Welcome Paul Krugman (The Conscience Of A Liberal – NYT) and Host George Grantham (McGill University)

[As a courtesy to our guests, please keep comments to the book and be respectful of dissenting opinions.  Please take other conversations to a previous thread. - bev]

End This Depression Now!

It is an honor and a pleasure to have Paul Krugman at the Lake this afternoon for a conversation on End This Depression Now! Dedicated “To the unemployed, who deserve better,” the book is a condemnation of the policies and mind-set that have produced the worst economic depression since the 1930s. And unlike the Great Depression, which contemporaries did not understand, we know what to do; the current depression is entirely self-inflicted. The broken homes and ruined lives are not attributable to acts of God or the inscrutable logic of the market, but are the direct consequence of public decisions that have amplified the inherent risk of private credit by deregulating financial operations and the attempt to balance the budget when aggregate private demand is collapsing. The central message is that none of this suffering is necessary, and none of it is justified.

I believe I do Paul no disservice in pointing out that none of this is new. If a non-tenured assistant professor were to publish this book, she might be denied tenure for wasting time on simple things instead of contributing to the advance of Economic Science. It used to take a little boy to declare that “the emperor has no clothes”; it apparently now takes a Nobel Laureate.

The basic economics of counter-cyclical fiscal policy is not rocket science, though the reasons why firms can adjust production and employment faster than the economy can adjust prices and wages are complicated and subtle. But we don’t have to master the subtleties to understand that when private demand collapses, the short-term offset is a rise in the government deficit. If firms and households want to spend less than they earn, some other sector–i.e., the government or foreigners–has to spend more than it earns. Because one person’s spending is another person’s income, it is arithmetically impossible for all sectors of an economy simultaneously to spend more than they earn.

The government cannot run a surplus when the private sector is also running a surplus. If it attempts to do so, the resulting deficiency in aggregate demand will cause firms to reduce output (and therefore income) until the government tax revenues (and private saving) fall to the point where the deficits and surpluses match. This is what is currently happening in Greece, Spain, and Britain. Austerity makes things worse, not better. In principle, falling interest rates resulting from excess saving ought to stimulate private investment, but that option is ruled out when interest rates are already at rock bottom and much of the capital stock currently in place is idle. In such circumstances the only alternative is for the government to run a higher deficit. This simple accounting truth has been known for seventy years.

This brings us to the book’s second theme. If the technical remedy to a demand-based depression is so simple and has been around for so long, why has it been studiously avoided, derided, and actively opposed? What developments in political life and academic economics make unacceptable everyone forty years ago agreed should be done when demand collapses? The political consequences of the massive increase in income and wealth inequality are a prime cause of the policy impasse at the Federal level. Indeed, it is evident that certain elements of American society probably prefer high to low unemployment because it weakens labor’s power to bargain for better wages and working conditions. Though the point is common currency here at the Lake (hand-wave to masaccio), it is a powerful and somewhat dangerous admission for a mainstream economist.

But income inequality and perverse financing of electoral campaigns is not the whole story, and certainly does not explain the self-destructive policy of austerity in the eurozone, or the derision to which economists who advocate expansionary fiscal policy are subjected by certain well-known mainstream economists. Robert Barro (who believes government spending crowded out private spending during World War II, apparently forgetting that private goods were rationed) has suggested that Paul is not qualified to comment on macroeconomics. James Cochrane of the University of Chicago characterizes Keynesian economics as ‘fairy tales that have been proved false.” By whom and how, one asks? Is our current state simply a bad dream? Hypertrophic mathematical elaboration of macroeconomic models premised on market-clearing as one of the ‘first principles’ of economic reasoning is a major culprit. The models assert that such unemployment as exists is due to government and social interference with those principles. As Dean Baker quips, the first principles of economics also teach us that there is a price at which some economists are willing to say anything.

This is a passionate book. Beyond the wonkery (very limited) it meets the obligation to tell the truth. Part of that truth is the simple macroeconomics of aggregate demand; in the short run it is the truth that counts most, because lack of demand is wrecking the lives of millions of people. The deeper truths about politics and the nihilism of contemporary mainstream macroeconomics are more disturbing. They go to the heart of what we are becoming as a people and (to be parochial) as economists. Paul has peered into the abyss; it isn’t pretty. There are a lot of things that are wrong with our economic organization. This book argues for doing first things first. The first thing is to get people back to work in productive jobs. This can be done immediately. The impossible takes longer.

On the principle that pictures are worth thousands of words, I have copied several graphs from the book plus one from elementary macroeconomics to provide reference points for discussion.

The point at which the AE line crosses the 45 degree line determines the level of output and employment supported by current spending. A rise in that function causes a rise in that level, lowering it causes output to fall. I put this diagram up without labeling the axes as a Rorschach test for young faculty and graduate students in our macro reading group. It took a while before one of the professors tentatively said ‘Keynesian Cross?’

Why the stimulus package failed to restore full employment. It consisted almost entirely in automatic stabilizers.

Despite repeated cries of alarm that the US National Debt is out of control, the cost of government borrowing declined. The spikes are ‘Confidence Fairy’ sightings.

Where the money went: Also known as the liquidity trap.

The history of the euro in one graph.

This should be enough to get us started. Paul, welcome back to the Lake. It’s sometimes a bit choppy, but it’s clear sailing.

147 Responses to “FDL Book Salon Welcomes Paul Krugman, End This Depression Now!”

BevW May 19th, 2012 at 1:55 pm

Paul, Welcome back to the Lake.

George, Thank you for Hosting today’s Book Salon.

Paul Krugman May 19th, 2012 at 1:58 pm

And hi everyone — PK here, ready to respond.

Knut May 19th, 2012 at 1:59 pm


Thanks for being here today. This is a fabulous book. If I were still teaching, I could construct an intermediate undergraduate macro course from it, throw out the textbook (something I have done in the past) and work up analytical points as they arise in context chapter by chapter. It is a beautiful piece of economics. To the Pups, you can read this book at several levels. If you take the time and re-read the stuff that you don’t make out on first reading, you will learn a lot of macroeconomics and economic history, and you will be able to explain to others why there is no substantive reason for opposing government spending to counter a demand-based depression.

Knut May 19th, 2012 at 2:00 pm

I’m going to start this out with a fat pitch up the middle, followed by a hard slider low and inside.

Fat pitch: what do you say to those who claim that the main reason for high unemployment is that too many workers are trained for the wrong jobs, that the problem is mainly structural and will therefore take time to cure?

Slider: What do you say to those who claim that high unemployment is due to firms outsourcing jobs to low-wage countries or firms like Bain stripping companies into bankruptcy?

BevW May 19th, 2012 at 2:00 pm
In response to Paul Krugman @ 2

Thank you for being here, Welcome back.

BevW May 19th, 2012 at 2:04 pm

For our new readers –
You will have to refresh your browser to see the new comments –
PC=F5 / MAC = command+R key

Paul Krugman May 19th, 2012 at 2:05 pm
In response to George Grantham @ 4

OK, so the answer part one: if the problem was that we had the wrong kinds of workers, the right kinds of workers should be doing well. In fact, unemployment has soared across just about all industries and all occupations. That’s telling you that it’s an overall lack of demand, not structural.

I guess the point about outsourcing and all that is that it’s a real issue, but a long-term one. Our trade deficit is a drag on the economy, and Bain-type stuff has been hurting workers too. But that is about why the gains from economic growth have been so unevenly shared these past 30 years, not about why we’re having a catastrophe right now.

warp9 May 19th, 2012 at 2:06 pm

Paul, thanks for being here, this should be an interesting discussion.

Knut May 19th, 2012 at 2:07 pm

While we are still treading water, I want to tell a Great Depression story. In 1929 my father matriculated in the Forestry School at the University of Washington. His family was middle class. Their savings were wiped out by the end of the year when the mortgage-backed security settled on a skyscraper in Manhattan failed. He was out of work for the next 9 years, when he got into an apprenticeship programme at the Puget Sound Naval Shipyard. During that time he lived at home and worked for room and board in the family’s delicatessen. At one point he tried going door-to-door selling fuller brushes, but my mother told me he quit after a few weeks because he couldn’t sell the stuff to people who were poorer than he was.

I recall Robert Lucas saying at an AEA meeting in 1978 that there was no involuntary unemployment in the 30s, because people could always sell apples on a streetcorner.

