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Krugman writes: "What passes these days for sound policy is in fact a form of economic self-mutilation, which will cripple America for many years to come."

New York Times columnist Paul Krugman. (photo: AP)
New York Times columnist Paul Krugman. (photo: AP)

The Mutilated Economy

By Paul Krugman, The New York Times

08 November 13


ive years and eleven months have now passed since the U.S. economy entered recession. Officially, that recession ended in the middle of 2009, but nobody would argue that we've had anything like a full recovery. Official unemployment remains high, and it would be much higher if so many people hadn't dropped out of the labor force. Long-term unemployment - the number of people who have been out of work for six months or more - is four times what it was before the recession.

These dry numbers translate into millions of human tragedies - homes lost, careers destroyed, young people who can't get their lives started. And many people have pleaded all along for policies that put job creation front and center. Their pleas have, however, been drowned out by the voices of conventional prudence. We can't spend more money on jobs, say these voices, because that would mean more debt. We can't even hire unemployed workers and put idle savings to work building roads, tunnels, schools. Never mind the short run, we have to think about the future!

The bitter irony, then, is that it turns out that by failing to address unemployment, we have, in fact, been sacrificing the future, too. What passes these days for sound policy is in fact a form of economic self-mutilation, which will cripple America for many years to come. Or so say researchers from the Federal Reserve, and I’m sorry to say that I believe them.

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+90 # BradFromSalem 2013-11-08 14:41
This is the plain unvarnished truth. There are a dime a dozen nitwits on TV, radio, newspapers, internetties, and worst of all in public office that keep telling us we must make hard choice sacrifices to recover from the greatest robbery in the history of the world. They may not use quite the same terminology, but they do say, lets take a slice of your Social Security, lets not do anything to restore to YOU the wealth that has been taken by the banks, we don't have any for you because we gave it to the banks to save the economy. Right!
What Krugman does not talk about is why we have no job programs. They are not being created so the owner class can obtain complete and total control of all sectors of the economy. No jobs program means lower wages, and less free time for workers to engage in public affairs. Less income for the government means more and more government activities will be outsourced to private enterprise. Eventually, we will will back to feudal system. They were never happy to see it go.
+5 # tmarvin 2013-11-08 21:14
Brad's picture seems pretty correct, save one critical aspect. He thinks the ruling parties want full control and that they seek to 'hold us down'. I find that unlikely. The responsibility of controlling us is hardly in their interests. They primarily need us to buy and want -- and to work hard for it. They want more and more money -- and the power to continue their interests. They really don't care about the details .... and it shows, very clearly.
+73 # Bev 2013-11-08 17:16
By destroying the middle class we have essentially killed the goose that lays the golden egg. By reducing the population to survival mode the engine that drives the economy will reduce us to 3rd world status -- or lower.
+2 # Granny Weatherwax 2013-11-10 10:10
I don't think 3rd world status is the point.
the point is not what's the GDP per capita but what people have been used to and in what direction the trend is going.

Vietnam is the most optimistic country in the world and it lives not in abject poverty (as Bangladesh does) but still not too far form it, yet people there see the effects of an economy growing at 10% a year. BTW Vietnam is still communist.

France, on the other end of the spectrum is the country where people are the most pessimistic.

I think the US is not on its way to become like Vietnam but like France.
+23 # AMLLLLL 2013-11-08 17:24
It's my belief that Obama could have pushed the jobs bill first rather than healthcare. It would have bought him enough capital to move on to our crackpot insurance schemes and have America moving again.
+34 # Skeptical1247 2013-11-08 18:18
I have strong suspicions that there was NEVER any real intent to fix the jobs crisis on the part of either Party, or should I say the 2 PARTY PRETENSE. You really can gauge someone's INTENTIONS by looking at where they put their ATTENTION, and in what order of priority.
FIRST PRIORITY: Bail out the thieving banks, at our expense. The banks could have gotten some liquidity by just giving the 700 Billion or so to US. It would have been in the bank the next day. Plus the stimulus to the economy would have been substantial. What they did accomplish was destroying the trust in government right after the banks destroyed the trust in banks. Brilliant Plan...

SECOND PRIORITY: Ensure that corrupt insurance companies never have to worry about their disgusting, useless,morally reprehensible place in the financing of healthcare being eliminated. Totally important... to insurance CEO's.

OK, now that we got the important stuff done let's...stop the government from functioning at all...WTF??? Reform campaign finance? Anyone? Kill the filibuster? Hello? Tax Code Reform? Anybody out there? End the pointless wars? crickets....

