Self Help

End This Depression Now! - Paul Krugman

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Matheus Puppe

· 42 min read

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Here are summaries of the books mentioned:

  • The Return of Depression Economics and the Crisis of 2008: Analyzes the causes of the 2008 financial crisis and advocates for expansionary fiscal policy to promote recovery. Krugman argues we are experiencing a depression and need Keynesian solutions.

  • The Conscience of a Liberal: Traces the rise of social welfare programs in the 20th century US and argues for policies that promote broad-based prosperity. Looks at history through a progressive lens.

  • Fuzzy Math: Criticizes tax cuts and their purported economic benefits. Argues tax cuts do not pay for themselves and exacerbate deficits.

  • The Accidental Theorist: Collection of Krugman’s op-eds and columns from the 1990s exploring international trade and currency issues.

  • Pop Internationalism: Makes the case that international cooperation, not isolationism, is needed to address global problems like financial crises and climate change.

  • Peddling Prosperity: Economic analysis of the 1990s boom in the US and critiques Republican supply-side economics policies.

  • The Age of Diminished Expectations: Examines the rise of “deficit obsession” in the US and argues it has contributed to slow economic growth and rising inequality since the 1970s. Advocates for more active fiscal and monetary policies.

  • The chapter focuses on the impact of unemployment in the United States during and after the Great Recession.

  • Unemployment is shown to be extremely damaging, hurting people’s well-being and sense of self-worth beyond just the loss of income.

  • Official unemployment rates understate the problem by excluding discouraged workers and those forced to work part-time. Broader measures show around 15% of the workforce is impacted.

  • The persistent nature of unemployment is especially concerning. Over 4 million have been unemployed over a year, compared to just 700,000 before the crisis. Long-term unemployment is psychologically demoralizing.

  • Those unemployed also lose health insurance and benefits, putting major financial strain on families. Savings are depleted trying to pay bills without work.

  • While macro factors cause unemployment, the long-term unemployed face stigma from employers who see it as reflecting poorly on work skills or prior performance. The impact is devastating.

In summary, the chapter outlines how widespread and devastating persistent unemployment has been during and after the Great Recession in the United States. Both the economic and psychological toll on individuals and families is emphasized.

  • Long-term unemployment is damaging to individuals and the economy. It can lead to loss of dignity, financial distress, anxiety, depression and being seen as unemployable.

  • Young people entering the workforce are facing a terrible job market. Recent graduates in particular struggle with high underemployment and lower wages.

  • Research shows those who graduate into a weak economy do significantly worse in their careers compared to those who graduate during booms. The long-term scarring effects of the current recession may be greater.

  • The recession caused a sharp drop in US economic output (GDP). The recovery has been weak, with GDP still around 7% below potential levels. This translates to $3-5 trillion in lost economic value.

  • Prolonged weakness is hurting long-term economic potential through channels like long-term unemployment reducing the effective workforce, and low business investment decreasing manufacturing capacity.

  • Business investment is low currently not because of uncertainty or fear, but because businesses simply aren’t selling enough to use their existing production capacity.

  • When the economy does eventually recover, it will likely hit capacity limits and bottlenecks sooner than it would have otherwise due to the prolonged slump reducing investment.

  • The economic crisis has also led to cuts in public programs focused on the future like education, infrastructure investments, etc. This means future bottlenecks when the economy recovers.

  • The crisis has caused tremendous economic pain not just in the US but also Europe, especially youth unemployment in southern European countries.

  • Europe’s fiscal crisis in particular countries has pushed austerity measures that have worsened unemployment, possibly pushing Europe back into recession.

  • Prolonged economic slumps in the past have led to major political upheaval and the rise of extremism. Current extreme politics in many Western nations may be linked to the ongoing economic problems.

  • However, this ongoing depression does not need to be happening as the knowledge and tools exist to end it. Political will and overcoming ideological biases are needed to solve this problem. The future remains uncertain but recovery is possible if the right actions are taken.

  • Many economists, including Keynes, argued that recessions and depressions are caused by a lack of aggregate demand in the economy - not enough spending by consumers, businesses, and governments combined.

  • However, some influential conservatives reject this idea, arguing that spending can’t decrease overall because money spent is transferred from one group to another. This is known as “Say’s Law.”

  • The story of the Capitol Hill babysitting co-op illustrates how a lack of aggregate demand can occur. The co-op used scrip (coupons) as currency for babysitting services. But over time, too many couples held onto coupons as a reserve, reducing the number in circulation and causing a shortage.

  • This shows that even if individuals always spend their income on something, an overall lack of spending can still emerge if groups across the economy collectively try to save more by holding money reserves. The same logic applies to recessions - decreased spending in one sector is not necessarily offset by increased spending elsewhere.

So in summary, the babysitting co-op story provides a clear example to rebut the idea that aggregate demand cannot decrease, and supports Keynes’ argument that recessions can be caused by a lack of overall spending in the economy.

  • The story describes a babysitting co-op where members earned “coupons” for babysitting that could then be used to get babysitting services for themselves.

  • The co-op fell into a depression when many members had few coupons and were reluctant to go out and spend them, reducing opportunities for others to earn coupons through babysitting.

  • This illustrated how spending is interconnected - one person’s spending is another’s income. A drop in spending can lead to a self-reinforcing cycle.

  • It showed that a lack of demand, rather than a lack of productive capacity, can cause an economic downturn.

  • Printing more coupons (expanding the money supply) was able to solve the co-op’s problem, demonstrating how increasing the money supply can in theory solve economic problems through increasing demand.

  • However, increasing the money supply did not fully solve the problems in the real-world economy after 2008, due to a “liquidity trap” where increasing the monetary base did not translate to more money in the hands of households and businesses to spend.

