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Excerpt: "Half a century ago, any economist - or for that matter any undergraduate who had read Paul Samuelson's textbook 'Economics' - could have told you that austerity in the face of depression was a very bad idea."

Portrait, New York Times columnist Paul Krugman, 06/15/09. (photo: Fred R. Conrad/NYT)

The Austerity Debacle

By Paul Krugman, The New York Times

30 January 12

ast week the National Institute of Economic and Social Research, a British think tank, released a startling chart comparing the current slump with past recessions and recoveries. It turns out that by one important measure - changes in real G.D.P. since the recession began - Britain is doing worse this time than it did during the Great Depression. Four years into the Depression, British G.D.P. had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground.

Nor is Britain unique. Italy is also doing worse than it did in the 1930s - and with Spain clearly headed for a double-dip recession, that makes three of Europe's big five economies members of the worse-than club. Yes, there are some caveats and complications. But this nonetheless represents a stunning failure of policy.

And it's a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years.

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+7 # mjc 2012-01-30 08:41

Samuelson's economics text was the one I read when taking economics 101. That is also the course that made Keynesian economics a bit clearer as well. Those days, however, were a bit heady, optimistic for programs that the government could take up to make a prosperous nation.

+9 # soularddave 2012-01-30 19:34

May daddy used to teach from that book. We talked about public policy, economics, and stuff like that at the dinner table. That's why I had a good feeling about the bailouts for manufacturers, and hesitation about the bank stuff.

I know banks don't produce tangible products, and that fractional banking is a big gamble. I knew about "bubbles" before I was a teen, and how to spot them and when to get in and when it was over.

I believe in Government spending, and know that the "space race" was a proper kind of bailout that brew the middle class - highly unionized, with lots of spinoff, and all the other desirable traits.

We DO NEED infrastructure programs (the XL pipeline is NOT one), where there's lasting public benefit and maintenance. Waiting for private investment is a waste of time, because the projects will always suck money from the public for the benefit of share holders and the owners.

+43 # Valleyboy 2012-01-30 08:54

But Paul, what you don't realise is that Austerity is necessary to keep transferring the wealth from the normal people to the rich!
The quoted "short, sharp shock", I forget the person's name, is straight out of The Shock Doctrine. Economic policies that have been forced on poor countries by the IMF since the 70's are now coming to the rich countries. They required force to implement them there & they will here.
Thanks Milton Friedman!

+3 # RLF 2012-01-31 05:03

Remember how the South American countries got out of the austerity induced downward spiral? They defaulted on the debt owed to rich people. This entire depression was brought on by a business community that saw privatization of all public assets as an opportunity.

+7 # MidwestTom 2012-01-30 09:07

Keynesian theory may be correct, the problem is that governments only act on half of his theory. They expand government spending in bad times, but they do not reduce government spending when times are good. The other failure is that both Keynes and Halak would have been against the bailouts as structured.

+53 # bugbuster 2012-01-30 09:31

Counterproducti ve government spending, e.g., military spending, is the culprit. We have squandered our wealth on military adventures.

+1 # RLF 2012-01-31 05:04

Military spending bringing down a world power...sound familiar??

+3 # Midwestgeezer 2012-02-01 06:29

As in USSR? We were fortunate that they went belly-up before we did but, as it turns out, not by much!

+20 # LiberalLibertarian 2012-01-30 10:16

A lot of government spending is automatically reduced when times are good. Less is needed for unemployment benefits, rent subsidies and food stamps for the working poor. These expenditures will lessen as employment picks up. Other government programs such as infrastructure enhancements and maintenance can be phased out. Proper planning can help out, but legislatures usually are unable to do actual planning. Especially when a large portion of the legislators (Republicans) tend to think that a plan is to choose between eliminating a project or eliminating an entire department.

+13 # LiberalLibertarian 2012-01-30 10:21

Tom,

Drop the bailouts. They happened, and while you may not believe this many Lefties were against it as well. The fact is the bailouts were a partial success, and we did not spiral into total economic chaos. If the bailout was the action that prevented it, then it was a good thing.