Ya gotta EXPECT the Republicans to be assholes. They don't make the slightest attempt to hide it. But the Dems have to play a more nuanced game of hide the sausage.. up our butts.
+3 # RHytonen 2013-11-09 00:24
Quoting Skeptical1247:
.. or should I say the 2 PARTY PRETENSE. The banks could have gotten some liquidity by just giving the 700 Billion or so to US. Kill the filibuster? Hello? Tax Code Reform? Anybody out there? End the pointless wars? crickets....

Um....It was $14 TRILLION
+45 # Buddha 2013-11-08 17:58
The problem is that the Right is selling the meme that only the "Free Market" can create jobs...and terefore any government action to create jobs is counter-product ive, and that the "free market" if it isn't failing to create jobs is always due to government interferance. So, in essence, nothing will be done because ideologues believe that this is the way it must be.
+28 # tmarvin 2013-11-08 21:20
It takes a real idiot however, to believe the Right's theory of 'job creators'. They have gotten every tax angle imaginable, building this state of affairs over 30 years. And during that time ... job creation has been in reverse.
+7 # Granny Weatherwax 2013-11-10 10:12
The real problem is not that the right sells that meme but that people are uninformed enough to buy it.
+30 # shgo 2013-11-08 18:50
are we done with capitalism yet? unless we are, we are doomed.
+8 # tmarvin 2013-11-08 21:23
Get rid of it? Why not just control it for the benefit of all people. We merely need to control the piss out of capitalism, instead of imagining we can terminate it.
+15 # RHytonen 2013-11-09 00:30
Quoting tmarvin:
Get rid of it? Why not just control it for the benefit of all people. We merely need to control the piss out of capitalism, instead of imagining we can terminate it.

Nationalize the many sectors that need it - Energy, Defense, Health CARE (including drugs, facilities and equipment) Prisons, Education.
Tax all income as wages. 95% TMR, end business subsidies and the SS cap, means test and double benefits.

Don't care what you call that.
+3 # Granny Weatherwax 2013-11-10 10:14
Right, tmarvin. Vietnam is communist AND capitalist.

Somehow this is understood as an oxymoron in the US; it is not.
+10 # Mrcead 2013-11-08 19:08
Penny wise, pound foolish, describe the stewards of the American economy.

It takes money to make money, any investor regardless of experience level knows this. With that said, it must be a social reason that keeps unemployment high.
+3 # Malcolm 2013-11-08 20:04
LIsten, I'm a "John McCain economist", meaning I am pretty much clueless about econ 101, much less advanced economic principals. But i will say that it's not necessary to have money to make money. IMHO, that only applies to capitalists. Using myself as an example, I needed drive and ambition to make money, plus the (un)common sense to put a large percent of the money i made aside, for future use, beginning at about age 12.

I also have always counseled my kids, my friends, and various radio station listeners to avoid credit WHEREVER POSSIBLE. Reason? By following the american meme of "buy now, pay later", you'll be paying for "stuff" several times, if you consider interests payments in the equation.

CAVEAT: If you are SURE-or sure enough to make this a reasonable risk-that our economy is going to be going through a period of high inflation, the best monetary policy (for individuals-fuc k the banksters-is to go into debt. Borrow all you can, at the lowest down payment possible, on as much real estate (my choice; choose your own). You can make tons of money that way.

But remember, unless you have a very unusual crystal ball, you're well advised NOT to borrow money, but to save all you can by being frugal.

Best to all of you!
+2 # Malcolm 2013-11-08 20:07
I should also have mentioned that, while you're young and energetic, considering working more than one job. Take ALL the money you make on one of the jobs, and put it into safe investments. That way, when you're old and tired like us old farts, you won't have to work a full time job anymore.

Do the math, folks!
+10 # backwards_cinderella 2013-11-09 04:08
you say "consider working more than one job" like it's a choice. even 30 years ago, when i was young, it was NOT a choice to work three or four jobs, almost literally around the clock, to make ends meet and to try to have a little left over for my savings (which was decimated as soon as i had a child). the debilitating arthritis that i now suffer is a direct result of working like that. WE NEED A BETTER SYSTEM.
+8 # Carol R 2013-11-09 06:39
"Take ALL the money you make on one of the jobs, and put it into safe investments. "

College graduates are already working the low paying jobs. Those also are hard to get because of the number of unemployed.

I am a retired teacher and spent 25 years working as a single parent. During all those years of exhausting work, I was able to save only $50.00.

