Depression Economics and Paul Krugman

“Deregulation of financial services was supposed to have made us all better off, so why did most of us have to live off credit to keep up?” is what Decca Aitkenhead wonders.

According to her President Obama is the only world leader who has attempted a Keynesian stimulus programme. But than he questions “Why has it been only minimally effective? Why do most other western leaders still insist the only way out is to tighten our belts and pay off our debts, when that clearly isn’t working either? And how come the bankers, credit agencies and bond traders are still treated with cowed reverence – don’t frighten the markets! – when they got us into this mess?”

Paul Krugman: ‘These are not hard concepts.’ Photograph: David Levene for the Guardian

Perhaps we should try to find time to read Paul Krugman‘s new book “End this depression now!”

In End This Depression Now! Paul Krugman argues “Nations rich in resources, talent, and knowledge—all the ingredients for prosperity and a decent standard of living for all—remain in a state of intense pain.” Yes we all can see that we could live in such a flourishing world of butter and honey. but we lived in a world were media got people off in dreams which would not be easily be realised, though it was presented as everybody could get it at a finger-snap. And those who did not get all those smart gadgets would be the ‘loosers’, or the ‘noobs’.

Belgium got out the slump and disastrous situations of the two world wars. The Nobel prize-winning economist who writes a column in the New York Times and teaches economics at Princeton University had already written about the Japanese slump in The Return of Depression Economics in 1999.

The Western world could flourish and five years ago hardly anybody thought that our modern civilised nations would be forced to endure bone-crushing recessions for fear of currency speculators; that a major advanced country could be persistently unable to generate enough spending to keep its workers employed; that even the Federal Reserve would worry about its ability to counter a financial market panic. Several people laughed at it when they heard prophetic warnings for a depression similar as in the 1930s.

Reorganisation  or restructuring the businesses was the fashion word. The magic word to bring the solution was the Reorganisation, no matter that people would be put on the streets and be made redundant if they were an old play tool that did not satisfy any more. governments wanted to please the CEO‘s and put sand in the eyes of the shareholders, who were promised that the best solution to grow was to buy other factories or banks.

People had to think ‘big’ and had to be assured there was not a danger in expanding but there would be a danger in not expanding.Europeans had to go for the Euro which would bring more unity and would make travelling easier. At last we were released from the exchange of several currencies. Not having to have several currencies in the pocket to go from one end of Europe to the other should have been a blessing.

But did it not go all out of control, beginning with an increase of the prices, while the governments did nothing to call a halt. The content of the packets got smaller but the price kept the same and later increased. Not one government of the European Union thought of taking measures against the factories, businesses and organisations which had found a new growing market, but did not mind to get as much profit as possible no matter were they could find the cheapest employees or labourers.

The market failed to come to a regulation, to keep pace with an increasingly out-of-control financial system which positioned the world for the greatest financial crisis since the 1930s.

For the first time in two generations, failures on the demand side of the economy – insufficient private spending to make use of the available productive capacity – have become the clear and present limitation on prosperity for much of the world.

We can see that the ‘bubble’ was not been seen by economists and policy makers who also weren’t ready for this. The economic market had been growing for some years on the presented dreams by the media and the banks who were eager to get as much money out of the pocket of the saver.

Central banks have repeatedly managed demand – cutting rates to keep spending high – so effectively that a prolonged slump due to insufficient demand became inconceivable. Except in the very short run, then, the only limitation on economic performance was an economy’s ability to produce – that is, the supply-side.

According to Krugman there is an analogy between a household budget and a national economy. When we look around us we do have things to which we can relate. To him in there we could find the solution to our problems.

Paul Krugman says: “We know that advanced economies with stable governments that borrow in their own currency are capable of running up very high levels of debt without crisis. And we know it, actually, best of all from the history of the UK – which spent much of the 20th century, including the 30s, with debt levels much higher than it has now.”

I, just as an ordinary civilian and not an economist, am convinced that we as a capitalist community only can survive if we consume, and therefore there has to be created a climate to be able to consume.

First, according to me, the media should stop to bring such exaggerated negative news, and stop making people afraid to invest or to spend their money. Shares have for a long time not been so cheap. Now is the moment to buy shares and provide cheap money for the industry. By taking care that all the savings are kept in the banks who do not give enough interest, people are making those banks even more powerful, though they are at the heart of a lot of problems. It is because so many are slashing spending they are causing a depression that makes their financial situation even worse.

Secondly the government should make work of being stable themselves and getting as many people back at work, providing the industry with building projects for the whole community. They should have to try to give the people back a ‘feel good’ awareness and a communal sense, and this they have to do by being less greedy but spending more money not on increased wages on members of parliament, but on road and civil works.

Thirdly, the governments should get back regulating the banks, electricity, gas and water, and be in control of the expansion drift of pricing and manufacturing.

In the 1980s politicians were in part persuaded to deregulate by the argument that it would make us all richer. And to this day, “there’s this very widespread belief that there was, in fact, a great acceleration in growth. But this really isn’t hard. You sit down for a minute with the national account statistics, and you see it ain’t so.”

There were early warning signs, such as the savings and loans crisis of the late 80s, that should have alerted politicians to the dangers of financial deregulation, moral hazard and subsequent spiralling debt. But by then Wall Street’s influence over policy-makers had rendered them deaf to alarm bells – in part because bankers were financing so many politicians’ campaigns. Krugman quotes Upton Sinclair’s famous observation: “It’s difficult to get a man to understand something, when his salary depends on his not understanding it” – but more than that, he suspects the sheer glamour of wealthy bankers had a powerful influence over politicians.

Krugman states that only one government is “engaging in unforced austerity because it believed in the confidence fairy: David Cameron’s government in Britain.” However, “business confidence fell to levels not seen since the worst of the crisis and consumer confidence fell even below the levels of 2008-9… Yet Cameron and Osborne remain adamant that they will not change course.” He praises the Bank of England, which continues to do what it can to mitigate the slump.

Paul Krugman – Caricature (Photo credit: DonkeyHotey)

Krugman looks at whether the economic collapse in Europe would have happened regardless of the US crash, what the causes of the European crisis were and why it came as such a shock. He discusses how long the euro will be seen as a unifying currency when there are such stark differences between the economic situations of countries that have adopted it.

Please do read more about it in:

Paul Krugman: ‘I’m sick of being Cassandra. I’d like to win for once’

Stop worrying and learn to love inflation

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