May 19th, 2012 at 2:08 pm

Thank you so much for being here today, Mr. Krugman.
I’ll be lurking. But, with my best listening ears on.
(Great questions, Knut.)

Knut May 19th, 2012 at 2:09 pm

What do you say to those who claim that the unemployment is due to work rules that impede flexibility, excessive pensions, and the like. In other words, that everything would be better if those damn workers just woke up and smelled the roses? What do you say to people who say that a permanent reduction in wages and benefits (sometimes called ‘entitlements’) is necessary to restore the ‘competitiveness’ required to sustain full employment?

Paul Krugman May 19th, 2012 at 2:12 pm
In response to George Grantham @ 9

Actually, since we’re telling 30s stories — I don’t have one personally, but I would like to think that the depression we’re in, even though not as bad as the Great Depression (hey, that’s a winning slogan — not as bad as the Great Depression) would put an end to that kind of thinking. You have to be very isolated not to know LOTS of people who are desperate for work but can’t find anything at all.

Robin and I don’t go a day without thanking the fates that we’re lucky here, that we aren’t jobless or impoverished. Because it is luck — millions of people suffering through absolutely no fault of their own. And I find it hard to fathom the inner lives of all those political types so eager to blame the victims.

ThingsComeUndone May 19th, 2012 at 2:13 pm

the book is a condemnation of the policies and mind-set that have produced the worst economic depression since the 1930s.

Has anyone looked at the psychological, educational and contribution from parents that not only produced such bad economic ideas but ideas that seem especially lacking in empathy.
Did lack of empathy for others heck a taste for Scadenfreude ( enjoying the pain of others ) produce these ideas or did these ideas create a gradual loss of empathy.
The idea that for you to be rich others must be poor did that over time change them?

eCAHNomics May 19th, 2012 at 2:13 pm

The deeper truths about politics and the nihilism of contemporary mainstream macroeconomics are more disturbing.

What are they?

Knut May 19th, 2012 at 2:15 pm
In response to Paul Krugman @ 12

I was visiting my mother in Silverdale WA last year. They had a job fair. I think there might have been 400 positions (maybe less, I don’t remember). 10,000 people showed up. They came from everywhere. Postal workers who had lost their jobs, forest workers who didn’t have work. There was a long story in the local paper. There are people living out in the woods behind my niece’s house. It’s mostly invisible, but it’s there.

masaccio May 19th, 2012 at 2:16 pm

Thanks for visiting with us, Professor.

I’ve been reading economics papers, including several by Casey Mulligan, and I am struck by all the equations. They aren’t particularly complicated equations, and I can’t see exactly what they contribute to the thought process.

Is math a big part of getting an advanced degree in economics? What is a typical level of math taught in grad school?

Has there been any effort to apply any 20th Century math, like, say, fractals, or anything I don’t know about, to the mainstream education of economists?

Tammany Tiger May 19th, 2012 at 2:16 pm

In your excellent book The Conscience of a Liberal, you described the Republicans as a “revolutionary” party–and this was years before the Tea Party movement arose. Which Republican economic idea do you consider the most revolutionary, and why?

Knut May 19th, 2012 at 2:17 pm
In response to eCAHNomics @ 14

The nihilism in politics is what nihilism always is: power as its own justification. In academic economics, it comes to pretty much the same thing in the management of professional journals and the feedback that makes publishing in those journals the main criterion for tenure. Paul gives some examples in the book. You weren’t in academe, so you weren’t exposed to it. In the business world it is just ‘my way or the highway.’

ThingsComeUndone May 19th, 2012 at 2:17 pm

but are the direct consequence of public decisions that have amplified the inherent risk of private credit by deregulating financial operations and the attempt to balance the budget when aggregate private demand is collapsing. The central message is that none of this suffering is necessary, and none of it is justified.

Agreed but when will economics act like a real science point to the real world consequences of these ideas and ditch the Chicago and Austrian schools of economics the same way map making has ditched the Flat Earth society and Astronomy ditched the Catholic Church’s sun centered Universe scheme?
Until economics holds its own to believing that events that happen in the real world are true you can’t be called a real science.

SouthernDragon May 19th, 2012 at 2:17 pm

Welcome back to the Lake, Mr Krugman.

George is right, a second reading of your book makes just as interesting a read as the first.

May 19th, 2012 at 2:19 pm

Is anyone aware of any research done to see if companies who have outsourced departments like customer service or tech support have actually lost customers and money due to inferior understanding of the product or moreso maybe, a communication challenge?

Bert Gold May 19th, 2012 at 2:20 pm

Why is the belief that fiscal punishment (austerity) will bring universal happiness so strong in America?

eCAHNomics May 19th, 2012 at 2:20 pm

No way to overcome that.

hary3hve May 19th, 2012 at 2:21 pm

On last night’s “Real Time” a conservative guest stated that Glass-Steagall would not have prevented the 2008 banking meltdown and that the bailouts would still have been necessary. Bill Maher could not factually challenge that assertion and said he’d check on the facts. Is it true?

Paul Krugman May 19th, 2012 at 2:21 pm
In response to eCAHNomics @ 14

In brief (but read the book for the full story), what we’ve had is a process of intellectual retrogression driven in part by politics, in part by bad social dynamics within the field of economics (which are in turn partly political).

On the political side, the idea that governments can act to create jobs when the economy is depressed has always been seen as threatening by the right. Partly that’s because any notion that the government can do good might lead to the notion that the rich must pay taxes to support those good things; partly it’s because if the government can create jobs, then it might not be so crucial to soothe the egos of the rich and the corporations to instill “confidence”.

As a result, there’s been a long crusade against Keynesian economics, which has nothing to do with its intellectual merits — and this has left our political class unable to recognize and react appropriately even when we found ourselves in a very obviously Keynesian world.

Meanwhile, many economists turned away from realistic analysis of recessions and depressions to mathematically elegant models that happened to say that the depression we’re experiencing couldn’t actually happen. No doubt politics played some role here too. And rather than reconsider their positions in the light of events, all too many of my colleagues have just dug in.

It’s a terrible story; we would have reacted much better to this depression 40 years ago (when Nixon declared himself a Keynesian) than we did in practice.

Knut May 19th, 2012 at 2:21 pm

Economics forgot what physics (which it envies) never forgot. Einstein notwithstanding, Newton’s Principles still make sense and actually do the work they were constructed to do. Keynesian Economics is the same. It’s not a religion, it is just a tool. At some point in my and Paul’s academic lifetime, economics got changed into an ersatz religion. That is why the debate in the scholarly world is so fierce. People on one side think we are all going to hell if we don’t believe what they do.

PhilPerspective May 19th, 2012 at 2:22 pm

Dr. Krugman:
It occurs to me that, although he wasn’t part of their economics department at the U. of Chicago, the President certainly acts like he was. What would it take for the President to listen to you, or Atrios for that matter(with his “No one gives a sh-t about the deficit!!” mantra)? Because people don’t care about the deficit. It’s only ever brought up when a Democrat holds the White House to stop Democrats from enacting a bigger welfare state(my guess, if the Democratic Party wasn’t so corrupt). Will a Democrat ever have the stones to use Darth Cheney’s words against those who whine about the deficit, especially in a deeply depressed economy?

ThingsComeUndone May 19th, 2012 at 2:22 pm

Robert Barro (who believes government spending crowded out private spending during World War II, apparently forgetting that private goods were rationed) has suggested that Paul is not qualified to comment on macroeconomics. James Cochrane of the University of Chicago characterizes Keynesian economics as ‘fairy tales that have been proved false.” By whom and how, one asks?

Just what were these joker’s economic predictions when Bush was President cutting taxes on the rich and deregulating everything when he even bothered enforcing the regulations he kept?
Just how do they explain the Bush now Obama economy?
I do like fiction)

PhilPerspective May 19th, 2012 at 2:23 pm

How much of it is what I’ve heard called “The Iron Law of Politics”?

dugsdale May 19th, 2012 at 2:23 pm

The resolute advocacy of austerity in spite of zero evidence that it “works” makes me wonder if there isn’t some sort of underlying intention on the part of elites to finally, once and for all, eradicate the social safety net and consign the middle class to a precarious, insecure existence that requires literal fealty to the “job creators”? I don’t mean as an unwitting byproduct of their failed policies, I mean as a conscious strategy. What do you say? Ever hear any of the financial elites talking that way?

jessefrederik May 19th, 2012 at 2:23 pm

Mr Krugman

How much does the currency user/currency issuer distinction matter? Will the bond markets ever turn on Japan/US/UK?

