End This Depression Now! – Breaking Down the Chapters

Chapter One: How Bad Things Are

  • Examines the US Economy starting in 2009. Krugman opens by reviewing the optimistic outlook of Federal Reserve Chairman Ben Bernake
    • The state of the Economic Crisis, easing but not eliminated
    • The United States is making an extremely slow recovery
    • Job drought. People, especially Americans find worth in finding and keeping a job. There were 13 million unemployed Americans at the end of 2011 – which was a sharp increase from the 6.7 million Americans unemployed in 2007.
      • Long term unemployment is demoralizing for Americans. One in four recent college graduates are unemployed.
      • Falling GDP between the year 2007 and 2009 caused a feeble economy that lacked the ability to produce at its capacity.
      • Focusing on fixing the economy in the “long-run” is the wrong approach. The way to recover the economy is to come up with short term solutions that fundamentally change the US economic model.
      • The economic downturn hurts business investment, undermined the skills of US workers and damaged public programs.
      • The terrible state of the European economy and depression. Extreme unemployment plagues Western Europe, and uneven distribution of the depression across the various countries. Krugman evokes the depression that hit Europe prior to the rise of Nazi power. Links the depression to “politics of despair” – rather – the authoritarianism that emerges out of depressions

Chapter Two: Depression Economics

  • Living in the shadow of economic catastrophe, Krugman reassures that this economic downturn “doesn’t have to be happening.” Our economic problem is the result of poor organization as opposed to the result of low production capacity.
  • There is a solution to our economic problem now, and the United States should not have to “punish” ourselves for economic difficulty. This is magnified by the fact that there is a strong desire to see economics as a “morality” play between “right and wrong.”
  • Demand (by consumers) controls the economy  and currently there is not enough demand in the US economy to output at full force. Less spending on the part of consumers translates to less output by producers and less work for workers.
  • Example of the “Babysitting Co-Op” that Krugman uses to prove that lack of demand is possible. In the Co-op parents hoarded their babysitting coupons in hopes of spending them at a later date. However, this ended up negatively affecting the parents who wanted to go out more often because once they spent their coupons, their supply was not replenished until one of the hoarding couples changed their minds.
  • The takeaway about the US economy “your spending is my income, and my income is your spending”
  • “Colossal muddle” as noted by Keynes relates to the world economy. People are trying to buy less things than they are capable of producing and spend less money than they earn, resulting in our economic devastation.
  • Printing money will no longer revive the economy
  • We are currently in the liquidity trap
    • Lowering interest rates will not eliminate the problem
    • Interest rates nearly at zero did not provide enough incentive to increase spending and borrowing
    • Inadequate demand is not due to unskilled labor force
      • The Federal Reserve cannot convince consumers to spend more

Chapter Three: The Minsky Moment

  • Financial instability hypothesis
    • Focused on leverage (the buildup of debt relative to the assets or income)
      • Economic stability increases leverage (the complacency consumers feel in borrowing)
      • The more people who borrow, the more increase in leverage
  • However, the rise in leverage increases financial instability
  • Highly leveraged economies are vulnerable to things going wrong
  • If too many aspects of an economy are in debt at the same time, they face more challenges coming out of debt
    • If deflation occurs due to decreased spending, the value of the dollar increases therefore deepening the debt
    • The desire to pay off debt after the housing crash of 2007 decreased the demand of items such as housing and cars
    • As long as the economy is doing well, lending does not seem like a risky transaction
      • “Minsky” Moment
        • Once debt levels are high due to increase borrowing and economic vulnerability, anything can set off the collapse.
        • The rhetoric of US economists is focusing on the wrong metaphor
          • Economists see the economy as a family who has fallen “on hard times” and the solution is to “tighten the belt”
          • The reality is that to come out of the recession, the economy needs to spend and produce more
          • “Paradox of thrift”: everyone saves money at the same time and therefore spends less, causing the economy to shrink even further.
            • Does not depend on the excess borrowing
            • Paradox of deleveraging: the more debtors pay off their debt the more they owe (based upon leveraging concept)
            • “Paradox of flexibility”: that although it seems best to cut wages, reducing everyone’s income leaves everyone struggling for economic stability and yet the individuals debt remains the same.
            • Some inflation in the US economy would release the overwhelming burden of debt that many in the United States carry.

