End This Depression Now!, written by Nobel laureate Paul Krugman, provides a straightforward analysis of the lessons of ‘depression economics’. The answer, as he so candidly puts it, “we have both the knowledge and the tools to end this suffering” (20). Immediately, this may leave the reader thinking whether or not it can really be solved that easily, given the length of the recession and consistent media coverage regarding policymakers struggle to produce a successful fiscal deal. Krugman assures the reader that the answers have been there since the reversal of the Great Depression through the utilization of Keynesian rationale of “magneto trouble.” This analogy essentially asserts that the economy functions similar to that of a car in which the engine can work efficiently once the technical problem is solved. Right off the bat, Krugman acknowledges how difficult this theory was and is to accept now. Political matters aside, our hardships are “relatively trivial” from a merely economic standpoint. Krugman proclaims that a great deal can be solved if the people in power were to wake up from their disillusionment.
Krugman begins to discuss the main feature of our recession: high unemployment and low economic output. This is attributed to the fact that a lack of spending creates a lack of demand in the overall economy. Krugman acknowledges that many influential people in power do not believe in this philosophy. Krugman then refutes the naysayers through a metaphorical economics story, discussing a babysitting co-op on Capitol Hill, that reasons, “your spending is my income, and my spending is your income” (28) in order to justify his point to the everyday reader. Through this isolated example economy of babysitting, the reader can recognize that there are three lessons drawn from the story; it is possible to have an overall inadequate level of demand, magneto trouble is real, and widespread economic plight can sometimes have manageable solutions. Normally, a depressed economy can revive itself through the manipulation of a country’s monetary base; or in other words, printing more money. Due to the burst of the housing bubble in 2007, the Fed lost its ability to influence the market through interest rates because of a liquidity trap. This occurred because the Federal Reserve pumped so much liquidity into the economy and drove down interest rates as far as possible before hitting zero. However, this proved to be insufficient as rates close to zero create an environment in which holding onto cash is the viable option. Alas, this coerces debtors to retract spending and discourages creditors from spending more, eventually causing the overall demand of the economy to sink.
The reader is carried along by Krugman’s dissection of the economic and political history, leading to the crisis of 2008. This historical review is necessary for the reader to conceptualize what prohibits the conventional solution of the Great Depression: government spending. Through a discussion of old spurs of economic thinking that began to seep through the surface after the initial shock of the crisis, Krugman offers many theories that examine the causes of the United States economic vulnerability. A notable theory is the ‘Minsky Moment’, conjured by a man (Hyman Minksy) who for most of his existence, was shunned from mainstream economics. Being that the United States is a highly leveraged country, it is considerably vulnerable to crisis (48).
The housing bubble created a situation where there were increased amounts of borrowing because lending does not appear to be a risky transaction when an economy is flourishing. However, during an economic crisis, the desire to pay off debt surpasses the demand for other facets of the economy (i.e. consumer goods) causing a “paradox of thrift”. Unfortunately, there are too many economists who allegorically view our current economy as a family that needs to save money during “hard times,” therefore reducing spending overall, and worsening the state of the economy.
The irresponsible actions of the banks, influenced by prominent deregulation since the 1980s (i.e. Monetary Control Act of 1980 and Garn-St. Germain Act of 1982) also attributed to the vast increases of debt held by the United States. A segment of a speech by Ronald Reagan, the president who spearheaded banking deregulation, is inserted into the text as a means to demonstrate past politician’s tactics of promoting “extraordinary growth”. This is quickly refuted by Krugman through the following statement: “In the United States, growth in the decades following deregulation was actually slower than in the preceding decades; the true period of ‘extraordinary growth’, was the generation that followed WWII, during which living standards more or less doubled” (70). Krugman transitions the conversation of the qualms of deregulation by connecting it to the “coming of a second Gilded Age” otherwise known as income inequality.
Deregulating the financial industry largely causes income inequality, as it encouraged corporate mergers that resulted in larger profit margins. As wealth increases influence and induces the probability of contact with political elites, we are currently experiencing a political environment that is unable to effectively respond to our economic crisis.
