July 20, 2012 1 Comment
In a nice New York Review of Books essay, Paul Krugman makes a good case that we know what to do about the current economic situation, but just aren’t doing it. And even that’s it is actually politically possible. As, I believe Ezra has suggested (and Krugman addresses), I actually think it us possible that Romney might actually have it easier accomplishing this in the “only Nixon could go to China” vein. Here’s the intro:
The depression we’re in is essentially gratuitous: we don’t need to be suffering so much pain and destroying so many lives. We could end it both more easily and more quickly than anyone imagines—anyone, that is, except those who have actually studied the economics of depressed economies and the historical evidence on how policies work in such economies.
The truth is that recovery would be almost ridiculously easy to achieve: all we need is to reverse the austerity policies of the past couple of years and temporarily boost spending. Never mind all the talk of how we have a long-run problem that can’t have a short-run solution—this may sound sophisticated, but it isn’t. With a boost in spending, we could be back to more or less full employment faster than anyone imagines.
But don’t we have to worry about long-run budget deficits? Keynes wrote that “the boom, not the slump, is the time for austerity.” Now, as I argue in my forthcoming book*—and show later in the data discussed in this article—is the time for the government to spend more until the private sector is ready to carry the economy forward again. At that point, the US would be in a far better position to deal with deficits, entitlements, and the costs of financing them.
Naturally, he also brings the empirical evidence throughout. I found this bit quite compelling:
Fortunately, researchers at the International Monetary Fund have done the legwork, identifying no fewer than 173 cases of fiscal austerity in advanced countries over the period between 1978 and 2009. And what they found was that austerity policies were followed by economic contraction and higher unemployment.
Good stuff. If you care about the economy, read it.