Chapter Four: Bankers Gone Wild

  • The bank’s ability to sell “asset-backed securities” to misinformed consumers encouraged irresponsible lending on behalf of the banks.
    • When loans went “bad” they became known as toxic waste for the banks and the consumer who purchased them
    • Banking is a tradeoff between liquidity (the ability to access funds) and returns (the ability to earn something from the investment)
    • Banks are vulnerable to “bank runs” when depositors feel insecure about the safety of their funds and seek to remove them immediately. Bank runs can be extremely contagious.
      • Often these “bank runs” are a self-fulfilling prophecy
      • Glass-Stealgall Act of 1933 established regulations for banks.
        • Established FDIC which guarantees depositors against the loss of their assets if the bank fails
        • Limited the risks banks could take
          • Deposits could only be used to make loans (as opposed to investing in stock)
          • In 1980, finance was subject to deregulation.
            • Monetary Control Act of 1980 ended regulations that prevented banks from paying interest on deposits
            • Garn-St. Germain Act of 1982 relaxed restrictions on the kinds of loans banks made
              • Intended to solve “thrift” or unnecessary saving
  • These acts encouraged risk taking
  • Clinton lifted Glass-Stealgall rules that separated commercial and investment banking
  • The deregulation of the banking system caused debt to soar
  • Private regulators loaned money to risky borrowers without being backed by the Community reinvestment act
  • Conservatives want the US consumers to believe that it was the US government’s recklessness that caused the financial crisis because to admit otherwise would admit that the GOP has been on the wrong trajectory.
    • Banks overextended themselves
    • Bank deregulation only affected a small minority positively by exponentially increasing their income. The middle class, all in all, was not benefitted by this deregulation.

Chapter Five: The Second Gilded Age

  • The incomes of the top one percent of earners in the United States skyrocketed between the deregulation of 1980 and 2006.
    • The top one percent has their income determined by committees who the CEOs appoint themselves
    • Rising inequality amongst Americans.
    • Deregulation caused corporate mergers and even larger profit margins, further expanding the inequality gap
    • Politicians are rewarding financially for holding certain positions – a sort of “soft” corruption
      • Difficult to tell the difference between what politicians believe and what they are paid to believe
      • Wealth brings access to the political elites and access brings influence.
        • The pull of the rich is stronger when the rich have more money to give (the rich are richer)
        • Republicans are ideologically more inclined to support the views of the rich
        • Relationship between inequality and the current depression – reduced progressive taxes, reduced aid to poor, decline of public education.
        • The very rich are making their money from unregulated finance.
        • Inequality created a political environment that hindered the US ability to respond to the crisis.

Chapter 6: Dark Age Economics

  • Some economists turned away from responsible economics in favor of deregulation, despite the known risk since the 1970s.
    • Economists have been part of the problem
    • Runaway academic sociology – Keynesophobia
    • 2008 the world lacked sufficient demand
      • Activist government policies were needed
      • Keynesian literature was removed from most economic curriculum
        • Deemed one of the most harmful books of the 19th century
        • Conservatives opposed Keynesian economics because of the fear it may lead to socialism and government control
        • Keynes would have considered Capital Asset Pricing Model (CAPM) [that is, balancing the risk of an investment against its reward] a liability for the market, despite the CAPMs usefulness and role in the current market
        • Alan Greenspan rejected calls to control subprime lending with the belief that modern economics had everything under control
          • Believed the global “invisible hand” of economics has created stable exchange rates, interest rates, prices and wage rates
          •  Freshwater versus saltwater economists
            • Freshwater economists tend to live in the middle of the United States and are “laissez faire” supporters
            • Saltwater economists tend to live on either coast of the United States and support the ideas of Keynes.
            • Freshwater economists stated in 1970 that recessions are caused by “temporary confusion”
              • Workers and companies could not distinguish between inflation and changes within their own microeconomy
              • Freshwater economists did not want to admit that Keynes’ argument carried some validity and therefore moved away from a realistic approach to recessions
                • This approach included viewing recessions as “natural” and part of all “economic cycles”
                • Schlock Economics
                  •   No one predicted the economy would encounter a recession that couldn’t be controlled by The Fed or monetary policy
                  • Economists dismissed the economic policies of Obama advisors as “schlock economics”
                    • Ideas that were rationalized with policies that were already created
                    • Political conservatives dismissed federal stimulus with the intention of increasing demand as “unjustified”