So in summary, it used the simple example of a babysitting co-op to illustrate key economic concepts like interconnected spending, demand-driven recessions, and the limits of monetary policy.

  • The Fed tried to boost the economy by pushing more cash into banks to increase liquidity and drive down interest rates, making it cheaper to borrow and spend. However, interest rates cannot go below zero.

  • The US hit the “zero lower bound” on interest rates by late 2008, but the economy remained weak with low consumer spending, weak housing, and high unemployment. This is called a “liquidity trap” - zero interest is not low enough to spur spending when demand is too low.

  • Using the babysitting co-op analogy, the author argues the US private sector collectively tried to save more than its income, leading to depressed demand. More money alone cannot fix this.

  • Some argue the problems are “structural” like a skills mismatch, but unemployment increased across all occupation and skill levels. And no groups experienced prosperity, arguing against a skills-based explanation.

  • The solution is obvious - spending must increase to match reduced private sector spending. In the late 1930s, this came from increased government military spending before WWII, helping boost the economy out of depression. However, many refuse to see increased spending as the answer.

  • As America entered WWII, military spending soared to replace equipment sent to allies through lend-lease and to house and equip millions of new military recruits. This spending created jobs and boosted incomes.

  • As consumer spending and business investment increased, the Great Depression ended almost overnight. Workers who were previously considered “untrained” were back to work.

  • Economically, the type of spending (military vs domestic) didn’t matter - all spending creates demand. Politically, military spending was more palatable than New Deal programs.

  • Minsky argued that periods of stability lead to rising debt/leverage as risk awareness declines. This increasing leverage eventually causes financial instability and economic crisis.

  • Deleveraging through selling assets or paying down debt can worsen a crisis if too many actors do it simultaneously, as it reduces aggregate demand. This “debt-deflation” dynamic deepens recessions.

  • The 2008 crisis demonstrated Minsky’s “financial instability hypothesis” - a crisis occurred due to high leverage levels after a long period of stability. His ideas are now seen as more relevant given recent events.

The economy finds itself in a situation of widespread debt trouble. Individual actions taken to get out of debt, such as homeowners selling houses or consumers reducing spending to pay off credit cards, end up being self-defeating. This is because they collectively drive down home prices, slow the economy, eliminate jobs, and make the debt burden even worse.

Irving Fisher called this the phenomenon of “the more the debtors pay, the more they owe.” As debtors cut spending to pay off debts, it leads to a deflationary spiral of falling prices and incomes that actually increases the real burden of debts.

This is what exacerbated the Great Depression according to Fisher. And a similar dynamic is at play today, with debtors unable to spend and creditors also reluctant due to worries about debt risks. This is depressing overall demand and economic growth.

The buildup of too much debt sets the stage for what Hyman Minsky called a “Minsky Moment” - an event that triggers lenders to suddenly recognize debt risks, forcing widespread deleveraging and setting off Fisher’s debt-deflation spiral. High debt levels make economies vulnerable to self-reinforcing downturns. This dynamic helps explain both the Great Depression and today’s ongoing economic problems.

  • In 2005, Alan Greenspan believed that modern financial innovations like asset-backed securities, collateralized loan obligations, and credit default swaps had made the financial system more stable and resilient. However, these were precisely the innovations that led to the financial crisis a few years later.

  • On the eve of the crisis, there was extraordinary complacency about the financial system among economists and policymakers. Concerns about rising debt levels and risk-taking were marginalized.

  • Beginning in the 1930s after the Great Depression, regulations were put in place to protect against banking crises. However, over the 1980s and 1990s, many of these rules and regulations were dismantled through deregulation. Regulations also failed to keep up with changes in the financial system. This deregulation and failure to update rules contributed to the buildup of debt and subsequent crisis.

  • Historically, banks engaged in fractional reserve banking by lending out deposits while keeping only a fraction in reserve, recognizing that not all depositors would withdraw funds at the same time. This practice needs regulation to prevent bank runs and collapses.

So in summary, the passage discusses how deregulation and lack of regulatory updates allowed risky behaviors in the financial system that contributed to the crisis, in contrast to the more regulated environment after the Great Depression.

  • In the past, goldsmiths began storing gold coins for people and issuing paper receipts that could circulate as a form of currency. This established the basis for modern banking.

  • Banks provide liquidity for depositors while also investing those funds in longer term loans/assets to earn returns. This partially removes the tradeoff between liquidity and returns for investors.

  • However, banking relies on depositors not withdrawing funds all at once. A bank run can occur if depositors lose confidence and rush to withdraw funds, which the bank likely cannot pay out immediately without selling assets at fire sale prices.

  • During the 1930s, banking regulations like FDIC deposit insurance and Glass-Steagall reforms stabilized the system by protecting depositors and separating commercial and investment banking to reduce risk-taking. This led to stability.

  • However, deregulation beginning in the 1980s enlarged risks by allowing higher-risk activities and loosening lending restrictions. This contributed to financial problems in the savings and loan crisis and helped set the stage for greater instability.

  • Shadow banking refers to financial activities that serve the same purposes as traditional banking (taking deposits, lending, etc.), but operate outside normal banking regulations. It includes money market funds, repo lending, and auction rate securities.

  • In the run-up to the 2008 crisis, shadow banking grew significantly and even surpassed traditional banking in size. However, shadow banks pose the same risks as traditional banks like vulnerability to panics.

  • Critics argue shadow banking should have been regulated similarly to traditional banks as it grew in importance, but political will was lacking. Banks also pushed for deregulation to expand into risky shadow banking.