I don't know the answer, but you cannot continue to claim that because Bush and Obama both determined that a bailout was what was needed, that they are equally inept at managing the economy.

0 # Holyone 2012-01-30 15:25

Well said. The bailouts did help and they are paying the money back..with interest. Measures have been put into place that will arrest this cycle of irresponsible behavior by people who take the 99% for granted.

+2 # Texas Aggie 2012-01-30 22:44

Those measures you mention are being fought tooth and nail by the banks. So far they are so far ahead that the game might as well be called.

0 # RLF 2012-01-31 05:05

You're kidding, right???

+1 # John Locke 2012-01-31 09:42

LiberalLibertar ian: The bailouts were done incorrectly. They were a gift to the Banks and had no concern for the people who were known to have been defrauded by the Banks. The Banks should have been allowed to fail. That is true Capitalism...We the taxpayers, without our consent bailed out the crooks. We can't have a free-market economy "Capitalism" when certain activities are protected and priveledged like the wealthy, and the Banks but austerity for the rest of us. It doesn't work.

And Holyone is incorrect, there were 16tn that was advanced secretely by the Fed to not only US Banks but banks across Europe Like "Dutsche Bank" for example, None of this has been repaid, and this just happens to be the amount America is in trouble... Anyone for sending cakes to our politicians.

+33 # bugbuster 2012-01-30 09:29

I think this is something like what Paul means:

If a private corporation bogs down, you can starve it of funds and shut it down. That seems to be what they are trying to do with Greece, Spain, Portugal, and if our own GOP had its way, the Unites States.

If instead you decide that it's not a good idea to starve a whole country of funds and shut it down, then you have to put some money into it to get it started up again.

The rich have no reason to put up their money, so it's left to the governments to issue bonds. There are many willing buyers for US treasury bonds, so that shouldn't be a problem. The government can then circulate the money until the engine catches and starts running again.

Those who fear government debt forget who the creditors are. Mostly they are us. We owe ourselves money.

Those who promote fear of debt are doing so out of self interest. They have their wad and nothing to lose by playing political games with lives and livelihoods of everyone else. All they have to do is fire up their misinformation machine and dumb down the riff raff with their anti-debt fearmongering. Then they get the votes, the congressional seat, and all the perks that follow.

But hey, if we're so smart, then why aren't *we* rich?

-6 # MidwestTom 2012-01-30 10:29

I agree with what you say, however, there are two major negative problems with expanding the monetary base: 1. At some point it kicks off inflation (note the price of many everyday items rising lately), second the price of fixed assets appreciate as more dollars chase a fixed number of things, thus accelerating the differences between the wealthy and the hourly workers with few assets. The continuously increasing money supply of the past 30 years without raising taxes has lead us to where we are today.

+6 # bugbuster 2012-01-30 11:28

We lived through bad inflation in the 70s. That was precipitated largely by sharp increases in the price of crude oil as a result of the Arab oil embargo. We haven't seen much inflation in recent years.

I think that the reduced consumer demand of the bad economy holds prices down on consumer goods. When the economy picks up again and consumer demand increases, then we will have more dollars chasing fewer goods. That's what we had in the 70s too.

It will be nice to have a better economy, but it won't be so nice for folks on fixed incomes if we also get inflation. But students with student loans and rising incomes will rejoice for inflation because it reduces the impact of their debt.

+15 # reiverpacific 2012-01-30 09:40

So why can't "Austerity" be applied to those who have way more than they need to even live luxuriously? -And I'm all for free-enterprise, especially in the small business sense- but we are directly hurt by austerity as applied to the submerged and already trapped in the bottom of the heap.
As for economics, I don't even pretend to understand the deliberately obscure language of which Greenspan was the master.
Milton Friedman's ghost must be hovering around between .C. Wall Street and Westminster, chuckling evilly!
Cameron's so-called coalition (but truly Tory-Whigs) is doing it's best to emulate the appalling Thatcher in it's gutting and privatizing of the UK's Social Safety net and infrastructure. Hope Scotland resists and goes for autonomy -and I've never been much for nationalism but in this case it's justified.