ThingsComeUndone May 19th, 2012 at 2:24 pm

Your answer fits but it scares me. What can be done?

Scarecrow May 19th, 2012 at 2:25 pm

Welcome Professor Krugman, and thank you to Knut for the fine intro. I’ve seen a number of interviews in which Paul emphasizes how important it is to get his basic messages out there, given the unemployment crisis . . . and yet the last week has been focused on a mindless “fiscal summit” in which the main theme was the supposedly imminent debt crisis, or entitlements, or the “cliff.”

And we’ve seen story after story that the media/punidts are starting to blame “austerity” for the recessions and unemployment in Europe . . . and yet there’s no sign that the people that matter have changed their basic way of thinking about the problem or its remedies.

What do you think is the most difficult obstacle in breaking through on this?

Knut May 19th, 2012 at 2:25 pm

It seems to me the only thing we can do is what we are doing here and what the demonstrators are doing in Chicago. To use Albert Hirschman’s terminology, there’s no exit; all we have left is voice.

Paul Krugman May 19th, 2012 at 2:25 pm
In response to hary3hve @ 24

Glass-Stegall by itself wouldn’t have prevented the crisis, though it wouldn’t have been as bad. The reason is that much of the crisis involved “shadow banks” — institutions that weren’t big marble buildings taking deposits, but things like Lehman that used short-term borrowing to make long-term investments, which is functionally a form of banking but not regulated.

So ideally we should not only have preserved Glass-Steagall but extended it to shadow banks too.

Still, some of the institutions that got us into this mess wouldn’t have been able to if the old rules had stayed in place. And if the spirit of 1930s regulations had been preserved, none of this would have happened.

Knut May 19th, 2012 at 2:26 pm

Paul, one of the comments I frequently get from well-intended but misinformed persons (including, sadly, my wife) is that the government can’t run deficits forever (or even in the short term) because it will bankrupt the country. Don’t we have to pay it off, and won’t this impose insufferable burdens on the next generation (as opposed to their not finding work for the next half dozen years)?

Bert Gold May 19th, 2012 at 2:27 pm
In response to dugsdale @ 30

This appears consistent with my observations. There seems to be a belief that if we suffer, it will all get better.

eCAHNomics May 19th, 2012 at 2:27 pm
In response to Paul Krugman @ 25

There was a survey of academic economists published in a journal several years ago. Sorry for the vague ref but it disappeared into a pile of papers. Anyhow, from memory, the survey reported that 97% (+or-) of economists did not support neoliberal economics. The author of the article castigated the profession for being so backward.

Q: How did the 3% of academic economists get to rule the roost?

chicagogal May 19th, 2012 at 2:27 pm
In response to Paul Krugman @ 12

Let me add my thanks and welcome for being here today Professor!

As one of millions of victims of what happened, I’ve been trying to understand why it seemed like the entire business community collapsed at the same time in 2008. While I’ve mostly learned how that happened, it seems like very few people, especially our elected officials and policymakers at all levels of government, have done anything worthwhile to bring us out of this depression and put us on the road to recovery.

In a time when no elected official will listen to their constituents, much less do what they want, what can we as indivuals do to be heard and affect any sort of change in policy?

PhilPerspective May 19th, 2012 at 2:28 pm

Have you tried explaining to her WWII and the years after?

robotpriest May 19th, 2012 at 2:28 pm

Hi Paul, I have a question about the minimum wage. If we have insufficient demand because of high levels of household debt, and if tax rebates are most effective when given to those who will spend it immediately, does it follow that increasing the minimum wage is an effective way to send money to those who will spend it immediately?

Also, would import tariffs be a good strategy to make US manufacturing more competitive with Chinese imports? Are tariffs a good idea, but politically impossible or are they just not a good idea? It seems that is an idea that is never discussed.

PZ May 19th, 2012 at 2:30 pm

Professor Krugman,

While I find the worldviews of politicians like Romney and Ryan disturbing, to some degree I understand why they hold them-running for office costs a lot of money and promising nice things to wealthy people is a sure-fire way to get your coffers filled. Also, if they loose the elections, they have a nice job waiting for them afterwards. What bothers me is so many of your colleagues in the media buy into this austerity mindset and think the best thing we can do for the economy right now is to cut social safety net programs. Why do so many columnists, not just at right-wing publications, buy into this notion the poor and middle class have had it too good for so long and now they’re paying the price for their extravagance?

Bert Gold May 19th, 2012 at 2:30 pm
In response to robotpriest @ 41

It is difficult for me to believe that import tariffs on solar panels will help. Here in Frederick Maryland when BP solar closed the plant (or was closing it) I repeatedly wrote to the whitehouse to no avail. I also know, Dr. Krugman, that you had meal there at some point (I think you disclosed something like that in your column) to no avail. So, what’s an old high school buddy of Axelrod’s like me to do?

ThingsComeUndone May 19th, 2012 at 2:31 pm

Just what are the biggest threats to the economy more and more people not spending leading to more and more people losing jobs and homes? Bank deregulation letting banks continue to gamble? A Greek default followed by Spain, Ireland, Italy etc? Credit Default Swaps? A rise in oil prices if we go to war with Iran ( just how much would oil prices go up if Iran sinks even one oil tanker)? Naked Shorting of Stocks?
There seems to be so many different ways the economy can go down what are the most likely ways and am I missing any ways the economy can go down?

Paul Krugman May 19th, 2012 at 2:32 pm
In response to jessefrederik @ 31

For those not clued in, all of the debt crisis countries right now are either countries that gave up their own currencies for the euro, or borrowed heavily in someone else’s currency (Hungary). Countries that issue their own currency and borrow in it, like us, the British, and the Japanese are able to borrow at very low rates even when, like Japan, they have high debt levels.

So can they (and we) ever have a debt crisis? I think so, but it takes much higher levels of debt than even the Japanese have. People have to believe that there’s no way they can service the debt without printing lots of money, even once the economy has recovered.

The closest parallel I’ve been able to come up with (too deep in the weeds, but I can’t help myself) is France after World War I, which had its own currency but a basically impossible level of debt. Even so, the consequences weren’t catastrophic: a sharp drop in the franc, a brief bout of inflation that reduced the real value of the debt, and a return to stability.

The important point for now is that America is nothing, nothing like Greece — that is, unless the austerians push us into a full-on depression out of misplaced fear that we’re going to turn into Greece …

Bert Gold May 19th, 2012 at 2:33 pm
In response to Paul Krugman @ 45

I fear Mr. Romney will do that. If only to please his constituency.

jessefrederik May 19th, 2012 at 2:34 pm
In response to Paul Krugman @ 45

Does the famous Reinhart/Rogoff study make a distinction between currency users/currency issuers?

ThingsComeUndone May 19th, 2012 at 2:34 pm

What if anything could happen that would force Obama or Mitt for that matter to tax the rich more like FDR did and then create jobs to get the economy going?
Do we need another economic collapse of the banks and or a revolution to effect change or can something short of that work?

marcospinelli May 19th, 2012 at 2:34 pm

How likely is it that post-election 2012, privatizing Social Security, cutting benefits, is embraced no matter who wins?

And what happened at your White House luncheon with Obama a couple of years ago?

Knut May 19th, 2012 at 2:34 pm
In response to eCAHNomics @ 38

Q: How did the 3% of academic economists get to rule the roost?

Unlike Investment Bankers and hedge fund traders, academics are a rather insecure lot on the whole, especially academic economists outside the charmed circle of the very top departments. Economics is probably the most hierarchical discipline in the academy, totally unlike science, where the Nobels are scattered throughout the university world. The result is that second-rate places like the one I taught at (this is not an insult. second-rate is pretty good), are always trying to nudge their way up into the charmed circle, and this means that the judgement of the members of that circle are all determining when it comes to making tenure decisions.

I can’t count the number of times I have pulled what’s left of my hair listening to colleagues say we have to depend on someone else’s rather than our own judgment on whether to promote someone or not.

Knut May 19th, 2012 at 2:38 pm
In response to Paul Krugman @ 45

It is important in this respect to recall that the French debt was mainly due to the government’s decision during World War I to delay raising taxes, in the belief that the war would be short, and when it turned out not to be short, that the Germans would pay for it. It was not a story of unsustainable entitlements.

Phoenix Woman May 19th, 2012 at 2:39 pm

Welcome back, O Shrill One!