Chapter Seven: Anatomy of an Inadequate Response

  • Obama signed the American Recovery and Reinvestment Act upon being inaugurated.
  • Policies were never strong enough to avoid a rise in unemployment
  • The economists who had the right ideas about the economy never acknowledged how much action was needed nor what was actually needed by the economy
    • “Those who were right lacked conviction, and those who were wrong were filled with passionate intensity” (111)
    • The “bursting” of the housing bubble did not lead to an immediate recession
    • The combination of the housing bubble, the credit crunch, and the failure of the Lehman Brothers
      • The lack of trust in the assets of the banking system
      • Solid borrowers were able to borrow at low rates, however, the slightest risky investments were shut out after the financial panic and crash of 2008
      • The Federal Reserve acted quickly to ensure that the banks had enough cash to avoid a meltdown
        • Krugman believes that the government should have struck a “tougher deal” with the banks when they offered assets at a low interest rate
        • The American Recovery and Reinvestment Act (at $787 billion) was too small to stimulate the economy
          • Many economists warned Obama administration that the stimulus was too small before it was signed
          • The ratio of spending to GDP appears high because the GDP of the United States is currently low
          • The entire federal stimulus was distributed to “unemployment benefits” to help the citizens out of work due to the crisis. That being said, there was no growth to Medicaid or other established government entitlement programs
            • There was hardly any allocation in the stimulus package that went to federal works projects
            • The Obama Administration fell short in the following areas
              • Failed to grasp the severity of the crisis
              • Failed to appreciate the political fallout as a result of his stimulus plan
              • Lack of bipartisan participation in the Legislative Branch
              • Obama administration never asked for a larger bill
              • Failure of mortgage relief
                • Households are attempting to eliminate relief by doing less spending
                • Foreclosure of troubled homes is disastrous for the bank and the homeowner, and extremely costly on the banks behalf
                  • Despite this, 10 million homes were foreclosed upon the recession
                  • Krugman asserts that there are things that policy makers could have done that would have improved the financial situation despite the economic spiraling.

Chapter Eight: But What About the Deficit?

  • The inadequacy of the first stimulus, wrote off the possibility of an additional stimulus as unemployment continued to rise despite the efforts of the Obama administration
  • Washington focused on debt and deficits
  • Warnings about a debt crisis are political rhetoric during a crisis, and debt is to be expected
    • Exaggerated fear of deficits
    • Fear of fiscal deficits are driven by bond vigilantes
      • The US should borrow more to respond to the low rates of interest
      • The negative press surrounding the deficit changed the way in which Americans viewed debt, created the deficit into a larger problem, simply by fear
      • Deficit spending does not necessarily work against monetary policy,
        • Liquidity trap – even at zero percent interest rates, people are unwilling to spend as much as they produce
        • In depressed economies, budget deficits do not compete with private sector for funds and therefore keep the interest rate low.
        • Low interest on short term bonds and higher interest on long term bonds are to be expected in the recession.
        • The debt the United States occurs now is smaller and more manageable than the bond vigilantes are claiming
        • The United States had sizeable debt post WWII that was never actually paid off, rather inflation and growth of the economy managed the debt rather than eliminating it
        • The United States will not have to pay off their debt, rather they must ensure that the interest on the debt is paid and that the economy grows faster do the ratio to debt is smaller.
        • Cutting spending now may reduce future debt, but it also reduces future income
        •  The debt the United States owes is mostly to the United States, foreign debt is small.
        • Debt is not created equal, some debt is better than others.
        • At the current state of the economy, lenders are not willing to lend and spenders are not willing to spend.
          • Krugman suggests the intervention of the government to borrow from itself.
          • Krugman suggests that debt can cure debt
            • Uses the example of WWII when the United States went into debt to fund the military expansion and eventually emerged with more spending on behalf of a strong economy