I finally left the US and worked overseas in an international school that paid a good salary. That money is helping me in my retirement years.
+7 # Malcolm 2013-11-09 07:40
Carol R, Backwards Cinderella, I apologize. I made it sound too easy. And my history may not apply to a lot of people in the current era. Times have certainly changed-for the worse, unfortunately, during my lifetime.
+22 # rjmcca22 2013-11-08 20:22
Krugman has forecast every significant economic development for years, yet the media would rather provide its stage to the austerity nitwits. Despite the lessons of the great depression our government has continued on the path of budget cutting. What do you do when our leaders deny reality because the government takes its orders from Wall Street. In every major government policy over the past 13 years, the government has defied history and has paid a high price. Who didn't see the occupation of Afghanistan becoming a disaster? Yet our leaders ignored the fact that great powers have marched into that nation only to come out gravely weakened. The warning signs and red flags have been there forever but our leaders refuse to learn the lessons. Just last month the Republicans thought a government shutdown would be a success. Right. Income inequality is a consequence of austerity. CEOs and the 1% are monopolizing the nation's income. If a CEO took $50M of compensation instead of $100M and the other $50M was used to improve employee benefits and wages, we would no longer look like a third world country. The national economy is badly weakened, the safety net is being shredded and the infrastructure is in collapse, but CEOs are diverting every dollar of profit into their pockets. If they continue to hoard all of the income, then return to a progessive tax system and put an end to the most costly entitlement program in the budget, our subsidies to the wealthiest.
+12 # Nominae 2013-11-09 03:03
Quoting rjmcca22:
Krugman has forecast every significant economic development for years, yet the media would rather provide its stage to the austerity nitwits.....

Astoundingly astute analysis !

And I fully agree that Dr. Krugman earned his Nobel Prize.

However, Dr. Krugman addresses the situation from the perspective of a sane, logical, brilliant and educated human being interested in the proper path to a rational and overall beneficial system.

The *full-out*, and even aggressive effort to AVOID job growth programs on the part of this "Wall Street Administration" since 2008, however, may just as easily be seen as a matter of direct, intentional policy, as any kind of simple (and predictable) economic ineptitude.

What if someone (like Wall Street) wanted to see unemployment remain unaddressed ? What if someone wanted to see Government "reduced to the size where it could be drowned in a bathtub" via the loss of tax revenue ? What if someone wanted the public to have less power, less money, less education, and less government to which to turn in times of trouble ? What if someone relished the loss of $1 TR per annum to the Economy ?

Wouldn't such a someone respond to the Crash of 2008 in a manner pretty much indistinguishab le from the exact pattern adhered to *by* this very Administration ?

This response could be the result of stupendous bumbling and ham-handed cluelessness, or it could be the result of careful and conscious planning.
+11 # Charles3000 2013-11-08 20:26
Everyone who knows anything knows what is needed to restore the economy. Even the Republicans in 1930 knew what to do when they organized the Reconstruction Finance Corporation that funded nationwide projects by pumping in money to put people to work. It started slow under Hoover but it became the largest bank in the world under FDR and was instrumental in getting the nation's economy rolling to win WWII. Where did the money come from? It came from where all legal money comes from; the printing presses of the Bureau of Engraving and Printing BUT it did not go through the coffers of the Fed. That is our real problem now because putting money via the Fed into the economy will cause inflation now but lawful money cannot cause inflation because lawful money as opposed to legal tender cannot be used for bank reserves and therefore cannot be expanded by a factor of 10 to 12 times by fractional reserve banking. We need a public bank financed by lawful money to put people to work rebuilding our nation. Give us another RFC. ....and let the banks yell....
+18 # reiverpacific 2013-11-08 21:34
"America will probably spend decades paying for the mistaken priorities of the past few years." (quote).
Mistaken priorities"?
I'd say rather "Calculated strategy"!
The super-wealthy no longer really need we "little people" and have almost accomplished their "New American Century" strategy of invasion overseas and indenture at home.
Disposable, over worked, minimally paid drones rather than employees is the goal.
Having written that, as a small business, we've had our best year since 2008 but have no illusions about returning to post 2007, when we had three businesses, one main one financing the other two.
But there's nothing like a spell of poverty to sharpen the wits and learn about "austerity" and we're investing what little we've made in upgraded equipment and as aggressive a marketing campaign as our budget will allow.
But I wonder in these times who will the buyers be and will they come?
The people I feel sorry for are those who have had their SNAP, Head Start and other already miserly benefits (No, NOT "Entitlement") cut to satisfy the rapacious appetites for downgrading and further humiliating the needy by those whose only interest is in keeping their well padded, lobbyist-grease d seat that you voted them into and are paying for.
To echo the seasonal saying "Are there no prisons, no workhouses"?
You can't "pull yourself up by the bootstraps" if you have no boots to start with!
+11 # tomo 2013-11-08 23:05
When I campaigned for Obama in 2008, it was my expectation that he would, as soon as he entered the White House, initiate major programs to stimulate the economy. I expected him to respond to the clear and present challenges of climate change by starting a major process of retro-fitting the way America provides itself with energy. Thus Obama would have solved two problems at once: he would have put unemployed people back to work, and he would have laid a foundation for an economy in the U.S. sustainable into the distant future--one in which the effects of our continually increasing emissions of carbon dioxide would begin to be tapered down. Instead, Obama used his political resources to provide the banksters with major rewards. The outcomes expected by his supporters were all put on hold. What he thereby proved to the highest rank of Republicans was that he was a man who knew how to take a fall--and they have justly despised him ever since, even as they've reaped in the profits he made available. As for many Democrats, Obama convinced them he was a terribly weak President, and by way of response, they have tried to defend him in everything he does. Much as I admire Krugman's sound sense of what Keynes taught about money and prosperity, I fault Krugman for being slow--even now--to cite Obama for his crucial failure to address the problems of recovery Krugman discusses here.
+2 # bingers 2013-11-10 20:31
You do understand that without Republican cooperation none of that can be done?
+8 # Merschrod 2013-11-09 07:00
Self-inflicted Mutilation of the Economy