Paul, speaking of austerians — who are the biggest ones in the US? Most FDL readers know about billionaire and former Nixon Cabinet member Pete Peterson and his Concord Coalition; he’s had a jones to destroy Social Security for decades now. But are there any others pulling strings behind the scenes who should have a big ol’ spotlight shined on them?

ThingsComeUndone May 19th, 2012 at 2:41 pm

How much are the bad economic policy ideas you rally against supported in Washington by Group Think from an educated minority raised in Chicago and Austrian Economics and not exposed to Keynes. How much of the blame falls on politicians who just listen to these economic experts and ignore what is happening outside Washington?
How much of these bad economic ideas are just a rationalization for greed? How many politicians just back these ideas because they keep the poor and minorities down?
America with FDR policies was great why would rich people settle for the Bush/Obama economy unless they cared about being more powerful than the 99% than they care about actually being wealthy?

Knut May 19th, 2012 at 2:42 pm

Could you explain for us the economics of the Confidence Fairy? What argument supports austerity? What is the logic and why is it wrong (other than being wrong on the clearly pragmatic basis of fact)? I realize that this is a complicated question, and that people who really want to know the answer should go to the book.

Paul Krugman May 19th, 2012 at 2:42 pm
In response to PZ @ 42

So, why are so many people who aren’t obviously in the de facto employ of the top 0.01% for austerity and committed to the view that we must slash spending now now now? I guess I have limited credibility in explaining this, since the sudden pivot of conventional wisdom to austerity mania in 2010 caught even me by surprise. Still, here’s what I make of it.

First, Very Serious People — thanks for that phrase, Atrios! — have spent their careers cultivating a reputation for Seriousness by calling for spending cuts and budget discipline. They’re just not nimble enough to accept the reality that if there was ever a time for that, this isn’t it.

Second, macroeconomics is hard. Most pundits who weigh in on macro issues have, whether they know it or not, been faking it; they can talk airily about global-schmobal but have never made the intellectual investment to understand college-sophomore level concepts. That’s not me being snooty or pulling rank, by the way; the point is that there is 80 years of hard thinking and a lot of evidence here, and you shouldn’t spout opinions without knowing at least something about that.

Finally, there’s the Overton Window. On one side you have people like me or Joe Stiglitz preaching what is actually standard textbook economics, the sort of thing you would have learned from Samuelson’s textbook. On the other side, you have goldbugs and other charlatans and cranks. And for many pundits, the truth is always in the middle — so they go for doctrines that are, without their knowledge, well over toward the charlatan/crank side of things.

cmb123 May 19th, 2012 at 2:43 pm

If the Congressional Progressive Caucus’ budget were passed this year, can you comment on or predict what the effects would be? Would it end this depression now (or soon)?

At the same time, what do you believe would be the concrete effects if the Ryan Budget were passed this year? (I recognize the Ryan Plan can be woefully short on specifics, but I think everyone knows it means drastically cutting spending on everything but the military and slashing taxes, disproportionately in favor of the rich.)

Paul Krugman May 19th, 2012 at 2:43 pm
In response to jessefrederik @ 47

No. But that’s not the problem. The problem is that they make no real effort to get the direction of causation right; if you look at it, it becomes clear that in their key cases high debt was caused by slow growth, not the other way around.

eCAHNomics May 19th, 2012 at 2:46 pm

Doesn’t supply side economics always result in bubbles & crashes? Gilded Age U.S., for example. Showering the supply side with tax breaks, protective tariffs, corp welfare of all forms is bound to create excess supply. Brits had to get peons in SE Asia addicted to opium to find customers.

Paul Krugman May 19th, 2012 at 2:48 pm
In response to marcospinelli @ 49

Privatization no, I think — that’s poison and I think everyone knows it. Benefit cuts worry me — we keep trying to point out in particular that life expectancy has NOT gone up much for the bottom half of the income distribution, who are precisely the people who depend on Social Security, but it’s hard to get that point through.

The famous luncheon was kind of a disaster, because I’m afraid that the scruffy bearded professors didn’t come across as being the kind of people who really knew how the world works.

Of course, Joe and I did, and the smart money (and I mean money) didn’t — and the WH knows it now. Enough said.

judybrowni May 19th, 2012 at 2:49 pm

I’m no economist, and I’m sure this is too simplistic, but my own private theory is that recessions (and depressions) are rigged so the top 1% can buy everything (including government) at garage sale prices.

More seriously, I echo #49:

How likely is it that post-election 2012, privatizing Social Security, cutting benefits, is embraced, no matter who is elected?

Knut May 19th, 2012 at 2:49 pm
In response to Paul Krugman @ 55

We taught the basic stuff for 40 years. Who learned it? What did we do wrong? Just about every undergraduate outside majors in French and Italian now do an economics course. That’s millions of people who presumably should have learned about the fallacies of composition. We failed.

The textbooks are horrible. I referee the ms for Canadian versions of standard introductory texts, and over the years they have gotten worse and worse, to the point where I don’t think any young person reading them could actually come away knowing any real economics. They memorize the graphs and the words, but they don’t learn the concepts. It is just something to memorize for a good grade, and then on to something else.

jessefrederik May 19th, 2012 at 2:51 pm

What do you think is the full employment rate of unemployment? Do you still believe in the NAIRU?

Paul Krugman May 19th, 2012 at 2:51 pm

The Confidence Fairy is supposed to work like this: the government slashes spending in a depression, and the public says “Wow! They really mean business! My taxes will be lower in the future, so I’ll spend! The government will be solvent, so let’s lend money at low interest rates!” And all this more than offsets the direct effect of mass layoffs of public employees.

Sadly, no government to date has managed to sprinkle the right kind of pixie dust.

Knut May 19th, 2012 at 2:51 pm
In response to Paul Krugman @ 57

It’s like when you lose your job and try to sustain your life in the short run by running up credit card debt.

Paul Krugman May 19th, 2012 at 2:52 pm

But I know of at least one principles textbook that does it all perfectly — and third edition of Krugman/Wells just came off the printers!

thatvisionthing May 19th, 2012 at 2:55 pm

Hi Paul, I just clicked in and haven’t read the conversation. Jumping in while I’ve got the chance! Your connection to Isaac Asimov and Foundation came up in a diary by geomoo last year on Daily Kos (Pundit Accuracy Tested: Krugman and Dowd DOMINATE! Update: Professional Left Snubbed), and in the comments I posted a pic of my 1975 letter from Isaac Asimov. I had written Isaac about Foundation and he wrote a note back. Since that diary, I always wished you might see it:


You can click up and downthread for more of that conversation, and I see there’s another thread here that traces your connection to sci-fi and Foundation. (There’s 143 comments in that diary so the focus might be helpful.) And if you read the diary itself you’ll see that the author posted a scan there of his own note from Asimov.

Hello! :-)

Knut May 19th, 2012 at 2:55 pm

We live in hope.

Margaret May 19th, 2012 at 2:56 pm

Welcome Mr. Krugman. This debate is analogous to climate change or evolution. These things are all peer reviewed, established fact and to take a contrary position is wholly without merit. This is only possible because the overwhelming majority of the establishment news media has adopted, repeated and endorsed the austerity idea and the discredited idea that social safety programs are the primary drain on society. Hardly ever is the military budget mentioned, except to report on how Republicans want to “restore it”. One never hears about enormous subsidies to get rich people richer and etc. How do we address the sometimes outright incestuous complicity that the so called “adversarial media” shares with the ruling caste and especially the one percent? In my mind this must be addressed because they always win the framing and winning the framing wins the support of the vapid and uninformed.

Paul Krugman May 19th, 2012 at 2:56 pm
In response to jessefrederik @ 62

Let me run this backwards. I believe that if we tried to keep unemployment at 3 percent for a prolonged period, we would experience accelerating inflation. So I guess I do believe in a NAIRU. Where is it? Probably around 5, although there are worrying signs that prolonged mass unemployment may actually be pushing it gradually up.

But you do have to be careful: saying that too low an unemployment rate will mean accelerating inflation doesn’t mean that stable inflation means that we’re at full employment. Wonk alert! I think we now have overwhelming evidence that there is a long-run, not just short-run, tradeoff between inflation and unemployment at low inflation rates, that we could have lower unemployment in the long run if we accepted 3 or 4 percent inflation than if we insist on keeping the rate below 2 or worse yet below 1. So in that sense I don’t believe in the NAIRU anymore; even the long-run Phillips curve is sloped near the bottom.