-6 # dorianb@fuse.net 2012-01-30 21:34

There is a lack of austerity in the WH. At a time when millions are unemployed and impoverished Michelle Obama spent 50 thousand dollars on lingerie. Ostention and extravagance like this sets a poor example during a recession.

+2 # reiverpacific 2012-01-31 08:45

Quoting

There is a lack of austerity in the WH. At a time when millions are unemployed and impoverished Michelle Obama spent 50 thousand dollars on lingerie. Ostention and extravagance like this sets a poor example during a recession.

Source please!

+14 # Onterryo 2012-01-30 09:44

I read Samuelson & Scott's text in 1969-70. From that point forward I believed in Keynesian economics. The criticism usually levelled by the conservative right is unfair because they judge the politicians rather than the theory. Politicians, over the past five decades, have always been willing to spend more when the economy needed it. The problem was that many of the new programs became entrenched and government spending was not reduced when the economy recovered and was doing well. Consequently, you had both public institutuions and private corporations competing with each other. This was not consistent with Keynesian economics. Paul Krugman is right...recovery begins with jobs, not with austerity. The failure of most Americans to understand what has happened to their economy and why, and why Obama's spending has not achieved the government's goals does not bode well for anything but a long and lengthy recovery which will create a lot more problems than we can imagine.

+19 # shortonfaith 2012-01-30 09:56

My God, another stupid theoretical clump of words to pretend that great minds are working night & day to solve this problem. B.S.

Everyone knows what it takes to get out of this slump. Slap on the tariffs & tax the heck out of the rich & the corporations. We've done it before & it works. Everyone know this but no-one wants to bite the hand that feeds them.

Well, the hand that feeds them is suppose to be the American people. The problem isn't different forms of economic thinking, it's that our leaders are all being bought off by the corporations. No form of economic thinking will work when the laws are not enforced. We are being ripped-off by our own representatives .

Say it. Say it loudly so you can hear it. Scream it out so your neighbor can hear it. Absolutely no amount of B.S. thinking will solve these problems until we stop the flow of tax-dollars to those people stealing everything. They have sheltered themselves by purchasing our government & judicial systems. The entire system has been sold off.

My God people, we are giving subsidies to corporation that are making $Billions? Can there be anymore evidence of complete corruption? Wake up stupid. This is the simplest thing in the world. We're diverting money to all the wrong people.

Those people who sit around pondering the theoretical are a major part of the problem. Every single second that goes by another $250,000 is lost. Wake up an start telling the truth.

+14 # Virginia 2012-01-30 10:05

Just another affirmation that the bailout should have gone to the homeowners to pay the banks in an early settlement for potential fraudulent activities... Before it got to the investigative stage. The banks were so eagar to lay the blame elsewhere that their short-sighted reasoning and lack of sense of consequence capsized their boat in the tsunami that is drowning our economy.

Had the bailout funds gone to the homeowners to pay off the banks, the investors could have been paid and all the bad acts could have been put to rest. Now the reality sets in that austerity is not the solution and it's too late because the jig is up - let the prosecutions begin.

+1 # 2wmcg2 2012-01-30 10:28

Samuelson and Krugman both reject the idea of shortening work time to offset the displacement of labor due to technology as a "fallacy", which they call the "lump of labor" fallacy. This so-called fallacy was never established by serious study but is instead a phase coined by a newspaper reporter during a 19th Century strike. Henry Ford and Samuel Gompers knew better. They were instrumental in establishing the 8-hour day and the 5-day week which became a bulwark of our consumer mass market. But time marches on. Now we need a 4-day week to cope with continued improvements in labor productivity since the Fair Labor Standards Act was passed. Don't expect Krugman and his colleagues to recommend such.