I am so glad that Paul has raised the subject again. I need a trampoline this morning for my usual critique concerning the structural hollowing out of the economy. That hollowing out was a self-inflicted destruction of the structure of the economy (more than mutilation) by taking the concept of free-trade to such an absurd extreme that the Keynesian economic solutions that Paul advocates will not work.
Let me explain. Keynesian economists hold that governments can take up the unemployment slack by investing in needed infrastructure until the private economy gets back on its feet. The approach is a sort of boot strap solution for a disrupted economy; the federal funds provide employment, increase consumer demand, and the ailing private sector is given a “transfusion.” People are happy, business is happy, and then the feds can back off. See part II
+6 # Merschrod 2013-11-09 07:08
Self-inflicted Mutilation of the Economy Part II

One of the assumptions from the Keynesian approach is that the money in the workers pocket goes to a local business that, in turn, employs more people to make more, transport more, wholesale more, and retail more. (All of those subsectors of the economy gain the use of the money.) In other words there are “multipliers.” Multipliers are measured by how many times that transfused dollar will be used again and again before it is lost from the “suffering system.” (In the real world there are imports and exports to other national systems. If they are not balanced, as in our case, the system is leaking.)
Because of the free market reductio ad absurdum, the whole manufacturing sector has been destroyed within the US system and along with it the chain of whole sale distributers, and mini transport that supplied the local retailers who have been wiped out by the box stores. This is much more than mutilation; it is the destruction of the system. The multipliers are gone because when the consumers have disposable income the dollar makes one trip to the market for some imported goods and it gone from the system. Economists are fond of pointing out that our economy is 75% consumer driven, but people are not consuming our systems products!

See Part III
+7 # Merschrod 2013-11-09 07:09
Self-inflicted Mutilation of the Economy Pt III
Hence the Keynesian transfusion approach assumes a body with at least a tourniquet, but in this day and age these transfusions from the Fed are like giving a transfusion to bull fighter with a severed femoral artery that has not been stitched up!
What is needed for the transfusions that Paul advocates is a vision beyond repairing the decayed infrastructure and putting people to work. The vision needs to include the allocation of the fiscal resources that the government does control for a purpose that will rebuild the system for the benefit of the citizens and, at the same time be more efficient for production. Simultaneously the “leakage” needs to be stopped. The last big exports that we had were the derivatives – clearly not a quality product, and, worse yet, no multipliers! However, for a US system to be successful we have to decide which consumer driven sectors should be internal for our economic security and simply not open that sector to the free market. Yes, rebuild manufacturing capacity and keep it in the system, e.g., modern computer, electronics, furniture. Support the agricultural sector for both food security and also quality control for health security.
Se Part IV
+7 # Merschrod 2013-11-09 07:13
Self-inflicted Mutilation of the Economy Pt IV

Why not eductional security for the citizens and the future of a new economy? Desks and buildings made in the USA, texts published here, Profs and Teachers employed, clerical and Janitors employed at a living wage.