For those who have no idea what I’m talking about, lucky you.

Sam Bell May 19th, 2012 at 2:59 pm

Hi Paul,

I just bought your book, and I’m really enjoying it! Three questions:

1) Your book doesn’t mention Marquette v. First of Omaha at all in its discussion of the rise in private debt. This surprised me. I’m curious if this was just a case of not being able to mention everything or if you think the role of Marquette has been overstated. I noticed that you don’t call for reinstating the interest rate caps that Marquette effectively eliminated. Do you oppose these?

2) Do you support using quantitative easing as a means of debt reduction? All the arguments for easing seem to come down to whether it is effective at helping the economy. But even if it’s not effective stimulus, it still reduces the public debt. It seems to me that we really need to do something to break the debt fear-mongering, and endorsing QE as a legitimate means of debt reduction seems like a pretty good way to do that. Are there concerns with taking that approach?

3) Are there any activist groups dedicated to fighting austerity and calling for Keynesian stimulus? If not, could we found one?

Knut May 19th, 2012 at 3:00 pm

I would like to turn the conversation to the finance sector. The introduction doesn’t say anything about it, but Paul devotes several important chapters to the evolution of banking since the 1980s, with reference to Minsky, shadow banking and confidence crises. I have to say that the economics of shadow banking is still over my pay-grade, though I understand the basic point that it amounts to borrowing short and lending long. I was wondering, though, whether the current low interest regime is fueling the Casino. Is it the case that when banker’s can’t find businesses to loan to, they bet against each other, or that they are going to bet against each other anyway. It strikes me as a mug’s game. As you point out, investors in hedge funds on average have lost money, which is what any model of a zero-sum game should predict.

Imhotep May 19th, 2012 at 3:00 pm

PK – Why do you think people like Paul Ryan and others in Congress working on the budget aren’t learning a lesson from the European austerity policies, which are failing and for which there is beginning to be a serious backlash?

Along with that, why doesn’t our Congress see that the humane European health care systems are compatible with capitalism?

I understand that VSPs don’t like to take advice from others, but when something on a large scale does or doesn’t work elsewhere, isn’t there a lesson to be learned?

bigbrother May 19th, 2012 at 3:06 pm

Simply put…deficit reduction is best done through growth. Tax returns multiply as consumers spend that stimulates more production for goods and services. Deficit reduces while no one goes without.
Thank you for being here and regular dose of good sense to the austerians everywhere. Greed rules.

Neil May 19th, 2012 at 3:07 pm

Hi Paul,

I was reading a piece on Kantoos by Henry Kaspar (link here: http://kantooseconomics.com/2012/02/03/the-liquidity-trap-monetary-policy-and-inflation-expectations-help-needed/)about influencing growth through future inflation expectations. I was wondering how a central bank can influence inflation expectations when the rates that a central bank directly controls are near zero. Wouldn’t the central bank need to directly affect consumer behaviour in order to get businesses to invest. If so how would it do that, and if not why would businesses invest without an increase in consumer demand.

Paul Krugman May 19th, 2012 at 3:09 pm
In response to Imhotep @ 72

I guess we’d like to believe that people in public life can learn from evidence. But the truth is that it very rarely happens. I think we can safely say that nothing will ever cause Paul Ryan to admit that his economic doctrine is wrong — take away that doctrine, and he’s just some congressman with nothing special to offer.

And on health care, there’s just too much money and ideology at stake for the evidence to sink in. I originally got the term “zombie ideas” from a paper on the Canadian health care system; the paper pointed out that there are myths about that system (terrible quality of care, huge numbers of people seeking treatment in America, endless waits for important surgery) that just keep shambling forward no matter how many times you think you’ve killed them.

And conversely, no matter how many times you show that private insurance markets are terrible at cost control, you just keep getting blithe assertions that only the private sector can control costs.

I guess the question here is, in that case why do people like me bother? And the answer is that hopefully there is a fringe of people who can actually be persuaded. But we can take it for granted that not a single Republican member of Congress is part of that fringe.

thatvisionthing May 19th, 2012 at 3:10 pm

edit: There are two diaries and two threads, Paul Lev’s from 2008 with the pix (Nobel Laureate Paul Krugman Cites Asimov’s Foundation Series as Inspiration) and geomeoo’s later one from 2011 with the 143 comments. Sorry, forest, trees, can’t see the diary for searching the comments

Paul Krugman May 19th, 2012 at 3:11 pm
In response to Neil @ 74

Well, that’s not right; inflation expectations are strongly affected by beliefs about what the central bank will do once the economy recovers. I agree that the Fed has very little traction now; but someday the unemployment rate will drop below, say, 7 percent, and markets are very interested in the question of whether the Fed will pull the trigger at that point or wait until inflation has risen to 3 or 4 percent.

Daniel May 19th, 2012 at 3:12 pm

Can you discuss why most economists ignore politics as an candidate explanation for the rising income inequality since the 1970s?

Knut May 19th, 2012 at 3:13 pm
In response to Paul Krugman @ 75

In this respect, do you know of any case where a major economic recession caused by a negative demand shock was countered by deliberate countercyclical fiscal policy? The Second World War expansion was a by-product, and the Kennedy tax cuts were on the whole fine-tuning. Here in Quebec we had an effective countercyclical policy because six months before the Depression set in, an overpass collapsed on a car killing four people, and the government decided to redo all the bridges, overpasses and culverts just when things were going South everywhere else. As a result, our unemployment rate was lower than in most of the rest of Canada, and is still lower than in the United States. But it was hardly deliberate.

John Aho May 19th, 2012 at 3:16 pm

Hi Paul,
I just finished reading Robert Caro’s “Passage of Power” and looking forward following that up with your new book. My question is about the 1964 tax cut package that is mentioned in the book. Why was that tax cut package successful in stimulating economic growth and what makes it different from the tax cuts of Reagan/Bush that did not lead to growth?

Why would cutting taxes today not have the same impact?


Paul Krugman May 19th, 2012 at 3:17 pm

Yes, look at Asia. China had a big stimulus program; so, less well know, did South Korea.

I know that fiscal stimulus is hard to engineer. But one of my points in End This Depression Now! is that we can actually achieve a lot just by reversing the unforgivable austerity we’ve actually imposed when we should have been doing the opposite.

shma May 19th, 2012 at 3:17 pm

Montrealer here,

George, you should invite Paul to give a talk at McGill. I’m sure there’s a large group of people here who’d love to come hear him.

PeasantParty May 19th, 2012 at 3:19 pm

Hi Paul.

Great to have you back at FDL. I know the questions are flying, but could you jump back to number 52?

The reason I ask is because it has recently been noted that Brenan and others that are no longer relevant in policy are still holders of security clearance like Henry Kissenger. I’d like to know if there are still hangers on from the old timers club pushing these policies.

jessefrederik May 19th, 2012 at 3:19 pm

What do you think about using taxes to control inflation and leaving interest rates permanently low? (keeping with Keynes’ euthanasia of the rentier)

defogger May 19th, 2012 at 3:19 pm

Welcome Professor Krugman :If viewed from a perspective of monopoly sociopathy , austerity would be a very logical means of looting and privatizing public wealth in a fire-sale climate of fear and desperation .Accordingly ,the tighter the austerity screws are turned more euros are squeezed into what appears to be a recirculating scheme that empowers the bundesbank to perform with reserve currency dictates .I realize those euros also come here ,but I’m speaking of structural adjustment power .Your thoughts please .

Paul Krugman May 19th, 2012 at 3:20 pm
In response to John Aho @ 80

Actually, I believe the Kennedy tax cuts are way overrated — it’s become a legend that they were responsible for growth, but there were a lot of other factors (and a lot of government spending after 1965, as Vietnam ramped up!)

But the main point surely is that US budgeting was fairly responsible all through the 1960s. We did not run persistent large deficits even when the economy was strong. Reagan and Bush did — and left us in a weaker position than we should have been when a crisis struck for which deficit spending actually was appropriate.

Knut May 19th, 2012 at 3:20 pm

I’ll try to see if we can get him another honorary degree. That’s how we got Steve Gould. Problem is that only the graduating students and their parents get to go hear him.

