End the Depression Now!
Sorry about the rather long wait for this book analysis. I found this book to be an overall great read, being an informative and entertaining look at the crisis, and a interesting look at the solutions at our disposal. I say an analysis, by the way, because I don’t have a clue as to how to begin a review, however, I am very excited to discuss some ideas that were raised within the book.
Paul Krugman’s End This Depression Now! is a rather optimistic outlook on our recent crisis, he provides a very much Keynesian view of the crisis, and emphasises that lack of demand is our problem, and not so much in the structural side. One of the main arguments that Krugman makes is one regarding debt, with the application of the Minsky model and using debt deflation as the method through which the recession takes place. He argues that the high amount of leverage that consumers and corporations have undertaking have made use vulnerable to shocks, upon reading this I came to the natural conclusion that paying off the debt will be a fundamental part of our recovery. Krugman argues otherwise, he suggests the idea of using a combination of GDP growth and steady inflation to erode away at the real burden of the debt. I question the sustainability of this strategy however, since Krugman also argues fiscal stimulus is key in this process, governments will have to essentially gamble that the stimulus and its multiplier effect, coupled with the inflation will increase at a faster rate than the debt being accumulated. Perhaps in countries with a lower debt to GDP ratio this might be possible, where the spending of the government may be enough to compensate for the lack of private spending. However, I worry in the case of Japan (with debt 230% of GDP), where high growth and inflation seems unlikely. This strategy could go one of two ways, the stimulus and its multiplier effect could indeed lead to GDP growth which will increase the incomes of labour leading to increase private spending and in turn, investment, which should decrease the burden of the debt. The alternative is that governments get caught in a even more vicious cycle of increasing debt, and low confidence, indeed this seems to be a case of ‘go big or go home’. Another major criticism I have of this tactic, is that the added fiscal stimulus will lead to more involvement by the government in the economy, which will surely lead to a slower rate of growth in the future. It seems to me then that there's a trade off between getting the economy going again, and having a rate of growth that somewhat resembles pre-crisis levels. Indeed, this was the conclusion that I came to in my RES essay, although a recovery was assured, steady, rapid growth was not.
One idea for fiscal stimulus that I found interesting was the proposal that stimulus didn’t have to be an ‘add-on’ at all, Krugman argued that by simply making up for the austerity measures that local and state governments had to undertake that 3 million jobs could be created, mostly in the education sector. Indeed, this idea could prove to be both a long-term improvement in quality of labour, and short-term improvement of incomes and therefore spending increase. This also circumvents the need for ‘shovel ready’ projects and reduces the risk of the stimulus leading to excessive growth. The role of monetary policy in this situation should also not be disregarded, quantitative easing is already at work with reducing long term rates for government, with the program set to end, the role of interest rates will once again become more important. It would be unwise for central banks around the world to prematurely increase the rates in fear of bubbles forming in financial or asset markets, this will become a delicate issue to come.
One element of the crisis that saw more discussion in this book was the idea of inequality, specifically ‘spending cascades’ where higher spending in high income groups leads to a cascading effect where lower income groups that are in social contact with these high income groups want to spend more. In order to facilitate this spending, debt must be taken on, Krugman cites this as an alternative reason for increased debt. On the topic of debt, it seems to me that there is now greater attention being paid to the debt cycle, is there way to prevent the booms and busts of this cycle? The fluctuations in the cycle seem to be more due to behavioural changes in anything else, with consumers being more willing to take risks and take on debt when incomes are rising, perhaps the cycle could be seen as a representation of the people’s general view of risk. The risks that are taken could lead to reward, or it could lead to busts, it should not be a large problem in our recovery however, as confidence is quite low and therefore willingness to take on debt should be smaller.
The Eurozone situation was particularly interesting to me, as I was not previously aware of the weaknesses of the Euro. With the unified currency, a devaluation of currency not possible, the only recovery option left for some peripheral countries is a long series of austerity. One element of the eurozone situation that surprised me was the ease with which the creditworthiness of one country could be so easily transferred from one country to the next, through the use of a shared currency. Krugman raises an interesting area of economics known as ‘optimal currency areas’, with the following argument being that the eurozone is indeed not ‘optimal’. Issues such as language and cultural barriers, and lack of fiscal support prevented the shared currency from being optimal. This is an area that I will do further reading on, perhaps it warrants a post of its own.
Overall, I find it hard to find issues that I disagree with in this book, being a Keynesian myself. I found Krugman’s analysis of the crisis to be very thorough, and he raises some ideas that I feel are less known such as the ‘spending cascade’. I would recommend this book to anyone that has even a remote interest in the events and causes or the recent crisis. That being said, it’s always good to have an alternative view, and to that end I’m reading Philip Coggan’s ‘Paper Promises’ which has been a completely different experience altogether, look forward to the discussion of that one soon!