Chapter Nine: Inflation: The Phantom Menace

  • Conservative party has used inflation to instill fear into constituents – the threat that the United States could become like modern Zimbabwe
  • Runaway inflation is not going to happen as long as the economy remains depressed
  • Since the United States is in a liquidity trap, printing money will not cause inflation
  • The Federal Bank does not actually print money, but its actions can lead to the Treasury printing more money
  • The Fed creates its own funds that it uses to purchase assets (the Fed can conjure money whenever needed)
  • Only when there is a boom in the economy and surpluses of jobs can inflation occur can there be inflation. Printing money during a depression can only help the economy by giving individuals an incentive to spend.
  • Occasionally “stagflation” can occur when inflation is combined with high unemployment, but that is presently not the case.
  • The rate of inflation since the fall of the Lehman Brothers increased only 3.6% over three years, averaging 1.2% per year. That is not sufficient enough to consider the rise in prices (measured by the Consumer Price Index [CPI]) as inflation.
  • Core inflation (measured by removing food and energy out of the price index) is used to determine the inflation of the economy
    • Core inflation is not used to calculate the cost of living
    • Used to measure “inflation inertia”
    • The price of food and fuel fluctuate regardless of the state of the economy and therefore cannot be used to measure inflation. The cost of corporate goods is a good indicator, however, inflation on behalf of the private sector is also unlikely
      • Prices set by the corporations are often negotiated with inflation in mind and included as a “cushion” in the current set price of the items
      • The rise of inflation seen in 2009, as Bernake predicted, was not permanent, but temporary, despite the evoked fears of the Republican party
      • Inflation “fearmongering” has been a large hype by the conservative party but is truly unfounded based upon actual data.
      • However, Krugman is quick to note that “falling inflation”  or “deflation” can make the depression worse.
        • The ideal inflation rate would be about 4%
        • High inflation can impose high economic costs, but inflation around 4% would benefit in three ways:
          • Loosen the constraints on interest rates in their inability to go below 0%
            • Increased willingness to borrow if they believe the dollars they borrow today are worth less than the dollars they will repay
  • Inflation can reduce the real value of debt
    • The real value of debt would be significantly lower 5 years from now than it currently appears. The economy would be further along than it actually appears
  • Workers pay checks do not need to be cut, rather the cost of living increases
    • Better for employment to keep stagnant paychecks then to cut checks in austerity
    • This phenomenon helps prevent deflation
    • Inflation is currently too low – the problem in Europe is that inflation is too low, making their economic situation worse than that of the United States