  • Deregulation, like the Gramm-Leach-Bliley Act repealing Glass-Steagall, allowed risky behavior to multiply and laid the foundations for crisis. Conservative claims that place sole blame on government policies like affordable housing goals are considered an attempt to explain away deregulation’s harms.

  • Even during periods of economic growth fueled by debt, problems were emerging, like the savings and loan crisis caused by earlier deregulation in the 1980s that cost taxpayers dearly. The good times were not as positive as they seemed due to growing risks from an increasingly deregulated system.

  • In the early 2000s, hedge fund managers in Greenwich, CT were building enormous mansions, sometimes buying historic estates just to tear them down and build even bigger palaces, often 15,000+ square feet.

  • These hedge fund managers were making billions annually, far more than industrial tycoons of the past adjusted for inflation. Their lavish lifestyles called back to the original Gilded Age.

  • However, average and median incomes for most American families did not see the same “extraordinary growth” claimed by deregulation proponents like Eugene Fama. Average family incomes grew more slowly after 1980 than before.

  • Income growth was highly skewed to those at the very top. While the incomes of top 1% quadrupled since 1980, adjusted for inflation, median incomes barely rose, showing the benefits of economic growth were not widely shared.

  • The explosion of incomes for the very rich, like hedge fund managers building mansions, may have led deregulation supporters to incorrectly believe everyone was experiencing extraordinary growth, when in fact it was limited to just a handful at the top. This inequality calls into question claims that deregulation unambiguously benefited the economy.

  • The incomes of the richest one-tenth of one percent of Americans saw a 660% gain from 1979-2007, far outpacing overall economic growth and gains for middle-income Americans.

  • This remarkable rise of the very wealthy has led to questions about why it happened and what it means.

  • The gains were not solely due to education or skills - highly educated professionals like teachers did not see similar increases.

  • Most of the big gains went to a small handful of the very wealthy, particularly those working in finance like hedge fund managers.

  • Their high incomes cannot fully be explained by conventional economic theories of supply and demand or marginal productivity. Factors like incentives for risky investments and excessive compensation set by CEOs themselves likely played a role.

  • For some in finance, profits came not just from value creation but also from potentially exploiting others or benefiting from government bailouts.

  • The proliferation of lavish homes, or “Taj Mahals,” in places like Connecticut reflects the dramatic rise in incomes at the very top of American society in recent decades.

  • The company was founded in 1870 and declared bankruptcy in 2009.

  • It was Simmons, a furniture manufacturer based outside Atlanta.

  • The bankruptcy caused many workers like Noble Rogers (who worked there for 22 years) to lose their jobs. Over 1,000 employees, more than a quarter of the workforce, were laid off in the year before bankruptcy.

  • The company’s bondholders stood to lose over $575 million.

  • However, the private equity firm Thomas H. Lee Partners that had bought Simmons in 2003 for $1 billion actually made a profit off the deal. They collected hundreds of millions in special dividends and fees from the company as its fortunes declined.

  • So while investors and employees suffered greatly from the bankruptcy, the private equity owners managed to profit from the downfall of the company.

  • Robert Lucas asserted in 2003 that depressions were a thing of the past and economists had learned enough since the 1930s to prevent them. However, as the global financial crisis showed, this turned out not to be true.

  • By the 1970s, mainstream macroeconomics had developed tools and understanding to prevent anything like the Great Depression from recurring. However, much of the profession later “forgot” what it had learned.

  • Many economists advocated for financial deregulation even as it increased vulnerability to crisis. Then, when the crisis hit, some famous economists argued ignorantly against effective responses. Robert Lucas was one of these.

  • This led the author to coin the term “dark age of macroeconomics” - unlike the 1930s “Stone Age” where tools were being developed, by 2009 economists had forgotten the tools and knowledge developed since then, reverting to a new “barbarism.”

  • The descent into this “dark age” involved a mix of political influence and “runaway academic sociology” that led economists to reject Keynesian ideas, even as the world had become Keynesian in nature with a lack of demand as the key problem.

  • The economic crisis showed that narrow technocratic solutions like interest rate cuts by the Fed were not enough. We needed more activist government policies like temporary spending to support employment and efforts to reduce mortgage debt.

  • Conservatives have historically opposed Keynesian economics, even though Keynes advocated moderate, targeted government intervention and supported private enterprise. Conservatives feared it could lead to socialism.

  • There is a special animus against direct government job creation policies because, as Kalecki argued, it reduces capitalists’ ability to indirectly control policy through manipulating confidence, as governments would no longer need confidence to spur recovery.

  • Over time, conservative views have moved further right even than Milton Friedman, who conceded monetary policy could stabilize the economy. Views that were fringe are now mainstream in one major party.

  • The influence of the wealthy upper classes likely colored academic economic discussions away from Keynesianism through donors, fellowships, jobs in a way basic lessons from the 1930s were forgotten. Financial markets came to be seen as perfectly rational despite evidence of bubbles and crashes.

  • CAPM and modern finance theory became popular in business schools in the 1960s-70s as they were elegant, convenient, and lucrative for professors. However, evidence for theories like efficient markets hypothesis was limited.

  • Finance theorists mostly looked at whether asset prices made sense relative to other prices, not real-world fundamentals like earnings. Critics like Larry Summers mocked their limited evidence.

  • Nevertheless, influential figures like Alan Greenspan strongly believed in efficient markets theory and it influenced policies like disregarding calls to regulate subprime lending.

  • The 2008 financial crisis seemed to disprove efficient markets theories but theorists like Eugene Fama refused to acknowledge flaws and blamed policies instead. There has been little reflection from finance theorists.

  • In macroeconomics, the “freshwater” rational expectations school heavily critiqued Keynesianism in the 70s-80s while failing to provide workable alternatives. The Lucas Project went off rails but theorists doubled down through models like real business cycle theory.