When considering the heavy industry and infrastructure consider public transport over defense spending so that people can travel to and from work in comfort and speed, so that goods can be transported efficiently (save fuel). Defense spending does not contribute to the system because after a first round of multipliers the product is simply a maintenance headache and does not produce. That hardware could be tractors for farmers for free and we’d have food security; or subways that are fast, clean, and frequent. This is where Paul’s infrastructure comes in. If the national budget were more balanced, i.e., people oriented instead of war oriented, we would have part of the equation plus larger multipliers.

In brief, Keynesian economics has a use, but the system assumptions need to be understood so that policy will work - of course a vision for the future based on more than free market absurdities is needed.

+3 # tomo 2013-11-09 20:30
Very thoughtful series of observations and proposals from Merschrod. Hope lots of people read it.
0 # artic fox 2013-11-09 11:40
teabaggers and republicans"

beware the Ides of June and November

Read Professor Pries' article in the (Toronto) Star newspaper of Aug 1, 2011: .
+7 # mjc 2013-11-09 12:49
Difficult to understand why President Obama did not take the road to recovery that he knew about from history, that of the New Deal and Franklin Roosevelt. There are so many projects that are needed and could come from the federal government, even in a state doing relatively well in recovery, New York. No question the Teapublicans, and especially the Tea Party component would have gleefully damned anything like a WPA or NRA but they have damned anything Obama as proposed or even supported for that matter. There is no war that would take us completely out of the 2008 recession/depre ssion and, in fact, it is the two wars that Bush and Cheney got us into...along with the war hawks in Congress that triggered such a massive recession. Those wars benefited the corporations that specialize in war making necessities but certainly not the American worker or middle class. Obama has made no real effort, beyond the health care legislation, to involved the federal government openly and heavily in road building and repair, dam building, park restoration, and aggressive ship building and trade vessels. What the hell is he waiting for?
+5 # RicKelis 2013-11-09 14:02
FYI: abstract-center cut
Paul Krugman: It’s pretty clear that the blockbuster paper of the International Monetary Fund conference will be one that focuses on the evidence that by tolerating high unemployment we have inflicted huge damage on our long-run prospects. According to the paper, our seemingly endless slump has done long-term damage: he long-term unemployed seen as unemployable; business investment lags thanks to weak sales; new businesses don’t get started; and existing businesses skimp on research and development. The authors suggest that economic weakness has already reduced America’s economic potential by around 7 percent, which means that it makes us poorer to the tune of more than $1 trillion a year — for multiple years.
+3 # RicKelis 2013-11-09 14:04
FYI: abstract, pt.1
abstract: Five years and eleven months have now passed since the U.S. economy entered recession. Officially, that recession ended in the middle of 2009, but nobody would argue that we’ve had anything like a full recovery. Official unemployment remains high, and long-term unemployment is four times what it was before the recession. Many people have pleaded all along for policies that put job creation front and center, [but] the voices of conventional prudence say can’t spend more money on jobs because that would mean more debt. We can’t even hire unemployed workers and put idle savings to work building roads, tunnels, schools. Never mind the short run, we have to think about the future! The bitter irony is that by failing to address unemployment we have been sacrificing the future, too.
+3 # RicKelis 2013-11-09 14:05
FYI: abstract, pt.2
What passes these days for sound policy is in fact a form of economic self-mutilation , which will cripple America for many years to come, says the Federal Reserve. By not even making unemployment a major policy priority, we’ve done ourselves immense long-term damage. [Now] one main reason we’ve done so little about unemployment is the preaching of deficit scolds. [But] debt doesn’t make the nation poorer, because it’s money we owe to ourselves. Anyone who talks about how we’re borrowing from our children just hasn’t done the math. Debt can indirectly make us poorer if deficits drive up interest rates, but that hasn’t been happening. And one of the main things keeping the economy weak is the depressing effect of cutbacks in public spending, in public investment — all justified in the name of protecting the future from exaggerated excessive debt. The Fed researchers are pessimistic — America will probably spend decades paying for the mistaken priorities of the past few years. It’s really a terrible story: a tale of self-inflicted harm, made all the worse because it was done in the name of responsibility. And the damage continues as we speak.
0 # fredboy 2013-11-14 09:51
For more than a decade banks have gotten free money from the Fed while consumers have not earned squat interest on their savings. Fueled by the Clinton-Bush-Gr eenspan disregard for most of us. What a crock.

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