Chapter Ten: Eurodammerung

  • The economic troubles of Europe are troubling both financially and politically
  • The European Union emerged through the Coal and Steel industry between Germany and France in 1951, creating a free trade partnership. .
    • By 1957, European Economic Community was formed to decrease the trade barriers between nations
    • Economic gains with each additional country were matched with integrated political systems
      • The promotion of European unitiy
      • The European Union adopted one currency with the idea in mind that cross-border trading was more expensive with multiple currencies
      • The rate in which the exchanges occurred made a single currency increasingly more conducive to business.
      • There is value (and benefits) to having an independent currency
        • The rise and fall of worker’s wages allows each country to match their income with their good produced, rather than under one currency when values are set at a higher cost of living
        • Having a single currency (i.e. the Euro) loses the flexibility of the economy
        • European nations do 60% of their trade within their borders, therefore, a single currency seemed reasonable for the European Union
        • Europe did not have labor mobility nor fiscal integration for the single currency to be successful
          • Labor does not move freely between European nations, workers cannot travel to where the jobs are, language and culture prevent easy mobility
          • Fiscal integration – when a state in the United States fails, the federal government can assist the state to prevent economic collapse (thus, buffering the shock.) However, in an European country, when an economic component collapses, the country is responsible for bailing itself out  despite its currency being tied to the rest of the European Union
          • There is no safety net for European countries that go into economic shock.
          • The Euro made investors investing in countries that were previously deemed risky. Greek, Spanish and Italian debts were treated equally to German debt due to the backing of the Euro.
          • The influx of investments resulted in reduction in the cost of borrowed money in the southern European states
          • The Euro created a huge trade imbalance between the southern countries of Europe and Germany.
          • The European economy crashed with the crash of the United States economy, however, was significantly worse due to the lack of fiscal integration
          • The European debt crisis was not caused by the irresponsibility of the respective European countries, rather it was caused by the lack of worker mobility and fiscal integration
          • Europe, when examined aggregately, is in better shape than the United States. That being said, the trouble with the single currency is that despite the unity in currency, the European nations are just that, nations. They cannot be examined together. Examined independently, the condition of Europe and its nations is dire.
          • Troubled countries in Europe (like Spain) will have to endure very high unemployment until wages fall to match demand
            • This is the result of Germany’s aversion to inflation
            • Countries that lack their own currency are EXTEMELY vulnerable to self-fulfilling panic
            • European Union countries cannot count on the European Central Bank to bail them out of an economic crisis
              • This unreliability of the European Central Bank exasperates the panic and results of the financial crisis
              • Breaking up the Euro would be economically disastrous
              • Solution to the Euro problem:
                • Stop panic attacks, ensure the liquidity of funds for all countries
                • Surplus countries have to be a source of demand for deficit countries
                • Europe is worse off in their crisis than the United States because they made the mistake of viewing the crisis as the result of fiscal irresponsibility
                  • Inability to come to terms with their real problem

Chapter Eleven: Austerians

  • Austerians = believers in immediate auster ity policies
  • Some of the first suggestions that emerged from the financial crisis from OECD were to “tighten the belts” of the markets
    • Raise interest rates
    • Slash spending
    • Increase taxes
    • Fiscal austerity became a trend in Europe
    • On behalf of the Austerians, there was never a clear reason as to why raising interest rates was necessary or beneficial for the economy
    • The fear factor: people predicted apocalyptic disaster if the deficit was not cut immediately and spending was not reined in.
      • The downgrade of the US credit rating perpetuated this fear
      • If the economy is deeply depressed, spending cuts cannot be offset.
        • Cutting spending reduces revenues
        • Eliminates an attempt to deficit reduction.
        • Austerians argued that immediate cuts would restore confidence in the market, which Krugman asserts is simply not true.
        • The confidence fairy:  the belief that cutting spending (decreasing demand )  would reduce employment, but restore confidence in the economy nonetheless.
          • Austerity in the time of financial crisis could increase confidence if future taxes are not as high as the population expects, therefore encouraging people to spend more now.
          • To Krugman, expansionary austerity was implausible.
          • In 2010, the debate was between more stimulus and austerity.
          • Austerians looked to a 1998 article written by economist Alesina that seemed to prove that austerity measures were successful in eliminating a fiscal crisis.
          • Two problems arise with austerity measures
            • Spurious correlation
              • Meaning, the success or “boom” of the economy is not due to lack of government spending – but due to a rapid change in technology and a “bubble in the economy.” Krugman points out the desire of Austerians to draw a correlation where there is none.
  • Fiscal policy “isn’t the only game in town” (198)
    • Meaning, there are external factors that contribute to the flourishing economy
    • There was no correlation between fiscal policy and employment rates
    • “The British Experiment” Britain endured austerity due to what Krugman calls the “Confidence Fairy”
      • Prime Minister David Cameron announced dramatic spending cuts in 2010
      • Businesses and citizens did not respond well, or become more confident as a result of the spending cuts
      • The British economy remains depressed
      • The general dislike of low interest rates in the financial sector means that any spike in the economy encourages the central banks and the federal reserve to increase interest rates
      • The misconception that low interest rates would be an obstacle to economic adjustment.
      • Austerity has been appealing to some, and it justifies social injustice and cruelty (broadly)
      • Economist Kalecki asserted:
        • When there is no route to return to full employment except restoring business confidence, businesses gain veto power over the government actions.
        • Fiscal policy when used properly can fight unemployment and reduce the necessity of business confidence à this reduces the dependency on capitalists.
        • Lenders, during financial crises, prefer governments who make honoring debts the highest priority, rather than by eliminating unemployment. I
          • It is in the lenders best interest to honor debt
          • The moral plea of Austerians is the incorrect approach to restoring the economy.
            • Fiscal Policy is not based upon how the policy “feels”