  • “New Keynesian” school near saltwater universities kept some imperfections in markets but bubbles/crises were not fully incorporated. They were still able to offer crisis responses while freshwater theorists could not.

So in summary, certain influential economic theories became entrenched despite failures, limiting learning from events like the financial crisis.

  • Theoretical economic models and thinkers on both sides of the “saltwater-freshwater divide” have useful insights, though freshwater economists grew overconfident that monetary policy alone could solve all problems.

  • When the 2008 crisis hit, freshwater economists resisted further action and stimulus, demonstrating ignorance of ideas like Say’s Law and fiscal policy impacts. They sought to undermine calls for bold action.

  • Obama’s 2009 stimulus was the largest in U.S. history but still inadequate to address the crisis. Both inside and outside the administration, many economists felt it should have been bolder to reduce unemployment faster.

  • Policy responses across advanced economies were similarly insufficient and reluctant to acknowledge shortfalls, failing to rise to the challenge of the crisis. Both timid proponents of action and fervent opponents of action contributed to the inadequate response.

So in summary, the passage critiques how ideological divides and resistance undermined the policy response to the crisis, arguing bolder action was needed from the beginning to properly address the scale of unemployment. Both supporters and critics of action showed flaws in their thinking and willingness to acknowledge shortcomings.

The article discusses the origins and unfolding of the 2008 financial crisis. It traces how the bursting of the housing bubble in the US led to large losses on mortgage-backed securities, undermining major financial institutions. This caused a credit crunch as banks became unwilling to lend.

The failure of Lehman Brothers in September 2008 triggered a “run” on the shadow banking system, particularly the repo market where banks financed their operations. This caused a freeze in lending and a spike in borrowing costs for all but the safest borrowers.

The government acted decisively to rescue the financial system, pumping huge sums into banks to ensure their stability. However, the stimulus provided for the real economy was inadequate. By late 2008, it was clear the economy faced a serious downturn as household wealth declined, despite the financial sector showing signs of recovery in early 2009. The article argues a much more forceful response was needed to promote economic growth and jobs.

  • The US economy fell $13 trillion in value in 2008 due to the financial crisis, resulting in a sharp drop in consumer and business spending.

  • The Federal Reserve typically cuts interest rates in recessions, but rates were already near zero so that tool was unavailable.

  • This left fiscal stimulus (government spending increases and tax cuts) as the main option to boost the economy.

  • The Obama administration passed a $787 billion stimulus package (American Recovery and Reinvestment Act) but it was too small given the size of the recession. The recession was deeper and longer than expected.

  • Unemployment still peaked above 10% and the stimulus failed to create a strong sense of economic progress, undermining support for further stimulus.

  • While federal spending as a percentage of GDP increased, this was largely due to emergency programs like unemployment benefits and Medicaid expanding to help those in need due to the recession, not a broad expansion of government.

  • The stimulus was too small at less than 2% of the expected $45 trillion economy over 3 years. It also faded out too quickly rather than providing sustained support.

  • The administration failed to grasp the severity and long-lasting nature of the financial crisis and recession and passed an inadequate initial stimulus as a result.

The key points made in the summary are:

  • The Obama administration’s stimulus plan (American Recovery and Reinvestment Act or ARRA) was inadequate in scale to fully address the economic crisis. While the politics of passing a larger plan were difficult, Obama never truly tried for a bigger stimulus.

  • Obama expected bipartisan support but faced unprecedented Republican opposition to anything proposed. He had to win over 3 moderate Republicans by reducing the stimulus by $100 billion.

  • Obama could have used reconciliation to pass a larger stimulus with only 50 Senate votes, as was done for health reform, but he did not pursue this option.

  • Early economic advisors warned against a plan that could “spook markets” and claimed the economy could only absorb stimulus for 2 years, limiting the scale and timeline of the response.

  • The mortgage relief program announced by Obama to help underwater homeowners faced significant failures due to lack of commitment and fears it would be seen as a “giveaway.” Very few borrowers received meaningful relief.

In summary, the plan critiques the Obama administration for the inadequacy of its fiscal stimulus and mortgage relief efforts in fully addressing the economic crisis, arguing larger and more comprehensive plans were possible but not pursued due to political miscalculations and fears.

Here are the key points from the passage:

  • By late 2009, it was clear the original stimulus plan was too small and unemployment was declining too slowly. However, there were no further stimulus efforts due to misjudging the politics and a shift in focus to deficits rather than jobs.

  • Deficit hawks exaggerated fears about deficits and the burden of debt, pointing to hypothetical harms rather than real economic issues like unemployment. However, their predictions of rising interest rates due to deficits were repeatedly proven wrong as rates remained low.

  • Interest rates remained low even as huge budget deficits persisted from 2008-2011 due to low tax receipts and emergency spending during the recession. Each time rates rose slightly, voices warned of bond vigilantes but rates fell again.

  • Keynesian economists correctly predicted deficits would not drive up rates in a depressed economy with low inflation, while monetarists and deficit hawks falsely believed rising government borrowing meant higher interest rates. The economy was still in a “liquidity trap” where monetary policy alone could not boost demand.

So in summary, the passage argues fears about deficits were overblown and did not recognize that standard economic theories did not necessarily apply in a depressed, low-inflation economy still needing fiscal stimulus. Deficit warnings ended further stimulus efforts despite poor jobs recovery.

  • A liquidity trap occurs when even at a zero interest rate, people are unwilling to spend as much as businesses are willing to produce. In other words, there is excess savings relative to business investment.