DWBartoo May 19th, 2012 at 3:21 pm
In response to Paul Krugman @ 75

Perhaps the larger question, Paul, is what might all of us, together, do to effectively change not only a corrupted economic “system”, but also the political system (a purported democracy) which money has thoroughly corrupted, even to the level of the Supreme Court, we have, now, a “political economy”, to use an old term, which no longer serves the interests and needs of the many but merely the appetites and whims, however destructive, of the few.

The Rule of Law is in shambles, the housing debacle continues, the “agreement that allows the too-big-to-fail banks to go on plundering is applauded, the government, “our” government, allows torture and the use of drones (which are morally equivalent to the use of V-2 rockets, if we are honest), and the extrajudicial killing of anyone, anywhere, and at any time … in an “endless war” … political repression is ever more obvious in our nation.

We face a tyranny of wealth and power. What do you suggest we do?


Neil May 19th, 2012 at 3:22 pm
In response to Paul Krugman @ 77

Is there any example of a country that has been at the zero lower bound on interest rates and managed to climb out of it by the central bank influencing inflation expectations (as opposed to say government stimulus or a slow grinding recovery where consumers pay down debt and start spending again)?

Knut May 19th, 2012 at 3:23 pm
In response to Paul Krugman @ 86

Going back to that ancient history, there was even an attempt in 1968 to raise taxes to prevent overheating. I distinctly recall having lunch at Commons with Bill Nordhaus and Marty Weitzman, and listening to Bill argue that we should oppose the hikes because it would simply ratify the war. The old Keynesians like Tobin and Solow supported it. I pointed this out at a conference to Christie Romer, who at one time bought into the irresponsibiity theme. It wasn’t the case.

judybrowni May 19th, 2012 at 3:24 pm

Defogger, translation: “austerity” = garage sale for the ultra-wealthy?

Paul Krugman May 19th, 2012 at 3:26 pm
In response to PeasantParty @ 83

Well, I’m not good at White House Kremlinology. We do know that Tim Geithner wanted early withdrawal of fiscal support; Peter Orszag seems to have been sort of on that side too.

But the main thing is probably the parade of Wall Street types who have had lots of access all along. I don’t especially fault the president for letting them have a say, but I think it took him way too long to realize that they were giving really bad advice.

Oh, and one cannot say too much negative about Pete Peterson, the Committee for a Reprehensible Federal Budget (did I get the name right?), and all that. They gave Paul Ryan an award for fiscal responsibility; need we say more?

PeasantParty May 19th, 2012 at 3:27 pm
In response to DWBartoo @ 88

I’d just like to say thank you for bringing the old term, “political economy” to the table. Also, Political Repression is a term that we must make much more use of in these financial Hitmen days. For as you know, there are Jackals behind all the events.

Paul Krugman May 19th, 2012 at 3:28 pm
In response to Neil @ 89

Actually, us! It’s widely argued that FDR’s decision to abandon the gold standard had a salutary effect on inflation expectations, and helped to fuel a pretty good recovery from 1933 to 1937. Unfortunately, at the point he let the Austerians of his day get to him.

Knut May 19th, 2012 at 3:30 pm
In response to PeasantParty @ 93

They are currently working their will in Chicago.

John Aho May 19th, 2012 at 3:30 pm
In response to Paul Krugman @ 86

Thanks Paul. You should get in touch with Caro, since your book-tour schedule is so light! He portrays the tax cut bill has being a key part of mid-60′s economic growth. LBJ spending a lot makes more sense.

Caro is a great writer/biographer, but an economist he is not.

PeasantParty May 19th, 2012 at 3:30 pm
In response to Paul Krugman @ 92

Thank you for that response. Love the humor in Kremlinology as I’m sure PW, Ecahnomics, Southern Dragon and most of the attendees will too.

juliania May 19th, 2012 at 3:32 pm

Thank you very much for being here, Professor Krugman. I see from the above that you have more than enough questions to answer, and thanks also to Knut for the excellent moderation. I loved your dedication – there is a whole generation plus that has been shortchanged and my heart broke when Obama, who had campaigned as an intellectual and a listener and a changebringer simply stayed the course. He quite deliberately ignored and betrayed the people to whom your book is dedicated. (Thank you so much for writing it.)

I cannot believe he does not know what he is doing, frankly. Is there anything that makes you think he doesn’t know the course he is on will further wreck the economy? I read a good piece by J.K. Galbraith to the effect that he and his group sent an advisory letter to Obama as his administration began – they were ignored. It is not as though many people have not been telling him he is wrong. He has the bully pulpit; he has not used it.

Paul Krugman May 19th, 2012 at 3:32 pm
In response to DWBartoo @ 88

Organize! Write letters (Congressmen care more than you think, and most journalists have surprisingly thin skins (but mine is made of rhinoceros hide)). Mount primary challenges to DINOs. But don’t do a Nader.

Actually, I have some hopes that if reelected, Obama will be tougher — having put all its chips on the man from Bain, Wall Street will have lost a lot of its clout.

PeasantParty May 19th, 2012 at 3:32 pm

:-D Glad you are one of us.

Knut May 19th, 2012 at 3:32 pm

Paul, there were two big pieces of economic news this week. Jamie Dimon’s ‘excuse me, I just lost $5 billion)’ and the Greek bank run (or jog). Taking the second one first, what would a Greek exit from the Euro look like in Greece? Understanding that this is all guess work, what do you see is the balance of cost and benefit of Greece leaving the euro?

Imhotep May 19th, 2012 at 3:33 pm

Secy Geithner has hinted that he plans to leave when budget discussions are finalized.
Do you have a recommendation for his replacement? Someone outside of the Wall Street cabal, but not a freshwater type?

DWBartoo May 19th, 2012 at 3:33 pm
In response to Paul Krugman @ 92

So you consider that Obama has decided that he got bad advise?

What do you imagine that he will now do with that understanding?

Frankly, Paul, I remain skeptical and do not imagine that Obama’s second term will be any more worthy of applause than the first.

Perhaps you might “see” something different?

If so, might you elucidate?

What, rather specifically, do you consider that Obama will seek to do differently with the bankers … this time?


Paul Krugman May 19th, 2012 at 3:38 pm
In response to juliania @ 98

OK, a mild sorta-kinda defense of Obama. Early in his administration, we was surrounded by smart-sounding people — and their Wall Street friends, who also sounded smart and had great tailors too — who told him that this was a brief panic in the financial sector, and that once the panic was past the economy would snap back. It’s a shame that he chose those people to listen to, but Obama was very much a conventional, centrist guy. (Some people may recall that I tried to tell progressives that during the primary, but they didn’t want to listen).

But that’s all water under the bridge now. I do talk to WH people, and even allowing for the fact that they’re no doubt saying what they think I want to hear, they do know better now. They’re operating under severe political constraints, but maybe after November they’ll be willing to be more daring on that front.

So it’s not fair to think of the president as being just part of the austerity madness. He and those around him have learned from experience, which is more than you can say about the vast majority of politicians.

mark May 19th, 2012 at 3:38 pm

You’ve come to terms with being shrill. How do you feel about being hysterical?

dwb May 19th, 2012 at 3:38 pm

great book, excellent blogging, lets end the european depression now too (its all interconnected). I have been reading up on the supposed German economic miracle and from what little i’ve read i am not super impressed: low labor force participation, rigid labor market – it seems less of a case of them doing great and more of a case of them merely doing less-bad than the rest of Europe. do you have any thoughts on this? is the ECB going to step up and help here, or are they doomed.

SouthernDragon May 19th, 2012 at 3:39 pm
In response to DWBartoo @ 103


Djuha May 19th, 2012 at 3:39 pm

Dr. Krugman, I think the point about economic education deserves a very serious look.

As things stand with most Americans, the austerity argument seems intuitive and the Keynesian argument seems counter-intuitive. This wasn’t always so, how can we break this mentality moving forward?

rvingretiree May 19th, 2012 at 3:40 pm

Dr. Krugman, just a practical question that applies to retired folks like me. If we were to adopt a policy of deliberately higher inflation, say 4%, what can folks with nest eggs do to protect them from that inflation when bond rates are near zero, and stocks are so risky because of things like the Euro crisis??

Incidentally, I no longer own an RV, so that expense is gone, although for me it saved money because I parked it and lived in it full time …

HelenaHandbasket May 19th, 2012 at 3:41 pm

Am I too late to the party?

Why do Democrats buy into the meme that tax cuts, even if they are for the middle class, are the answer to economic problems? That’s just trying to buy people’s votes with their own money.

DWBartoo May 19th, 2012 at 3:41 pm
In response to Paul Krugman @ 99

Don’t do a Nader?