Another initiative that may be unknown to the general public is the frequency of economists shying away from the established risks of deregulation, a concept that Krugman coins as “Keynesophobia” (93). Krugman exemplifies this trend by making a distinction between the types of economists seen today in the United States. There are either “freshwater economists” who, tend to lie in the middle portion of the United States and are huge supporters of “laissez faire” economics or “saltwater economists”, who tend to live on either coast of the United States and support the philosophy of Keynes (101). During the initial responses to the crisis, many economists disfavored the approach of Obama’s advisors and were in line with political conservative’s rebuttal of federal stimulus. Although Krugman acknowledges the Obama administration’s efforts for attempting to combat the lack of demand in the economy, he is critical of the fact that the American Recovery and Reinvestment Act were not adequate to stave off a rise in unemployment. He goes on to denounce the lack of aggressiveness in negotiating a substantial deal with banks when interest rates were low. Ultimately, Krugman believes that policymakers could have done more to prevent the shortcomings of this stimulus bill and openly blames the Obama administration for not pressing for a larger appropriation.
This defeat changed the conversation in Washington as policymakers began to shift their focus to debt and deficits. Krugman points out a few reasons for this change, although it is mostly driven by fear: fear of deficits via political rhetoric, fear of bond vigilantes, and negative depictions of debt by the media. Krugman refutes the fear of debt by explaining how deficit spending does not necessarily negate monetary policy because budget deficits are not contending with the private sector for assets. As the United States is experiencing a liquidity trap, Krugman suggests that it may be useful and reasonable for the government to borrow from itself. It may even surprise the reader to hear that debt is the answer to debt; however Krugman substantially backs up his point by discussing the acquisition of debt during WWII.
The dissonance over the federal deficit has also allowed fear of inflation to join political rhetoric. Krugman assures the reader that because of our liquidity trap, runaway inflation is not possible as long as the economy remains depressed. Furthermore, there is considerable data available to back up Krugman’s assertion. Krugman outlines the constraints of a low inflation rate in a depressed economy and recommends that the United States readjust the rate to 4% as it would be beneficial for increasing the market’s willingness to borrow, reducing the real value of debt and preventing cuts in workers paychecks. The economic state of Europe (EU nations) is closely related to low inflation and actually makes their situation worse than that of the United States. The reason is due to a lack of worker mobility and fiscal integration; problems that are not experienced in the United States as workers move across state lines freely for employment and the fact that the Federal Reserve can ensure the liquidity of funds for the entire nation. Europe’s main downfall is the fact that they view their economic crisis as a result of fiscal irresponsibility. This point of view has led to a trend of austerity in Europe, primarily in Germany, which is characterized by increased interest rates, large cuts in spending, and increased taxes. While Krugman discusses an array of problems associated with austerity measures; two key points to focus on is the lack of correlation between austerity measures and the health of the economy (i.e. booming U.S. economy in 1990s via technology bubble), and the fact that common solutions to detract the effects of budget austerity are not always successful across economies (i.e. Canada vs. Britain).
Although Krugman’s spends most of the book scrutinizing the impracticality of the measures utilized by the United States and, partially, Europe to “cure” this global economic crisis, he concludes by offering some hope for the reader. Ultimately, he has four policies that would remedy our suffering quickly: enacting a larger stimulus to offset the effects of unbalanced budgets for states and in turn, would boost employment, strengthening the policies of the Federal Reserve, relieving homeowners of debt via a comprehensive program, and pursuing policies that would allow consistent job creation. If the political will of the United States were to change in this direction, Krugman believes the public would be very amenable to this proposed approach.
While Krugman’s solutions may not persuade just any reader, he does a sufficient job of ensuring that his points are sound through discussions that have been emphasized more or less throughout the book. He highlights the importance of paying attention to data and what it has shown (i.e. difference between correlation and coincidence/fiscal austerity), the reasons why we need to examine history coupled with characteristics that are unique to a specific economy, provides conclusive evidence between government spending and wartime, and lastly, makes it a point to examine the affects of policy on economic health than merely spending trends. With that being said, there needs to be a drastic change as to the degree of economic data’s involvement in policy development.