*A full executive-style summary of this book is now available at newbooksinbrief dot wordpress dot com
Since the housing and financial crash of 2008, America's economy has been stuck deep in the doldrums. Indeed, GDP has remained well beneath pre-2008 levels, and employment levels have failed to recover. In an effort to resuscitate the economy, the American government tried first to jump-start it through stimulus spending, and has now replaced this approach with greater austerity. Nothing seems to be working. For Nobel Prize winning economist Paul Krugman, though, the answer is clear: the problem is that the original stimulus effort was too small, and, since that time, the government is moving squarely in the wrong direction. Indeed, Krugman argues that America's current situation bares a striking resemblance to the stagnation of the Great Depression, and that history has taught us what to do in such situations: the government must take an aggressive approach to stimulate the economy into recovery. This is the argument that Krugman makes in his new book `End This Depression Now!'.
Now, Krugman is not a proponent of big government spending under normal conditions. Indeed, even in a recession, Krugman's preferred approach is to drop interest rates in order to spur consumer spending. The problem now is that interest rates are already at zero, and this has not been enough to get consumer spending off the ground, thus leaving the economy in what is called a `liquidity trap'. For Krugman, the liquidity trap is actually quite common in economic downturns that follow financial crashes (as is the case with the current one, and as was the case with the Great Depression), and is why such slumps tend to be deep and prolonged.
According to Krugman, the best and surest way to save an economy from a liquidity trap is for the government to step in and undertake the spending that consumers won't. That is, the government must stimulate the economy back into action, until consumers can get back on their feet enough to take over for themselves. For Krugman, this is precisely what happened in America during WWII, when the government's military spending served to stimulate the economy and save it from the grips of the Great Depression.
Now, Krugman's opponents will point out that the American government has already tried the stimulus approach during this downturn, and that this approach did not work, thus showing that it cannot be relied upon. What's more, these same opponents argue that the government's debt is already enormous, and indeed dangerously high, and that further government spending at this point may well render the debt completely unmanageable, if not force the government into insolvency (which is indeed a threat that is currently being faced by several countries in the European Union). Finally, Krugman's detractors maintain that pumping more money into the economy at this time only threatens to drive up inflation to dangerous levels, perhaps even triggering a hyperinflationary spiral.
Krugman, though, claims that he has answers to all of these objections. In the first place, as noted above, the author maintains that the failure of the government's first stimulus effort did not prove that this approach is ineffective, but that it simply wasn't large enough to do the trick. Second, Krugman argues that though government debt does pose a concern, America's debt is actually not that dangerous by historical standards. What's more, since America has its own currency (unlike the countries of the European Union), it is able to print money to turn over its debt, thus preventing the possibility of bankruptcy. Finally, with regards to inflation, Krugman maintains that inflation simply cannot get off the ground in a depressed economy (as the current situation would attest to), and that when it is triggered in an upturn the government can always reverse its policy, thus keeping it firmly in check.
Krugman does bring up some important points that do deserve to be taken into consideration in the current economic debate. Indeed, the author does seem to make the best argument that can be made in favour of the stimulus approach. However, whether his arguments are strong enough to assuage the fears over the negative consequences that additional stimulus could provoke remains to be seen. A comprehensive summary of the main arguments in Krugman's book is now available at newbooksinbrief dot wordpress dot com.