime the economy now, rather than a bust government.

        For example most “Keynesians” thought (in the UK) that the expansion of the public-sector payroll by 20% while increasing its pay faster than the private sector and doing nothing about pension commitments was good, good, good. Keynes would not have agreed.

        If public sector contracts are corrupt, then we should all be equally angry. That has nothing to do with the debate between Keynesians and monetarists, please don’t bring it up again.

        I notice that you fail to respond to my point that, at 5%, we currently have ample enough inflation to ward off the paradox of thrift. With negative real interest rates it is largely irrational to save.

  7. Ken Zimmerman
    July 1, 2010 at 1:47 am | #11
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    J, tell me how you really feel. Sorry, I don’t understand your point. So Krugman isn’t a “pure” Keynesian. So what! Keynes wasn’t a pure Keynesian. But what are the chances tht what he is proposing will do more good than harm?

  8. J
    July 1, 2010 at 9:04 am | #12
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    My point: Krugman is a perfect “Keynesian”. He supports state intervention at all times, based on a respect for government’s decision-making and a moral desire for redistribution. Some people who do this wear their Socialist badge with pride – fair enough. Others try to tell us they are disciples of Keynes.

    And you’re right, Keynes was not a “Keynesian” in today’s sense. He was one of the great market economists; he told us that markets sometimes get it (badly) wrong – when facing the paradox of thrift, threatening deflation, only the government can (and should) step in. But at other times, he recognised that government’s role lies in the creation of benign conditions for private enterprise (including regulation of financial markets) – government should step back from the real economy.

    The chances of causing harm, by government overactivity when structural deficits are already massive, is significant. The chance of causing harm by underactivity when economic growth is sluggish is also significant. Picking our way through the trade-off is difficult – and historians will disagree about whether we made the best choices. But Krugman always confuses the issue because he is an interventionist through and through, unlike Keynes.

    Keynes would help us now – Krugman, Skidelsky are of less assistance.

  9. Ken Zimmerman
    July 1, 2010 at 7:30 pm | #13
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    But this is not an either/or situation. In fact, that’s really the main source of our current problems. We continue to be told by the “experts” that we must choose either socialism and the welfare state, OR neo-liberal private markets generally unregulated by government (in fact government supposedly should have virtually no role in these markets). This is an insane choice and it’s wrong. It’s derailed any chance for coherent and workable economic/industrial policy and planning. I recommend you read Clyde Prestowitz’s book “The Betrayal of American Prosperity.” His hope is that our present economic collapse will finally lead us to abandon “Laissez Faire Globalization.” It’s a fantasy, and one that’s killing us. Prestowitz has consistently warned against disregarding foreign competition (“seeing the US as #1″) while “Laissez Faire Globalization” erodes the US productive base. Our overreliance on capital markets that turned out to be a corrupt, over-leveraged, houses of cards has shifted the global balance of power to Japan, China and Europe, regions with protectionist policies that the US has failed to counter. And where did all this start? According to Prestowitz it can be traced to Cold War principles–low taxes, deregulation, privatization–that only make sense in the larger context of government-market coordination and cooperation. But these have become icons that we seem unable to challenge. What made America great in the 20th century was the New Deal “private sector-government partnership.” We have to get back to that – no more wars between the private sector and government, we need both working together. We’re cutting our own throats if we don’t make this change. But at this point we may be half way through the cut with little we can do to stem the blood flow.

  10. J
    July 2, 2010 at 8:49 am | #14
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    I agree that a balanced approach is required. As economists, we shouldn’t be hung up on ideology, we should try to provide a balanced critique that

    1. Recognises that most markets are pretty good systems with which to allocate resources to satisfy our wants
    2. Draws on the best insights from Pigou and others to address microeconomic market failures
    3. Draws on the best insights from Keynes and others to address macroeconomic market failures, including the paradox of thrift (the subject of your original post) as well as the sustainability (note that stability is a chimera) of the financial system.

    So Keynes is in our top-five economists, maybe he’s #1. My complaint is that his lessons have been hideously abused by Krugman and others who, instead of telling us that the state has a role to play in staving off deflation and depression, tell us that the state should just increase its reach at all points on the business cycle. Big state good, small state bad. How balanced is that? By failing to argue for a smaller state, and a public-sector surplus, when times were good, they have totally undermined trust in the recommendations of Keynes – so it’s unseemly that they keep invoking his name “against” free-market thinkers, when he was actually the greatest market economist of all. And by failing to note the critical distinctions between 1931 and 2010 (particularly inflation) they undermine any claim to speak at all.

    In 1931 there was no economy worth speaking of outside USA and Europe. There was nobody else to turn to if the tap was switched off. Today, as you note, other countries are catching up. We are NOT stuck in the paradox of thrift and deflation, we are (slowly) waking up to the reality that the world doesn’t owe us a living, and that we need to plan for the future.

    I haven’t read Prestowitz but it sounds as though I don’t need to. It sounds like yet another presciption for protectionism and state interference.
    – I don’t know where he gets the idea that the “balance of power” has shifted to Europe – over here in UK plenty of people are very jealous of your country’s commitment to freedom and enterprise, and are convinced that you will recover better from the financial crisis
    – As for China – could it possibly be that China has benefited from a massive and cheap supply of labour, and a willingness to give that labour the chance to work hard, combined with access to modern transport and IT?

    Apologists for a massive and growing state will always find ways to blame free-market thinking for tough outcomes. In fact the causes of our predicament are so simple:
    – we lived beyond our means, and still think the world owes us a living
    – we failed to invest in ourselves and our futures
    – too many people (more so in Europe) are dependent on bankrupt governments for their way of life
    – government intervention in all areas of the economy has taken the forming of “doing” rather than “facilitating”.

    If the economy is a game of cricket, Government should mow the cricket pitch and provide the umpires – instead it increasingly wants to field a team, and now people like Krugman seek to blame the pitch because the umpires didn’t do a very good job.

  11. Ken Zimmerman
    July 3, 2010 at 2:15 am | #15
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    J, hate to burst your baloon but eveentually someone must. Markets function only some of the time and even in those times they function imperfectly. That’s not really a hit on markets, just a recogniztion of the difficulty of contructing economic devices in general and markets in partcicular. Markets are also very difficult to maintain and break apart and down for all sorts of reasons. And the more actors involved and more complex the market the more fragile it is. I’d put a lot more faith in the backup systems in any modern jet aircraft than I would any modern market in any country. Prestowitz was a member of Ronald Reagan’s economic team. So he’d hardly a hard core Keyensian, and certainly not a protectionist. But he is a realist. Markets cannot protect us from giving away the farm to China, India, Japan, Germany, etc. Arguably China and Germany have best weathered the current economic crisis. Why? Prestowitz is correct in his diagnosis here. They both have strong and creative production economies. On the other hand the US production economy has shrunk to less than half its size when Reagan was President. The US today mostly “produces” financial trades and political rhetoric. And this is a direct result of govenment policy spurred on by bankers and other so called experts in the 21st century economy. Both government and crazy “free markets” got us into this mess. Free markets never know how to get out of a mess. They simply continue to do what they’ve done before (the definition of insanity). At this juncture only government can get us out. But US government is so “captured” by free market ideologues that it’s essentially paralyzed. Markets are interesting and sometimes productive economic devices but they often go off track, often dominate political as well as economic thinking, and often become their own worst enemy. At that point someone outside the markets, with good sense, and a strong hammer needs to step in. We’re at or actually past that point.

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