Krugman Boots One

Paul Krugman has played an indispensable role challenging the conventional wisdom during the financial crisis and the slump that followed. He has been proven right again and again in his brilliant debunking of austerity as the cure for recession.

Therefore, it was astonishing to read a rare, truly wrongheaded Krugman column in Monday’s New York Times. The offending column is titled “A Permanent Slump?

In it, Krugman proposes that something fundamental—something structural—has changed in the economy so that the new normal is what economists call “secular stagnation,” or as Krugman puts it, “a persistent state in which a depressed economy is the norm, with episodes of full employment few and far between.”

As I read through the column, I kept waiting for the pivot. Surely Krugman was setting up this claim as a straw man, the better to demolish it.

But, no. Krugman evidently buys this view. Even worse, the expert whose research he cites in defense of this thesis is one Lawrence Summers.

Krugman observes, crediting Summers, that consumer demand during the late boom of the 1990s was pumped up by a housing bubble and by people’s habit of increasingly borrowing against their homes. “Without that demand, how can we ever return to full employment?” he wonders. What if prosperity now depends on bubbles? Maybe something demographic accounts for chronically slower growth?

Surely Krugman knows better. For starters, there is the reality of increasing income inequality. If wages and salaries had risen with productivity growth after1978 as they did during the 30-year postwar boom, the average household income would be well in excess of $80,000 and the minimum wage, over $17 an hour.

That equals a lot of demand. People borrowed against their homes because their earnings were flat. Increase earnings and you can have bubble-free growth.

Krugman also knows that in the aftermath of a financial collapse, the economy can stay depressed for prolonged periods in the absence of massive government fiscal intervention. In the late 1930s, when unemployment was stuck in excess of 12 percent, commentators were making arguments much like those in Krugman’s column. High unemployment with stagnant wages was the new reality and we had just better get used to it.

But then Hitler invaded Poland, World War II broke out in Europe, Japan’s empire went on the march and Roosevelt persuaded a reluctant Congress to begin the process of rearming. After the attack on Pearl Harbor, the government entered $100 billion of war production orders in the first six months of 1942.

And a funny thing happened to secular stagnation. It vanished. Unemployment dropped to around 2 percent. For the four war years we grew at an average annual rate of around 12 percent. The war was the greatest accidental Keynesian recovery program of all time.

To pay for all that economic stimulus, we borrowed and taxed. At war’s end, the debt ratio was about 120 percent of GDP. But the war put so much purchasing power in people’s pockets and did so much to recapitalize American industry that the high public debt was no problem at all. The war boom shifted into the postwar consumer boom, and living standards rose steadily for another three decades. The debt gradually fell back to under 30 percent of GDP thanks to all that growth and broadly shared prosperity.

The point is that what looks like “secular stagnation” is often nothing but depressed purchasing power combined with the hangover from a financial collapse. And it could indeed continue indefinitely, just as Krugman’s column warns—unless and until the government gets off the austerity kick. I was on a panel with Krugman when he made exactly that point.

So unless this odd column was intended as a consolation valentine to Larry Summers, it is a mystery why Krugman has shifted ground and embraced an utterly defeatist view. One awaits the follow-up column by Krugman, rebutting Krugman.


Yes, but .... How are we to overcome lack of consumer demand since wages will remain low due to the shipment of jobs abroad and increasing levels of automatLion?

I think the point is that it isn't enough for the government to get off the austerity kick. In the last 30 years, we have had administrations that practiced austerity and governments that spent like drunken sailors (hey, guess which belonged to which party?). But incomes for the middle and working classes continued to stagnate and prosperity, such as it was, continued to rely on debt-fueled bubbles.

It's that income stagnation that's the problem here. If real wages stagnate, the only way to grow is to take on debt. What's driving that stagnation? I could list off a dozen possible answers to that question. If I had to guess, I would say it's likely the expansion of the financial sector, which is feeding on both sides of the economy. They suck up its brightest minds and corrupt its corporate governance, retarding real growth; and then they suck up the fruits of what growth we get.

But that's only a guess. We need real answers backed up by data. And then, once we have the answers, we need a political class willing to act on them. Getting off the austerity kick would be a good start, but nowhere near enough.