  • Government borrowing can help by giving those excess savings somewhere to go, boosting overall demand and GDP. It does not crowd out private spending as long as there is excess savings.

  • Large government deficits have helped the US economy escape from the liquidity trap by allowing the private sector to save more than it invests. Interest rates have remained low despite high deficits.

  • High debt levels alone do not necessarily cause interest rates to rise. Countries like the US, UK and Japan have sustained high debt-to-GDP ratios without bond market panic. Countries that borrow in currencies they control are less vulnerable.

  • While high debt burdens future generations, the debt does not need to be paid off quickly. If debt grows more slowly than GDP+inflation over time, the debt-to-GDP ratio will fall even with balanced budgets, as occurred after WWII in the US.

  • During most of the post-World War 2 period up until the Reagan era, the US generally ran modest budget deficits and debt was growing slower than GDP. It was under Reagan that debt started growing faster than GDP.

  • As long as interest paid on the debt grows slower than the economy, the debt burden will steadily decrease over time even without paying off the entire debt. Paying interest equivalent to around 2.5% of the real rate of interest would keep the debt stable as a share of GDP.

  • The additional $5 trillion in debt from 2008-2009 would cost around $125 billion per year in interest at a 2.5% real rate, which is under 1% of the $15 trillion economy. So the debt burden is not as big a deal as claimed.

  • When the policy focus shifted from jobs to deficits in 2009, it led to spending cuts which contracted the economy further rather than boosting it when it was still depressed.

  • Austerity policies are contractionary, not expansionary, despite claims that spending cuts boost confidence and growth. Cutting spending reduces GDP and tax revenue, so debt is not reduced as much as the cuts.

  • Austerity may also reduce long-term growth and the ability to pay off future debt by deepening and prolonging the economic depression. So deficit reduction through austerity is counterproductive.

  • The debt from stimulus does not have the same negative effect as past household and private sector debt, because government debt is money owed to ourselves rather than an unsustainable private debt buildup. Borrowing by the government now can help remedy problems caused by past private borrowing excesses.

  • The author argues that fears of high inflation in the U.S. have not materialized despite dire warnings from commentators and economists. Inflation has remained relatively low since 2009.

  • When an economy is in a “liquidity trap” with high unemployment and depressed demand, printing money does not necessarily lead to inflation. This is because even with low interest rates, there is not enough spending to use up the added money supply and drive up prices.

  • Japan in the 2000s showed that large budget deficits and money growth do not cause inflation in a depressed economy stuck in deflation. The U.S. has also not seen high inflation despite similar policies.

  • Normally, money printing is inflationary by increasing purchasing power and demand. But in a liquidity trap, the added money sits idle in bank reserves rather than circulating in the economy and bidding up prices.

  • So fears of hyperinflation or a repeat of Weimar Germany have been unfounded given the economic conditions of high unemployment and weak demand in the U.S. and other Western nations after the financial crisis. Inflation fears have outweighed economic realities.

  • When the Federal Reserve purchases assets from banks by crediting their reserve accounts, this increases the money supply. However, in normal times this extra money would be lent out by banks and lead to higher spending and demand in the economy, which could cause inflation.

  • But currently the economy is in a “liquidity trap” with interest rates near zero. In this situation, banks have little incentive to lend out the extra money from the Fed, as safe loans yield almost nothing. So the money just sits in bank reserve accounts and does not circulate in the economy to increase spending and demand.

  • After the Fed began large-scale asset purchases in 2008, consumer price inflation remained low, around 1-2% per year. A temporary spike in inflation in 2010-2011 was driven by higher oil and commodity prices and did not reflect underlying inflation taking off.

  • “Core inflation” which excludes volatile food and energy prices, is a better measure of underlying inflation inertia and expectations built into longer-term contracts and wages. It suggests inflation was not becoming embedded in the broader economy during this period.

  • So despite massive money printing, inflation did not accelerate significantly because the liquidity trap environment prevented the extra money from stimulating much higher spending and demand in the real economy. The risk of inflation remained low.

  • In mid-2011, inflation rose due largely to higher commodity prices like gasoline, but core inflation measures excluding food and energy increased much less. Wage growth did not accelerate.

  • Fed Chair Bernanke said this rise in inflation was temporary and not a sign of broader inflation taking hold. He predicted inflation would subside in coming months.

  • Many on the political right criticized Bernanke for being nonchalant about inflation, claiming higher commodity prices signaled a coming wave of inflation. But Bernanke was correct - inflation did subside as he predicted.

  • Some inflation worriers claimed inflation data was being manipulated by the BLS to hide the true inflation rate of around 10%. But private estimates like from MIT matched the official numbers, implying no manipulation.

  • An IMF paper argued central banks should target 4% inflation instead of 2% or less. Higher inflation could help economies by reducing debt burdens and allowing more room for interest rate cuts in times of crisis when rates hit zero.

  • Moderate inflation around 4% would have minimal economic costs compared to very high inflation, and could provide economic benefits in reducing debt loads and increasing willingness to borrow.

Here are the key points from the passages:

  • Europe has been engaged in an “economic integration” experiment since the 1950s to foster peace and democracy after World War 2. This started with the European Coal and Steel Community and progressed to the European Economic Community and adoption of the euro currency.

  • Adopting a common currency like the euro brings economic efficiencies from reduced currency exchange costs and uncertainty. But it also reduces economic flexibility, as countries lose the ability to ease shocks through currency devaluation.

  • The eurozone is currently facing challenges as some countries struggle with economic crises. Greece, Portugal, Spain, Ireland, Italy have all faced debt problems and recessions.

  • Allowing currency flexibility through devaluation makes it easier for a country to regain competitiveness after an economic shock like a housing bubble bursting. Lowering wages is politically difficult, while devaluation has more smooth effects.