Chapter Twelve: What Will it Take?

  • The United States has been in this position before, in 1936, and recovered successfully while creating greater equality.
  • Krugman has hope that the United States has the capacity to do the same in the 21st century, by taking the lessons for the 20th century depression to heart.
  • Federal spending in the years leading up to WWII boosted employment by 7% in the United States, Krugman has the same hope for federal spending now.
  • There is still a demand for action to improve the economy, despite the gradual improvements made by unemployment claims and decrease in debt.
  • The US economy’s climb is very small compared to the “deep hole” that the economy is in
  • Each month of the depression does more damage to American society
  • Krugman suggests three policies that would make the economy better NOW
    • Spend Now, Pay Later
      • The private sector isn’t willing to spend enough
      • The Obama stimulus should have been larger to relieve some of the states who have unbalanced budgets
        • Most of the job losses came from the education sector
        • Krugman suggests giving more aid to states to boost their employment and reverse the consequences of their budget cuts
        • The unemployment benefits distributed were not enough and did not last long enough to have a positive impact
  • “The risks of doing too little are much bigger than the risks of doing too much”  (215)
  • The Fed
    • Has been very timid in the wake of the depression
    • Bernake has had the interest of the Fed as an institution in mind, rather than the economy when it comes to the Reserve’s policies
  • Housing
    • Try debt relief in the housing market
    • Establish a program that allows homeowners to refinance their homes
      • Refinancing would eliminate some of the need for state stimulus
  • Pursue policies of job creation

Chapter Thirteen: End This Depression

  • Krugman asserts that the United States does not need to be suffering as much as it is
  • The public would most likely be receptive to a new policy approach because it would boost the economy, and does not have implications for individual sectors
  • There will always be pundits of the policy, but the pundits do not represent the general American population
  • The book was written in February of 2012, and Krugman spells out all of his predictions for the November 2012 presidential election
  • Predicts that if President Obama is reelected he will have the opportunity to revisit some of his stimulus policies.
    • Should note that the best economic policies are ones that deliver tangible results
    • Krugman predicts that a Romney election would be a setback for economic policy, but does not see the scenario as likely.
    • Lastly, Krugman predicts that Obama will be reelected, yet with a Republican House majority.
      • If this is the case, the President and his supporters should make a strong case for job creation
      • President Obama should be more assertive in what he asks for – despite his advisors telling him not to ask for “too much”
      • The only thing blocking the end to this depression is political will. It is the job of “everyone who can make a difference” to express concern in hopes of remedying the economy.

Postscript: What Do We Really Know About the Effects of Government Spending?

  • Economic policy should be based on facts, not traditions or suspicions
  • Krugman warns against “correlations” and how they can be misleading
    • Difference between correlation and coincidence
    • Poor attempts to use history to suggest correlations between government spending and unemployment
      • There is a need to examine any external factors that could contribute to growth or slow in the economy
      • Disasters, Guns, and Money
        • Increasing government spending during wartime clearly boosted the economy. Krugman uses a chart as reference to the years in which the US was producing for war, and which it was not.
        • Austerity, as well as war gives us data on the different consequences of fiscal policy
        • The IMF has discovered 173 cases of fiscal austerity
          • Austerity was following by economic contraction and further unemployment
          • There needs to be a change in which economic evidence gets through the legislative process.
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