Paul Krugman has the solution to the economic crisis in his book published earlier this year. You’ll never guess what it is!
Spend Now, Pay Later
The basic situation of the U.S. economy remains now what it has been since 2008: the private sector isn’t willing to spend enough to make use of our full productive capacity and, therefore, to employ the millions of Americans who want to work but can’t find jobs. The most direct way to close that gap is for the government to spend where the private sector won’t.
There are three common objections to any such proposal:
1. Experience shows that fiscal stimulus doesn’t work.
2. Bigger deficits would undermine confidence.
3. There aren’t enough good projects to spend on.
I’ve dealt with the first two objections earlier in this book; let me briefly summarize the arguments again, then turn to the third.
As I explained in chapter 7, the Obama stimulus didn’t fail; it simply fell short of what was required to offset the huge private-sector pullback that was already under way before the stimulus kicked in. Continuing high unemployment was not just predictable but predicted.
The real evidence we should be considering here is the rapidly growing body of economic research on the effects of changes in government spending on output and employment—a body of research that relies both on “natural experiments” such as wars and defense buildups and on careful study of the historical record to identify major changes in fiscal policy. The postscript to this book summarizes some of the major contributions to this research. What the work says, clearly and overwhelmingly, is that changes in government spending move output and employment in the same direction: spend more, and both real GDP and employment will rise; spend less, and both real GDP and employment will fall.
What about confidence? As I explained in chapter 8, there’s no reason to believe that even a substantial stimulus would undermine the willingness of investors to buy U.S. bonds. In fact, bond market confidence might even rise on the prospect of faster growth. Meanwhile, both consumer and business confidence would actually rise if policy turned to boosting the real economy.
One would probably have to read this book to believe the astonishing simplicity of his Neo-Keynesian approach. I could have written it in in a single page. Actually, I could have written in in a single sentence: More public debt and more government spending is the solution to this economic depression because government spending is capable of creating the jobs necessary to produce economic growth, while the resulting public debt is not a problem because any country with its own central bank can issue an infinite amount of it without any long-term costs.
I think what we are seeing here is the beginning of the death throes of Neo-Keynesian economics. They can’t assert that debt doesn’t matter at all anymore, since the conventional Samuelsonian argument was blown away by the growth of foreign debt and the financial crisis of 2008, so now Krugman and company have shifted to arguing that a certain and specific type of debt can be amassed infinitely. Time will soon prove this move of the goalposts to be false as well.
There is a lot to question in Krugman’s book and I will be addressing those questions over the next few weeks as I have 16 sections bookmarked. But this is the essential summary.