What I absolutely love and admire about Paul Krugman is how he makes economics, my worst and strongest enemy so far, so easy to understand. He uses simple analogies and explanations to discuss about complicated matters. On the downside, because economics always get more complicated as you further advance your way into it, when I don’t even understand his easy prose and illustrations, I feel like a complete fool.
Nevertheless, his book has been the most concise and clear-cut work that has finally, albeit mildly, explained to me this whole financial crisis and depression we’ve been slumped into since 2008. I’m not sure if, asked to explain in my words the genesis of this crisis and its solutions, I would indeed be able to, but I think I can answer some simple questions, now that I’ve read Mr. Krugman’s book. This is therefore a small attempt at summarizing and getting the main idea of the still rather complicated book, because let’s face it, it’s on economics, so there’s a limit to how easy it can get. (One other fact I like Krugman’s works – his books, those that are destined for laymen, at least, are never too thick, and therefore encourage the readers to take on the grand and daunting intellectual journey into the world of economics, numbers and charts.)
Krugman explains the beginning of the financial crisis (in the US) from the deregulations that occurred in the 1980s, during the Carter-Reagan era in the United States. Having had a rather ‘successful’ time after the Second World War (wars, unfortunately, are often financially beneficial to some countries, especially when war is not happening on the physical grounds of said country), the US government allowed for a series of deregulations on banks, giving them the freedom to pay any amount of interest or to have any kind of loans, especially in regards to business and financial firms in the private sector. Whereas banks had so far been a place where individuals deposited money for safe-keeping, banks were rapidly becoming places that lent cash they didn’t have to private investors. The differentiation between commercial banks and investment banks disappeared with the repeal of the Glass-Steagall Act, and commercial banks were as free as investment banks to lend to private business owners, thereby leading to the birth of the top 1% or even the top 0.1%.
Then comes the Minsky moment, a sudden and major collapse of asset values, and suddenly, people realize that they’re in a deeper debt than what they thought, and there is no way of getting out because everyone suddenly decides not to spend money because of such debt. It’s a vicious circle where A needs income to pay over his debt, but since B is also in the same situation and unwilling to spend money as well, there is no way for A to even have the income in the first place.
The fact that people are unwilling to understand that my spending is your income and vice-versa and only see their debt growing naturally steers them to cut their spendings and save money, money they unfortunately don’t have. The cash flow is stopped and no one’s willing to be the first to start it again.
Therefore Krugman argues that the current austerity policies most governments are taking, are only making matters worse. Sure, the tantalizing number of 16 trillion dollars in national debt is enough to scare off everyone and remind them it is time to stop ‘wasting’ money away. But sitting on the debt without anything is even more dangerous and will lead to nowhere. Moreover, the government is unwilling to borrow more on top because it’s afraid the interest rates will soar, thereby adding even more to the debt.
But, in the words of Krugman,
“in a depressed economy, budget deficits don’t compete with private sector for funds, and hence don’t lead to soaring interest rates. The government is simply finding a use for the private sector’s excess savings, that is, the excess of what it wants to save over what it is willing to invest. And it was in fact crucial that the government play this role, since without those public deficits, the private sector’s attempt to spend less than it earned would have caused a deep depression.”
Since the private sector is unwilling to spend more when the economy is at risk and we all know that private businesses will do nothing that undermines their benefits, it is up to the government to start spending, even if it means borrowing more (the current interest rate is nearly zero, so worries about high interest rates should be null).
What could and should be done?
More stimulus, for instance. The Obama government did in fact initiate a stimulus package in 2009, but it is Krugman’s opinion that it was insufficient. This insufficient stimulus pushed state governments to cause severe cuts in education, laying off school teachers and thereby making education worse than it already was. Many may ask, where should the stimulus or creating new jobs focus on? Should the government suddenly finance a brand new project, like building a new highway? No, there doesn’t need to be a brand new project to create jobs and re-boost the cash flow again. Investment in infrastructure, as in maintenance and upgrades, can be enough (the New York subways could use an upgrade, in my honest opinion). Help people in distress and those with enormous mortgage loans. Put money in people’s hands and they will spend it (not waste). But most importantly, do something, be aggressive. Don’t just sit on your debt and cut on spendings.
Why isn’t the government doing this? Among many reasons, one is political. This Keynesian policy, allowing the government to step in when necessary and not let the free market work its mojo until it finally gets it right, regardless of the countless jobs and homes lost in the way, is often seen as ‘socialist’, and thus contrary to the great American values, to many politicians on the right spectrum. (Although the Obama government has also been following the advice of rather anti-Keynesian advice.)
It is indeed unfortunate that even when seeing the numbers of high unemployment and other tragedies this depression has brought, the people that indeed can make a difference are unwilling to see past their disagreements to do something that actually matters and changes. Stop talking about ‘limited government’, there is a reason why we have a government in the first place.