+6 # reiverpacific 2012-01-30 13:26

Quoting

Samuelson and Krugman both reject the idea of shortening work time to offset the displacement of labor due to technology as a "fallacy", which they call the "lump of labor" fallacy. This so-called fallacy was never established by serious study but is instead a phase coined by a newspaper reporter during a 19th Century strike. Henry Ford and Samuel Gompers knew better. They were instrumental in establishing the 8-hour day and the 5-day week which became a bulwark of our consumer mass market. But time marches on. Now we need a 4-day week to cope with continued improvements in labor productivity since the Fair Labor Standards Act was passed. Don't expect Krugman and his colleagues to recommend such.

It works well in France, Germany and even parts of the UK but I can't see most Americans going for it, what with the ol' Protestant work-guilt ethic they've been inculcated with all their lives, being shit-scared that somebody else will pre-empt them and steal the job they're hanging on to with all fingernails if they still have one -and the work-more-for-less -until you're used-up attitude of the owner class.
I remember the widow of one founder of a major corporation starting with a mule-train say "If you needed time off ---- didn't need you!"
"Fraid t's going to take a major turn-around in mentality and a sense of sharing resources in this rather self-centered country to make your proposal even thinkable stateside.

+5 # cordleycoit 2012-01-30 10:58

Being rich makes one deserving. That is called predestination a key doctrine of the Rethugs and many Dems. Naturally it is aided by the non existent invisible hand. Hand can get quite mischievous as any viewer of the Addams Family will tell you, their sons are all economists. Hand has extracted twenty eight trillion for the economy and is hold up in Bisbee waiting for the northward tunnel traffic to end so he can take his loot someplace and enjoy it with his fellow directors of CitiBank. Capitalism has strange customs. The next we will see is the making the poor pay for the robbery and then they enslave us for not being like them, rich and crooked.

-18 # Robt Eagle 2012-01-30 12:34

Krugman said absolutely nothing of value in this short piece. Once again he rides his Nobel award. Does someone actually pay him for this tripe?

+3 # Majikman 2012-01-30 18:14

Yet again, Mr Eagle's comment mirrors his assessment of Mr, Krugman's.

+3 # Ken Hall 2012-01-30 19:05

A difference is that PK has a track record of good analysis and prediction, thus people listen to what he says. RE, who disparages him, is nowhere unless on the Cato Inst. dole or this tolerant thread.

+8 # reiverpacific 2012-01-30 19:01

Quoting

Krugman said absolutely nothing of value in this short piece. Once again he rides his Nobel award. Does someone actually pay him for this tripe?

Well, you never say anything of value either but you get to post your reactionary tripe on RSN. And you still haven't answered my long-standing question on which right-wing blog, radio station or anywhere else I can get a leftist view out without screening or censorship.

Put up or shut up!

+5 # bluepilgrim 2012-01-30 15:05

The problem is the system -- capitalism.
Keynsian is flawed and does not address the inherent contradiction within capitalism. Bandaids don't work in the long term.

Wolff explains better than I ever could.
(And see his website rdwolff.com for much more)

http://www.youtube.com/watch?v=_-KqeU8nzn4
The Costs of Capitalism's Crisis: Who Will Pay?
Economics Professor Richard Wolff details the problems of capitalism and urges our recognizing its obsolescence and replacing it with institutions that truly serve the people.
Talk at Church of All Souls in New York City, January 24, 2012.

http://www.youtube.com/watch?v=_IhTLiN2CP0&feature=related
Q&A

+1 # Ken Hall 2012-01-30 19:06

Yes, Prof. Wolff is very worth listening to.

+5 # nirmalandhas 2012-01-30 18:31

What about austerity in order to remove global poverty? I think some people are grabbing far too much of the global pie and that is the reason why others starve and it is these greedy ones who need to cut down on their consumption.

+6 # soularddave 2012-01-30 19:56

That's not going to happen where it's most needed. TV tells us that we need a TV blaring in each room, a car for each member of the family, and ice in the refrigerator door - in a house that won't be paid for in our lifetimes.

We might as well wear leg irons and suffer the whips and curses before we pay attention to the starving and enslaved in countries where we get our resources to carry on the gluttony we've become accustomed to.

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