  • The European experiment aims for both economic and political integration. But the push for a common currency may have downplayed warnings about losing flexibility to react to economic shocks in individual countries.

  • To get an economic recovery or “boom,” the passages suggest Europe needs both strong fiscal stimulus (government spending) as well as supportive monetary policies from the European Central Bank and coordinated policies with other countries. Expansionary fiscal and monetary policies can boost demand and growth.

Here is a summary of the key points from the literature on optimal currency areas:

  • Countries need to do a significant amount of trade with each other for a shared currency to make sense. Shared currencies are less viable if economies are not closely integrated.

  • Labor mobility across member countries is an important factor. Adjustment to economic shocks is easier if workers can move freely to areas with more jobs. Labor mobility was weak among European countries.

  • Fiscal integration, such as a central government that can provide automatic fiscal transfers between members, helps cushion individual economies from shocks. Europe lacked fiscal integration.

  • The euro led to substantial currency misalignment as investors no longer saw southern European countries as risky. This fueled large trade imbalances and housing bubbles in countries like Spain and Greece.

  • When the bubbles burst, it caused major economic crises that were exacerbated by the lack of labor mobility and fiscal integration to help adjust. Countries had to handle recessions largely on their own.

  • In summary, the literature suggested Europe did not meet key optimal currency area criteria like labor mobility and fiscal integration. But these warnings were overlooked due to the political motives behind forming the eurozone.

  • The author argues that Europe’s belief that its crisis was caused by fiscal irresponsibility (excessive government debts and deficits) is a “Big Delusion”, not entirely backed by facts.

  • While Greece did have irresponsible fiscal policies, it accounts for a small part of the eurozone economy. Other crisis-hit countries like Ireland, Spain and Italy mostly had balanced budgets and decreasing debt levels prior to the crisis.

  • The real problem is that these countries lost cost competitiveness after joining the euro and experiencing large money inflows. With a shared currency, internal devaluation through inflation is difficult, so they must deflate wages and prices slowly through high unemployment.

  • Private debt loads were also large, exacerbating the impact of deflation. Government deficits rose drastically due to bailouts and recession, but fiscal crises arose partly from self-fulfilling fears of default without each country’s own currency and central bank to guarantee liquidity.

  • The author argues Europe’s approach of moralizing about fiscal sins and focusing on austerity neglects the structural issues arising from a shared currency without fiscal and labor market integration.

  • Several eurozone countries are facing difficulties paying their debts due to high borrowing costs, which could potentially lead to defaults. However, this is unlikely to happen to countries like the US, UK, Japan that borrow in their own currencies and have their own central banks to step in and print money in an emergency.

  • The eurozone countries do not have this luxury as they share the euro and cannot directly rely on the European Central Bank in the same way. This has led to “euro penalty” where eurozone countries face higher borrowing costs than similar countries with their own currencies.

  • Breaking up the euro now would be very disruptive and politically damaging. However, simply continuing on the current path also risks further crises.

  • To save the euro, the ECB needs to guarantee liquidity to prevent self-fulfilling panics, deficit countries need a path to regain competitiveness, and surplus countries need fiscal stimulus and higher inflation. Deficit countries also need fiscal austerity over time.

  • However, the response so far has focused too much on austerity and not enough on helping deficit countries become competitive again or providing enough stimulus in surplus countries like Germany. The focus on “fiscal irresponsibility” as the cause is an oversimplification.

  • Beginning in 2010, many policymakers and economists embraced “austerian” views favoring immediate spending cuts and austerity even during high unemployment, contradicting textbook advice and historical lessons from the Great Depression era. This view came to rapidly dominate debate.

  • The Organization for Economic Cooperation and Development (OECD) is seen as a bellwether of conventional economic wisdom.

  • In 2010, as the global economy was still recovering from the financial crisis, the OECD advocated for immediate fiscal austerity (slashing budgets) and higher interest rates in both the US and UK.

  • Fortunately, the US did not follow this advice and pursued more stimulus. But the UK did impose austerity measures. Eurozone countries also tightened fiscal policy.

  • Other influential groups like the Bank for International Settlements also called for monetary and fiscal tightening despite high unemployment.

  • The push for austerity was driven by fears of a debt crisis like in Greece. However, economies differed and countries with their own currencies faced no risk of a Greek-style crisis.

  • Proponents of austerity kept changing their rationales for higher rates, suggesting underlying motives beyond objective economics.

  • Immediate austerity was counter to economic logic as it risked further depressing already weak economies when interest rates were near zero. But the “Austerians” argued it would boost confidence.

  • In summary, conventional wisdom strongly favored austerity despite the economic damage it risked from premature tightening in the midst of crisis.

Here is a summary of the key points about the employment effects of austerity in a depressed economy:

  • Slashing government spending reduces demand, which would normally lead to an economic downturn and higher unemployment. However, proponents of austerity argued that “confidence effects” would more than offset this direct impact.

  • They claimed austerity could boost confidence in investors and consumers, lowering interest rates and expected future taxes and boosting investment and spending.

  • However, for austerity to be expansionary, these confidence channels would need to strongly outweigh the direct negative impact of lower government spending. This was considered highly implausible given already low interest rates and lack of tax expectations.

  • Studies cited in support of expansionary austerity, like Alesina’s 1998 paper, did not hold up to scrutiny. Correlations found did not prove causation, and studies did not accurately capture actual fiscal policies.

  • Other research found fiscal austerity depresses growth. Historical examples like Canada often involved offsetting factors like interest rate cuts unavailable in current depressed economies.