How can the author in the same column say Krugman is "truly wrongheaded" and "And it could indeed continue indefinitely, just as Krugman’s column warns—unless and until the government gets off the austerity kick.".? If what Krugman is warning about could in fact happen unless current fiscal policy is replaced with much better fiscal policy, then surely Krugman is right to raise the alarm.

Also, regarding "Surely Krugman knows better. For starters, there is the reality of increasing income inequality. If wages and salaries had risen with productivity growth after1978...", how can I read that other than as saying that if we lived in a counterfactual universe in which income inequality hadn't increased a lot since 1978, then Krugman would be obviously wrong? The author is obviously aware than income inequality has in fact increased greatly since 1978 so how he can believe this is evidence against Krugman's case in this universe?

As Brad DeLong in fond of asking, why can't we have a better press corps? One that, for instance, doesn't contradict itself within the text of a single column.

The government cannot stimulate the economy. The whole concept of Keynesianism is flawed :

“Every stimulus effort has not two but three stages. When the stimulus is imposed, there is some positive short-run increase in GDP. When the stimulus is removed, there is an approximately equal and opposite reduction in GDP. But after that, the stimulus must be paid for with higher taxes or ongoing borrowing—causing a further reduction in GDP. Thus the total impact of the Keynesian policy is negative over its life.” ( )

The experiment was actually run once on an enormous scale - WW II :
“I have estimated that World War II raised U.S. defense expenditures by $540 billion (1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8 (430/540). The other way to put this is that the war lowered components of GDP aside from military purchases.” ( )

So, government stimulus doesn’t work, but reducing government has historically done so. We no longer have to use historical cases. We have an example that’s happening today as well!

“Right now Estonia is in the limelight because it’s the fastest-growing economy in the region, expanding at a 7.6 percent rate. It is the only eurozone country with a budget surplus. National debt is just 6 percent of GDP. How did they bounce back from the devastating 2008-09 crisis?”I can answer in [three] words,“ states Peeter Koppel, investment strategist at the SEB Bank: ”Austerity, austerity, austerity.“ Estonia went through three years of belt-tightening. Public sector wages were cut, the pension age was raised, benefits were reduced. ”It was very difficult, but we managed it,“ explains Juhan Parts, Estonia’s minister of economy and communication. This ”little country that could“ is now leading the way to recovery and prosperity. The Austrian way.” ( )

Atlas Shrugged was supposed to be a warning, Not A Newspaper!

Krugman is unable to admit, in public at least, that the game is fixed.
We are not having a slow recovery. We are having a recovery for the rich, paid for with our Tax money, and depression for the rest of us.
He was a big fan of NAFTA. Everyone who knew anything about the Mexican Government (or the US Government ) knew that all environment and labor provisions would be ignored and that Government supported American Agribusiness would destroy Mexican small farmers.
He was a big fan of the deregulation of Wall Street, he crooned of how "The Free Market " would control things better than restrictive laws.
Krugman is a big fan of "Free Trade ", where huge multinational Corporations, exploit the people and ravage the rescores of under developed Nations, taking the profits back to Wall Street and leaving ecological devastation behind.
Krugman nearly swooned when Paulson & Co. "saved" us from a depression, when all Paulson did was give our Tax money to the biggest thieves on the planet and left the rest of us to suffer for the greed of the psychopaths that Obama dubbed "Savvy Businessmen".
Krugman should go down to the border and see the damage that NAFTA has done - just remind him not to drink the water and don't breath the air.

I think Krugman's "utterly defeatist view" is more likely the result of his reading the long English translation of Thomas Picketty's book, Capital in the Twentieth Century. Piketty there shows that future growth in the G8 is very likely to return to the long term (as in 2,000 year average long term) growth rate of 2% with a return on capital closer to 4% yielding a stagnant rentier-dominated world similar to the nineteenth century in Europe. Ironically, it could also be influenced by Krugman finally appreciating Baran and Sweezy, but I think the former is much more likely. The high growth rates that the G8 saw post WWII look like a real anomaly in long term world history, resulting from a combination of recovery from the capital destruction of the period of the two World Wars and the threat posed by the Bolshevik Revolution. Do you really want to repeat that?

So sorry. See that this article came out last year, while the English translation of Piketty's book only came out this March. I doubt that Krugman read it in French! So maybe your Summers make-up call theory is correct.

You need to be logged in to comment.
(If there's one thing we know about comment trolls, it's that they're lazy)

, after login or registration your account will be connected.