Paul, Nader did not cost Gore the election, the Supreme Court, doing in the rule of law, deliberately, with total political disdain, anointed Bush President … and Gore meekly shuffled off the stage, desiring to remain “viable” rather than point out the obvious. Of course, Bush was the media’s darling … and the “press” would have taken poor Albert to task.

Many of us view the need of a third party as beyond question, as the legacy parties BOTH represent the same monied interests … as both are OWNED by those “interests”, corporate, military, or otherwise.

Ah, well …


Djuha May 19th, 2012 at 3:45 pm

Dr. Krugman, have you crunched the numbers on the effects of a full “taxmageddon” on unemployment, federal government revenue, etc.?

Paul Krugman May 19th, 2012 at 3:45 pm

The best model we have for a Greek exit is Argentina when it went off the dollar peg at the end of 2001. The first year was terrible: widespread panic and bankruptcies from firms that had liabilities in dollars but assets in suddenly devalued pesos. Real GDP fell 11 percent. But then the economy bounced back strongly, in part because the devalued peso was great for exports (and even existing exports were worth much more in peso terms).

Greece would also have a terrible first year, although my guess — it’s no more than that — is that it might not be as terrible as Argentina’s if only because the economy has already suffered so much damage and so many of those who might go bankrupt already have. On the other hand, the mechanics of replacing euros with drachmas will be very ugly. Some “experts” (there are in fact no experts on this, myself included) are saying a 50 percent GDP decline, but I think that’s implausible.

Then, I think, recovery. Yes, Greece has exports: shipping, which won’t be much affected and will be worth more in drachmas, tourism which will surge once the chaos is past and cheap package tours to the isles start attracting hordes of Brits, and yes, cheese, wine, and oil.

So ugly, ugly, ugly at first, but with a real hope of redemption.

judybrowni May 19th, 2012 at 3:45 pm

And Nader helped!

I can’t believe that at this late date, when third parties have inevitably help elect either the Republican (or, rarely, Democrat) there are still Nader apologists and “Greens” who persist in electing the party whose policies they claim to most despise.

jrootham May 19th, 2012 at 3:45 pm
In response to Paul Krugman @ 69

How much of that evidence about the long run Phillips curve not being vertical comes from the Canadian experience of having a central banker target 0% inflation?

Knut May 19th, 2012 at 3:45 pm
In response to Djuha @ 108

I’m going to step in here in case Paul gets derailed. There is a kind of ‘folk economics’ that is a little like folk physics. If you look outside the world does seem flat. It’s the same thing with debt. If we get in too deep, we will be forced into bankruptcy (unless it’s student debt). Most people don’t understand the difference between stocks (no time dimensionality) and flows (time dimensionality). The idea that everyone would be better off saving seems to make sense until you realize that in the aggregate everyone cannot save more than they earn. Another piece of ‘folk economics’ is that the government lives off the rest of the economy (this comes from Adam Smith, and is specific to his particular way of thinking about the transformation of raw materials into final goods), or that only private businesses create ‘real’ employment.

We spend a lot of time in elementary economics trying to undo folk economics, but it is a widow’s cruze of ever-flowing ignorance.

Paul Krugman May 19th, 2012 at 3:46 pm
In response to mark @ 105

I’m very calm about it.

HelenaHandbasket May 19th, 2012 at 3:47 pm

Was Milton Friedman right about anything?

Paul Krugman May 19th, 2012 at 3:47 pm
In response to jrootham @ 115

Lots more evidence now. Recent work from the San Francisco Fed (search my blog) shows a huge concentration of wage changes at precisely zero, showing that nominal wage rigidity is very real, which in turn implies a non-vertical Phillips curve. Again, if you have no idea what this is about, lucky you.

Paul Krugman May 19th, 2012 at 3:49 pm

Actually, yes. He was right about expectations and accelerating inflation at low unemployment; he was right about temporary versus permanent income changes having different effects on consumption. Unfortunately, his biggest claim — that the Fed could easily have prevented the Great Depression, and that fiscal policy is never needed — was dead wrong.

Knut May 19th, 2012 at 3:49 pm
In response to Paul Krugman @ 113

It strikes me a little like taking off a band-aid. You can do it slowly with excrutiating pain, or quickly with a sharp pain that goes away almost immediately.

Knut May 19th, 2012 at 3:51 pm
In response to Paul Krugman @ 120

Paul Samuelson said Milton was the smartest guy you’d ever want to meet, and the most persuasive guy you’d never want to meet.

Paul Krugman May 19th, 2012 at 3:53 pm
In response to Djuha @ 108

Actually, I think it more or less was always so, to at least some extent. Polls from the 1930s show a majority of Americans wanting the government to cut spending and balance its budget.

What political leaders have to realize is that whatever people say in response to issue polls, they vote on results. Do the right thing for the economy, and the votes will follow.

BevW May 19th, 2012 at 3:54 pm

As we come to the end of this great Book Salon discussion,

Paul, Thank you for stopping by the Lake and spending the afternoon with us discussing your new book and the Depression we are in.

George, Thank you very much for Hosting this great Book Salon.

Everyone, if you would like more information:

Paul’s website (The Conscience of a Liberal) and book (End This Depression Now!)

George’s website

Thanks all, Have a great weekend.

Tomorrow: Kip Hawley – Permanent Emergency: Inside the TSA and the Fight for the Future of Security; Hosted by Bruce Schneier

If you want to contact the FDL Book Salon: FiredoglakeBookSalon@gmail.com

wigwam May 19th, 2012 at 3:54 pm

Hi Professor Krugman. Thanks for being here.

A number of places, you’ve expressed the opinion that, in ordinary times, government borrowing deters inflation. I’ve seen the MMT folks come back with the argument that Treasury bonds are fungible, since among other things one can pawn that at various banks in exchange for freshly issued bank credit, which is new money going into the system, as would government printed money be.

Probably for lack of diligence on my part, I’ve not seen a reply to that argument and would be interested in any reference etc on the matter

warp9 May 19th, 2012 at 3:54 pm
In response to Paul Krugman @ 104

Obama was very much a conventional, centrist guy.

But, given how far things have shifted to the Right, wouldn’t being a real centrist actually put somebody pretty far to the Left these days?

It seems to me that this point relates to something you’ve said above (in post #55), about people who are taking the “middle position” on the economic debate, even though the austerity side of the argument is being driven by charlatans and cranks. Being a “centrist” when one side has gone off the rails into crazy land, is not a defensible position.

Paul Krugman May 19th, 2012 at 3:54 pm

I think Samuelson also said that while Friedman could do fine economics, he talked hokum to the yokels.

PeasantParty May 19th, 2012 at 3:55 pm

I like that response and the point about “Folk Economics”. In my line of living, folk economics is the only real economics there is. The Bernanke and Geithner economics doesn’t really work for folks. It only works for those few higher planed persons while the rest of the country is stuck in folk economy.

Many of us folk have been discussing how to make our real economy work better outside of the official Bernanke/Geithner type. We do not get any return on our savings and our 401K’s are at the mercy of Jamie Dimon. They have a way to make it all disappear in a day if we do not do something about it.

DWBartoo May 19th, 2012 at 3:55 pm
In response to judybrowni @ 114

Oh, judy, I despise both parties equally, not merely for their destructive actions AND in-actions, but also for closing the “system” to any other options, for deliberately toying with human beings and choosing power over reason and humanity … for limiting the “discussion” to absurdity and game-playing while human beings and the planet suffer.

Both parties are wedded to war, to austerity for the many, and to the financial well-being of their candidates, and their true constituency … the corporate class.

The play acting, the kabuki, is most appalling and this political season is not merely farce but direst tragedy … whoever “wins”, the people lose.


Knut May 19th, 2012 at 3:55 pm

Paul, thanks so much. Diane says hi. Give my best to Uwe. He never forgave me for our trip across the Continent back in 1965.

Paul Krugman May 19th, 2012 at 3:56 pm
In response to BevW @ 124

And thank you Bev and George for this opportunity. It’s been great fun.

Djuha May 19th, 2012 at 3:57 pm

Thank you George for your work to undo such thinking, apologies if this strays too far off topic.

Perhaps I am wrong, but it seems like economics education is designed specifically for students whose target is to go to grad school in econ rather than for the vast majority of students who are just getting their intro micro/macro requirement out of the way.