  • Countries adopting harsh austerity like UK and southern Europe did so under pressure, except UK which believed in austerity despite high unemployment, leading to negative economic impacts and higher joblessness.

So in summary, austerity was found to contract economies and raise unemployment rather than boosting growth, as its proponents had claimed, when implemented in depressed conditions without offsetting monetary policies.

  • George Osborne, Britain’s chancellor, announced austerity budget cuts in 2010 to reduce debt and boost confidence. This was praised by conservatives and centrists.

  • However, the austerity policies do not seem to have had the intended effects. Interest rates stayed low globally, not just in Britain. Business and consumer confidence fell rather than increased.

  • The UK economy remains depressed years later, doing worse than during the Great Depression. A new recession seemed imminent at the time of writing.

  • The Bank of England helped mitigate the slump by continuing stimulus, despite calls for tighter monetary policy.

  • Keynesian economists argue austerity is misguided and destructive in a depressed economy. Liquidationist arguments for austerity resemble outdated theories discredited by the Great Depression.

  • There may be political and ideological motivations for why austerity remains appealing to some, such as justifying inequality and supporting dominant social/business interests. Kalecki also argued austerity benefits those with political power.

So in summary, the passage questions the effectiveness of UK austerity policies and examines possible reasons beyond economic theory for their ongoing appeal, despite evidence they are worsening the economic situation.

  • An influential 1943 essay pointed out that business lobbies effectively have veto power over government actions as long as restoring business confidence is seen as the only route to full employment. But more expansionary monetary and fiscal policies could make business confidence less important.

  • Austerian policies favor creditors over workers by prioritizing deficit reduction over job creation and keeping interest rates low only to fight inflation. They make maintaining debt obligations the top priority and oppose actions that help borrowers.

  • There is a tendency to view economic crises in moralizing terms, where suffering is seen as punishment for past sins rather than something that should be alleviated through policy.

  • To end the depression, we need increased government spending where the private sector isn’t willing to spend, more accommodative monetary policy, and policies to reduce income inequality over the long run. increased spending and easier money can rapidly boost employment in the short term, counter to claims of unavoidable long-term problems or that past stimulus failed.

  • While political obstacles are real, the economic solutions are clear based on historical evidence: increasing spending and reducing unemployment are very much within our means if we have the will.

This passage discusses steps that could be taken to stimulate the US economy through increased government spending and more aggressive action by the Federal Reserve. Some key points:

  • State and local governments cut spending significantly during the recession due to balanced budget rules, costing over a million jobs. Providing more federal aid could reverse these cuts and boost GDP by $300 billion per year.

  • Restarting postponed/canceled infrastructure projects at state/local levels could also provide a quick stimulus through new spending.

  • Increasing aid to unemployed/distressed individuals could get money circulating in the economy quickly through additional consumer spending.

  • The Fed has more scope for unconventional monetary policy suggested by Bernanke previously, like quantitative easing, targeting long-term interest rates, currency devaluation, or higher inflation targets. But it has been timid, unlike Bernanke’s call for “Rooseveltian resolve.”

  • More aggressive action is needed from both fiscal policy through increased government spending, and monetary policy from the Fed, to help boost the economy back to full strength according to the author.

  • The author argues that the current economic depression is unnecessary and could be ended more quickly and easily than assumed if the right policies are pursued.

  • Housing policies to enable mass refinancing could provide significant boost by lowering mortgage rates. However, programs so far have been too limited. Broader refinancing is possible given Fannie/Freddie nationalization.

  • Fiscal stimulus combined with aggressive Fed action and housing relief could jumpstart growth. Individual policies may not work alone but together could have greater effect.

  • Political will is the biggest obstacle but compromise should be on policy details not the truth. Public opinion is less settled than claimed. Voters focus on improving economy, not complex policy analyses. Successful policies that boost growth will gain political support.

  • The author urges continued advocacy for bolder policies to spur job creation and end the depression, arguing chances of policy change are better than assumed if economic growth can be achieved.

  • The author argues that expansionary fiscal and monetary policies like increased government spending and debt relief are needed to help boost the depressed economy and get it moving again.

  • If the 2020 election leads to a Democratic president and Congress, it would make implementing these policies easiest. The Obama administration could pursue another round of stimulus.

  • If Romney wins but has Keynesian advisers like Mankiw and Hubbard, there is some hope he may pursue more expansionary policies than his rhetoric suggests.

  • If Obama wins reelection but faces a divided Congress, he should continue making the case for job creation and applying pressure to push Congress toward helpful policies. This proved somewhat effective in 2011-2012.

  • Strong evidence from the Great Depression and recent research supports that increased government spending can effectively boost growth and employment when interest rates are near zero, as they are now. However, simply looking at correlations between variables like spending and growth is not enough - randomized trials and other rigorous research designs are needed.

So in summary, the author argues expansionary fiscal policy is both economically justified and could make political sense, though implementation may depend on the specifics of the 2020 election outcomes and require sustained advocacy.

  • Years with high tax shares (e.g. 2007) tended to have lower unemployment, while years with low tax shares (e.g. 2010) tended to have higher unemployment. However, this is likely just a spurious correlation and not evidence that raising taxes reduces unemployment.

  • In years with high tax receipts like 2007, the economy was strong due to things like the housing boom, which also boosted tax revenue. By 2010, the housing bust had weakened the economy and reduced tax receipts. So tax levels were a consequence of the economic situation, not a cause.

  • To properly assess the effects of fiscal policy like government spending and taxes, you need “natural experiments” where changes in policy can be separated from other economic factors. Wars and fiscal crises sometimes provide such experiments by forcing large, abrupt changes in spending or taxes.

  • Research on wars like World War II and the Korean War found that increases in military spending were associated with economic booms, and decreases with downturns. This suggests government spending can boost growth and jobs.

