Stop this Depression Now ! Krugman

Watch Krugman's Solution to Fiscal Stimulus? It Involves Aliens on PBS. See more from PBS NewsHour.

Greece and California budgets

Pain without Gain.  Paul Krugman. 2/20/12. NYT.

“And this downturn is hitting nations that have never recovered from the last recession. For all America’s troubles, its gross domestic product has finally surpassed its pre-crisis peak; Europe’s has not. And some nations are suffering Great Depression-level pain: Greece and Ireland have had double-digit declines in output, Spain has 23 percent unemployment, Britain’s slump has now gone on longer than its slump in the 1930s.

Worse yet, European leaders — and quite a few influential players here — are still wedded to the economic doctrine responsible for this disaster.

For things didn’t have to be this bad. Greece would have been in deep trouble no matter what policy decisions were taken, and the same is true, to a lesser extent, of other nations around Europe’s periphery. But matters were made far worse than necessary by the way Europe’s leaders, and more broadly its policy elite, substituted moralizing for analysis, fantasies for the lessons of history.

Specifically, in early 2010 austerity economics — the insistence that governments should slash spending even in the face of high unemployment — became all the rage in European capitals. The doctrine asserted that the direct negative effects of spending cuts on employment would be offset by changes in “confidence,” that savage spending cuts would lead to a surge in consumer and business spending, while nations failing to make such cuts would see capital flight and soaring interest rates. If this sounds to you like something Herbert Hoover might have said, you’re right: It does and he did.

Greece, Ireland, Italy, California -Keynes was Right

By Paul Krugman

“The boom, not the slump, is the right time for austerity at the Treasury.”  So declared John Maynard Keynes in 1937. Slashing government spending in a depressed economy depresses the economy further; austerity should wait until a strong recovery is well under way.

Unfortunately, in late 2010 and early 2011, politicians and policy makers in much of the Western world believed that they knew better, that we should focus on deficits, not jobs, even though our economies had barely begun to recover from the slump that followed the financial crisis. And by acting on that anti-Keynesian belief, they ended up proving Keynes right all over again.

In declaring Keynesian economics vindicated I am, of course, at odds with conventional wisdom. In Washington, in particular, the failure of the Obama stimulus package to produce an employment boom is generally seen as having proved that government spending can’t create jobs. But those of us who did the math realized, right from the beginning, that the Recovery and Reinvestment Act of 2009 (more than a third of which, by the way, took the relatively ineffective form of tax cuts) was much too small given the depth of the slump. And we also predicted the resulting political backlash.

The economic crisis continues

   As the video above illustrates, we continue to have an economic crisis in the nation.  While Wall Street has recovered and returned to profitability, working people continue to suffer  15 million unemployed with at least 10 million more under employed.   It is more than a crisis - the reality is that the financial class has looted the U.S. economy.  They took 13 trillion dollars  out of the economy and caused 4 million people to lose their homes and  another 4.5 million to fall into foreclosure.    Millions have lost their unemployment benefits and their health care. See the story below from Bloomberg news of how the banks borrowed 7.7 $ Trillion dollars .

            We should have recovered from the economic collapse by now, but Republicans block all efforts to stimulate the economy.  It is simply not true, not accurate, that we are broke.  California remains the richest state in the richest nation in the world.   We have a crisis because the richest 0.1 % are making enormous profits and they are not paying a fair share of taxes.  Many of the largest corporations and the richest people pay no taxes at all.  They are not paying taxes for schools, police, roads, bridges, fire protection and basic services. Responding to a recession by budget cuts is self defeating.  All you have to do is to look at Ireland, Greece, and Great Britain to see what follows. It is a cycle down.   We learned this during the Great Depression – its called Keynesianism.

            We should be investing in re building our crumbling infrastructure  and putting teachers, cops, and childrens protective workers back to work.

Goodbye Keynes, Hello Hoover- William Grieder

The first fundamental failure of Keynesian economics occurred forty years ago during the Vietnam War when the economy was overheating but the political system failed to take the corrective steps that would restrain price inflation—that is, raise taxes and reduce federal spending. The decade of economic stagnation that followed became a central factor in discrediting both liberalism and the Democratic Party.

We are now witnessing a second great failure of the doctrine John Maynard Keynes devised for managing a healthy economy. This time, Washington faces the opposite problem—a starkly underperforming economy in which 10 percent of the workforce are without jobs and income. Yet the President and Democratic Congress, spooked by the swollen federal deficits, are unwilling to do what Keynes prescribed in these circumstances—pump up federal spending enormously and run even larger budget deficits in order to force-feed a stronger recovery.

The results of this political decision will be tragic for millions of struggling families, but also potentially devastating for the Democratic party. Democrats are implicitly choosing to do nothing more to rescue the country from the deepening dislocations and lost output. Making mistakes can be forgiven, but not giving up.

We need jobs, not budget cuts

In order to help the economy grow, national, state and local governments need to maintain and to create jobs.  This policy is called Keynesianism.   Interestingly candidate Meg Whitman proposes exactly the opposite – cut jobs and reduce taxes for the corporations.   That is Reaganomics.

County revenues and state revenues are down. There has been a  nearly 30 percent drop in sales tax for Sacramento County over the past five years. Property tax funds an  large  share of county budgets, and plummeting real estate values have meant even less income for counties to pay their bills.  State cutbacks have been severe cutting some 16 billion from schools in the last two years.

 The reality is that almost all of California's counties are facing significant budget shortfalls resulting in cuts in programs, services and staffing.  And, some 42 of the states have severe budget crises.

 California and other states  have budget restrictions that prevent deficit spending, yet, according to Keynesian theory  we need deficit spending to get out of this recession.  The cutbacks at the state and local levels around the country are negating the value of the federal stimulus of 2009.  We must  stop the cutbacks at the state and local level.

Paul Krugman,  won the Nobel Prize in Economics in 2008 and is well known for his regular columns  in the New York Times.  He has republished The Return of Depression Economics with an update- the Crisis of 2008.  Krugman, a Professor at Princeton,   argues that the crisis is endemic.  It has been growing since the 1990’s.  He describes  particularly the 1994 Peso Crisis in Mexico , the East Asian Crisis, and the  US stock market bubble of 2001/02.  He could have well added the Russian Crisis of 1998.

The 2007/2009  U.S. economic  crisis was severe in part because of the   growth of finance capital as a  dominant actor  in our economy .   Finance was in crisis, not the production of goods and services.  Since the 1980’s,  in the age of globalization,  U.S. finance capital and financial services grew as a percent of the total profits in the economy  while manufacturing  declined.  At the same time, while the financiers made billions from stock options and bonuses, the average wage of working families remained stagnant, thus they had limited  money to use to buy new products.  And, when they did buy, the products were often manufactured in China or Vietnam and their production stimulated  those economies, not the US economy.