It’s like with math: why bother with pre-calc if the student isn’t going to go on to calc or differential equations and never plans to go into engineering? If the student only has one class to take, why not make the most of that one class and have them do stats instead?

Don’t have them memorize meaningless (to them) equations, teach them policy analysis skills so that they can form informed opinions of the important questions of the day such as stimulus vs. austerity.

juliania May 19th, 2012 at 3:57 pm
In response to Paul Krugman @ 104

Thank you, Professor Krugman, for responding. With great respect, I simply do not buy it. The presidency is such an enormous responsibility that it behooves any well-educated aspirer to listen to all sides – that was what distinguished great presidencies of the past, from Washington on, and Obama was modelling himself literally on Lincoln. Yet, he ignored the arguments which elected him once in office and surrounded himself, as you say, with folk who advised only one way to ‘do business.’ That’s not presidential in my book, and in my book he doesn’t deserve a second term.

From the perspective of those to whom your book is dedicated, it has really been an enormous disappointment and betrayal. And if competency is the issue this has been a very expensive education for one unprepared executive leader.

But thank you enormously for writing and teaching sound economics in a time of ignorance and greed, and thank you for sharing this forum with us. What we all want is the same outcome, a peaceful and productive world.

DWBartoo May 19th, 2012 at 3:57 pm

Thank you, Paul and George.

Thank you, Bev.


applepie May 19th, 2012 at 4:04 pm

Hi there. Thanks for coming on to FDL for this. I am, however, very cynical about how neoliberalism has played out, not just internationally in the slave shops of China or with the depressed people of Japan, but also here with the crushing of unions and the artificial debt crisis and the ravaging vampirism of the energy sectors attack on the envmnt. While I do not always agree with you I have appreciated your writing over the years, and at times your lone voice towards sanity, especially on the Sunday talk shows!

My question has to do with the future. As international capital and the powers of transnational corporations shift to emerging markets (not my choice!), does that mean that any protectionist impulse would be thwarted? For example, here in the NW, we are seeing the huge juggernaut of coal export rolling out. We are fighting to preserve the health of our region but it seems that the corporations involved will ignore our desires and intents. Old story right? Well, it is a bit different since the coal is for foreign growth, and transnational corporations are involved. Must the local always be subservient to intl trade here? In terms of modern American economics, and our economic survival, is this an inevitability? I think not. Do you have any thoughts on this?

darms May 19th, 2012 at 4:10 pm

Thanks Paul, Knut & Bev for an excellent book salon, I’ll definitely put it on my to-read list. One thing I didn’t see in the above discussion was the acute political angle, the r’s have had but one goal since 2008 which was to make Obama’s a failed presidency. This goal accelerated in 2010. Granted, Obama has done a lot of foolish things and listened to far too many of the wrong people (while ignoring the few like Paul who have actually been correct) but the sheer naked hatred from the r’s side of the aisle is a big factor in why there’s no recovery for the 99%.

thatvisionthing May 19th, 2012 at 4:12 pm
In response to juliania @ 133

…peaceful, productive… and sustainable. A moment to grieve the 800-year-old giant red cedar cut down in Washington for the roof shakes that could be made from it. I worry that everyone can count a bean but no one can count (or make again) a tree like that:


And I don’t know how you model that value and loss in a Depression or otherwise.

Thank you Paul for being here with us today.

eblair May 19th, 2012 at 4:15 pm

Mr. Krugman, while it is perhaps convenient to explain the dogmatism and lack of consensus that one finds in economic debates in terms of national politics, the dogmatism and lack of consensus is a global fact as economists in different countries disagree quite dramatically in a way that physicsists or even music theorists don’t. The standard explanation that a philosopher of science would give is that economics just isn’t a science. It’s serious claims cannot be tested. So my questions are: don’t you think that economics has promised far more than it can deliver? Do you really think it is a science? And if so, what year did it become a science?

defogger May 19th, 2012 at 4:16 pm

Hey judibrown .clearly you have no understanding of progressive politics .I don’t think you will find many OWS or Nader peeps who find lesser-evil dems more laudable than pubs Personally .I blame mainstream dems for moving the center into fascist terrain ,and do not give a fuck about Obama or Romney .

judybrowni May 19th, 2012 at 4:49 pm

I’ve only lived progressive politics for, oh, 40 years.

I’ve watched the Naderites and Greens elect Republicans, with the help of the Democratic voters who who claimed there was no difference between Gore and Bush, elect Bush.

If you believe there would have been no difference between a Bush and Gore presidency, you’re delusional.

As well as ignoring a century of U.S. history: the recessions and depressions that inevitably followed Republican administrations, which were alleviated by Democratic administrations.

Alan Maki May 19th, 2012 at 4:53 pm

The deficit-obsessed U.S. House just signed off on $652.5 BILLION for the National Defense Authorization Act and this doesn’t have any economic impact? Give me a break.

Forget about Keynesian economics and check out Karl Marx who declared that when a nation squanders its wealth on militarism and wars this is like tossing the wealth of the nation into the deepest depths of the oceans.

Come on Krugman; do you really expect us to believe that pumping over one-half trillion dollars into policing the world for Wall Street’s interests and fighting dirty imperialist wars isn’t one of the primary reasons why we can’t put America back to work?

Spend that same amount of money creating a National Public Health Care System, a National Public Child Care System, re-establish the WPA, CCC and C.E.T.A. and we will put everyone to work creating a full-employment economy but it won’t be a capitalist economy, will it?

I think you have a lot of nerve and unmitigated gall suggesting we should accept a 5% unemployment rate.

Not only is militarism and war never even broached here except by one participant who raised it but it has apparently gone unanswered; but, there is no suggestion that what is needed in this country is a massive “blitz” to end poverty.

Is there one single legitimate reason we shouldn’t be thinking outside of the capitalist box about the socialist alternative which places human needs before Wall Street’s greedy and insatiable drive for profits?

I find it rather moronic an economist of your note would not bring forward the need for a “peace dividend” as the only way to begin turning this country around.

defogger May 19th, 2012 at 5:24 pm

Hey judibrown ,you come off as a congenital reactionary .I believe you have been a dem for 40 years ,and I could imagine you being an activist who worked to advance some issue for which you have empathy ,but I hope you realize that the class-averse nature of identity politics doesn’t reflect progressive politics .I believe anyone is delusional who believes a pansy like Gore wouldn’t have been rolled into war by Lieb and other neocons .Please ,put down the kool-aid and think for yourself .Can you name 2 dems in the DLC who didn’t push the war ?

IrishRed May 19th, 2012 at 5:27 pm
In response to Paul Krugman @ 104

Sorry, but 3.5 years of watching Obama and friends cave on every last issue progressives care about, hoping that they’ll somehow change in the next term just ain’t good enough.

Occupy is getting my money and time this election and a third party or write-in will get my vote.

OmAli May 19th, 2012 at 5:57 pm
In response to juliania @ 133

Beautifully written, juliania.

Thank you, DW.

wahyusamputra May 19th, 2012 at 6:05 pm

There are better and simpler, more effective solutions, for example:

‘We should impose a gradually rising carbon fee, collected from fossil fuel companies, then distribute 100 percent of the collections to all Americans on a per-capita basis every month. The government would not get a penny….the reduction in oil use resulting from the carbon price would be nearly six times as great as the oil supply from the proposed pipeline from Canada, rendering the pipeline superfluous. James Hanson, 2012

Published on Thursday, May 10, 2012 by The New York Times

Dr. James Hansen is director of NASA’s Goddard Institute for Space Studies and adjunct professor in the department of earth and environmental sciences at Columbia University. He was the first scientist to warn the US Congress of the dangers of climate change and writes here as a private citizen. Hansen is the author of “Storms of My Grandchildren: The Truth About the Coming Climate Catastrophe and Our Last Chance to Save Humanity.”

bigchin May 20th, 2012 at 5:10 am

The incongruities between Dr. Krugman’s knowledge of economics and his partisanship for Obama and the Democrats is one of the most dynamic hypocrisies running in this years election campaign. And Krugman’s refusal to address that issue here, but for a mealy and unprincipled “Don’t do a Nader” line speaks volumes.

I call bullshit.

Obama is a fraud.

The Democrats are fraud.

Vote progressive third party and put an end to these 21st century “Whigs”

juliania May 20th, 2012 at 3:41 pm

Totally agree, thatvisionthing. My definition of ‘productive’ includes the health of the planet and all living things on it – I was simply playing on the word economically speaking.

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