  • Looking at regional differences within countries and arms races between countries in the 1930s also suggests government spending has a larger multiplier effect (over $1 per dollar spent) than seen in wars alone.

  • Austerity programs intended to reduce budget deficits have generally been found to contract economies and raise unemployment rather than helping growth, based on studies of many cases in advanced countries since 1978.

So in summary, while correlations are unreliable, focused research on “natural experiments” provides substantial evidence that government spending increases can boost a weak economy while austerity tends to undermine recovery from recession.

  • The Global Financial Crisis of 2008-2009 had significant long-term economic impacts including high unemployment, slow recovery of business investment and manufacturing, and increased income inequality.

  • Deregulation of the financial industry beginning in the 1980s under Reagan and continuing under Clinton contributed to risk-taking and the crisis. It exacerbated income inequality.

  • Government spending was insufficient during the crisis and recovery. Austerity policies in Europe slowed growth. Deficit spending by governments can boost demand and jobs during downturns.

  • Low inflation, zero interest rates, and quantitative easing by central banks like the Federal Reserve helped stimulate recovery but did not achieve fast job growth.

  • High private and public debt levels in many countries hampered recovery through deleveraging and lack of demand. Debt deflation was a major factor prolonging the crisis.

  • The eurozone faced particular problems with lack of fiscal integration and inability of member states to devalue currencies or adjust wages, constraining economic flexibility. Fixing the euro requires further integration.

  • Conservative ideology downplayed government’s role in recovery and overstated deficit concerns, exaggerating public fears. Keynesian policies were generally not followed enough.

So in summary, the passage analyzes the multiple economic causes and impacts of the Global Financial Crisis and views insufficient fiscal and monetary responses as prolonging the difficulty of recovery. Ideological stances were seen as limiting more effective pro-growth policies.

Here is a summary of the key points about unemployment, social safety nets, and the European debt crisis in the passage:

  • Unemployment was a major issue in many countries discussed, with rates mentioned for Europe (4, 17, 18, 176, 229, 236) and Greece (4).

  • Social safety nets, such as unemployment benefits, were important protections in some European countries during the crisis but varied considerably across nations (18).

  • The European debt crisis beginning around 2010 severely impacted several countries like Greece, Ireland, Portugal, Spain and Italy through high debt levels, austerity programs, and unemployment (x, 4, 40, 45, 46, 138, 140–41, 166–87).

  • Austerity policies aimed to reduce budget deficits but had uneven impacts and slowed economic recovery in many crisis-hit countries (46, 144, 185, 186, 188, 190).

  • Issues like fiscal irresponsibility, housing bubbles, interest rates, and liquidity fears were factors that either exacerbated or were responses to the crisis in Europe (177–79, 187, 65, 169, 172, 174, 176, 174, 176, 182–84).

  • The European Central Bank took actions like influencing interest rates but its policy responses were controversial and recovery remained uneven across Europe (46, 183, 179, 190, 202–3, 185, 186).

In summary, the passage discusses how unemployment rose significantly and social safety nets were tested in some crisis-hit European nations, while the multi-year debt crisis had broad economic and political impacts across much of the continent.

Here is a summary of the key points from the passages referenced:

  • The Emergency Budgetary Fund played a role in debt crises in Ireland, Italy, and the eurozone in the late 2000s and early 2010s.

  • Investor rationality was called into question during the 2008 financial crisis, as behavioral economics research showed limits to rational decision-making.

  • Ireland experienced a housing bubble and debt crisis in the late 2000s, with high unemployment, interest rates, and use of “internal devaluation.”

  • Italy also experienced a debt crisis and high unemployment in this period.

  • Japan has struggled with financial troubles, high government debt levels, and the challenges of stimulus and austerity policies since the early 1990s.

  • Keynesian economics emphasizes the role of government spending in stimulating demand and recovery from economic downturns like the Great Depression. It faced opposition from advocates of laissez-faire economics and proponents of austerity policies.

  • Research on liquidity traps, deficits, inflation, and the limitations of austerity policies played a role in debates around appropriate policy responses to crises like the one beginning in 2008.

So in summary, these passages discuss various countries’ debt crises, debates over fiscal and monetary policy, and research that informed arguments around Keynesian vs. austerity-focused approaches.

Here is a summary of the key points from the sources provided:

  • David Ricardo introduced the concept of comparative advantage in international trade, where countries specialize and trade based on their relative costs of production.

  • Brian Riedl discusses how Say’s Law posits that supply creates its own demand, and that aggregate production determines aggregate demand. Unemployment results from wages being too high.

  • Risk taking increased during the deregulation era of the 1980s and contributed to crises like the savings and loan crisis. Later regulations attempted to limit risk taking in the financial system.

  • Christina Romer, Greg Sargent, and others argue more aggressive fiscal policy was needed to combat unemployment during and after the Great Recession through stimulus programs and other measures.

  • Kenneth Rogoff and Carmen Reinhart studied historical financial crises and concluded the average government debt level takes around 5 years to recover following severe crises.

  • Emmanuel Saez documents the significant rise in income inequality in the U.S. since the 1970s, with the top 1% earning a greatly disproportionate share of income.

  • The savings and loan crisis of the 1980s involved high-risk lending practices that weakened the thrift industry and led to taxpayer bailouts.

  • Spain experienced a housing bubble, debt crisis, high unemployment, and use of internal devaluation policies following the Great Recession as it struggled with public debt issues within the eurozone.

  • Paul Krugman, Joseph Stiglitz, and others advocated for more activist fiscal and monetary policy from governments and central banks to boost demand and economic recovery after 2008.

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