End This Depression Now!

"The last two books that I’ve chosen are closely related. You can think of them as being, broadly, two sides of a debate. Again, they’re related to this whole question about the conduct of fiscal policy, but they take different sides. End This Depression Now! is a book by Paul Krugman. Krugman has written other books on very similar topics: The Return of Depression Economics is another related book. In End This Depression Now! Krugman has a very informal tone. It came out in 2013 and is clear advocacy for a particular type of policy. The type of policy that Krugman was advocating was for an increase in government spending. His argument was that the recession that countries in Europe were undergoing, and the weak recovery that the United States was undergoing, were unnecessary. There could have been greater prosperity, and there was no reason why we were not having it. And the tool to unlock this greater prosperity was a relaxation of fiscal policy: i.e. an end to the austerity policies that were being undertaken in many countries in the world, notably in the United Kingdom. Also, he argues that the US was not doing enough. We should have just spent more, ideally as consumers, but if consumers weren’t doing it then the government should have done more. This would have increased the total level of demand in the economy, which Krugman argues was stagnant, and was the cause of the weak growth. His point is very clearly, ‘Spend more.’ Governments should spend more to stop this restraint, and by doing so, they will unlock greater economic activity and output. Importantly, he makes the point that greater output will lead to higher income for households and that the social cost of not doing so is extremely high. He says it’s not an issue of numbers. We think of economists as just being focused on the numbers, on the money. He makes the point that the human cost of a recession is very high. Because people can afford less, they eat less, they enjoy life less, and health outcomes are worse. His second point is, I think, uncontroversial: recessions are very painful events. We should really try to understand how to avoid them and how to mitigate them. I think that every economist or social scientist would agree on that. His first point—about the recession being unnecessary and caused by excessive government restraint—is extremely controversial. Many people agree, and I think that many policymakers would agree, that governments should do more whenever possible. But it’s not a widely accepted conclusion. I think most of the authors of the books I have suggested would not subscribe to it. Nonetheless, it’s a very influential view. This is a point that Krugman is making not only in this particular book, but he is also a frequent contributor to the New York Times . He is also a Nobel Laureate in economics (just like Thomas Sargent, although mainly for his contribution to international trade rather than to macroeconomics). Krugman is highly influential, so this is a view that is worth keeping in mind. It’s a view that’s important and receives a lot of attention. Yes. The British government was at the forefront of austerity. The point that Krugman makes is that for countries such as Italy in 2011-2013, there was not much leeway. Italy was in the Euro area, so it could not finance government expenditure by relaxing monetary policy. And, at the time, financial markets were not lending to Italy at favourable rates, so the treasury of Italy found itself in a very constrained situation. It did what it could. In Italy or in Greece, austerity was imposed by financial markets or by institutions in the European Union. That was not the case for the United Kingdom, where borrowing costs were low, inflation was low, and interest rates were low. The UK could have chosen a different track. It could have chosen not to reduce government expenditure in 2010-2015. It could have done something different. That’s the reason why the UK example is particularly interesting, because as opposed to what was happening in southern Europe, the austerity that the UK underwent in this period seemed voluntary, the outcome of a deliberate political choice. Of course, there was an underlying risk that the cost of borrowing for the UK would have gone up sharply as well, had it chosen a different stance of fiscal policy, but that’s what we call a ‘counterfactual’, we cannot know for sure."