Can government spending create jobs in depressed economies?

By Jonathan Chevreau on June 22, 2012
Estimated reading time: 3 minutes

Krugman doesn't spend much time debating whether or not we're actually in a depression. He simply states it as a fact that's self-evident since the financial crisis hit in 2008.

The New York Times Book Review recently reviewed Paul Krugman’s latest book, End This Depression Now!, which I subsequently obtained and read. Krugman is of course a prominent economist and NYT columnist himself, and a Nobel Prize winner in Economics. I found the book an intriguing read. From the get-go I found it interesting that Krugman doesn’t spend much time debating whether or not we’re actually in a depression. He simply states it as a fact that’s self-evident since the financial crisis hit in 2008. Having stated this, he moves quickly on to the need for governments and central banks to prime the printing presses big time to get the economy moving again and create jobs to lower the shameful levels of unemployment in the United States (Krugman’s main focus) as well as Europe. Eurodammerung True, Krugman clearly prefers big-spending Liberals or Democrats like Obama, but investors can still benefit from his analysis, particularly of the problems in Europe. In a chapter cleverly titled Eurodammerung, he makes it clear that the siren song of austerity is bringing misery to millions of workers. In fact, I can’t think of a post 2008 book that gets to the heart of the problem as succinctly, apart from Anthony Boeckh’s The Great Reflation or Rogoff and Reinhart’s This Time is Different.

As the NYT review noted, Krugman seems to have abandoned hope of getting more right-wing pundits and policy makers to accept his thesis; with this book he is attempting to go over their heads and appeal directly to the public. He argues that all this economic misery and unemployment isn’t necessary because “we have both the knowledge and the tools to end this suffering.” Several false dawns on economic recovery Since the financial crisis hit there have been at least three premature “all-clears” sounded on the economy recovering, starting with Ben Bernanke’s “green shoots” declaration of 2009 and the Obama administration’s “recovery summer” of 2010. Krugman was finishing the book in February 2012 and as we all know, things have hardly improved in the months since. He expects that unless something drastic is done, full recovery will take at least five more years and probably closer to seven. Krugman does a nice job of anticipating or summarizing the arguments of the camp he dubs the “Austerians” (as in practitioners of austerity), then of rebutting their views. Investors confused about the probable course of inflation and interest rates would do well to heed his warnings. In a chapter entitled Inflation: The Phantom Menace, Krugman dismisses what he terms that “Zimbabwe/Weimar Thing” as well as the world of “inflation conspiracy theories.” Inflation fear mongering has been about a non-existent threat:

“Underlying inflation is low and, given the depressed state of the economy, likely to go even lower in the years ahead.”

While the “Austerians” may prefer to keep annual inflation to around 2%, Krugman thinks the central bankers of the world should be targeting closer to 4%. Krugman’s prescription So what does Krugman want? Since the private sector appears unwilling or unable to maximize the full potential productivity of millions of workers, government must step in to fill the gap. The initial stimulus the Obama administration embarked upon shortly after assuming power did not go far enough in Krugman’s view. For starters, he’d like to see various levels of American governments reinstate the more than a million positions shed in recent years but he also wants to see new investments in roads, rail upgrades, water systems and other key parts of the industrial infrastructure. And of course he’d like to see the federal reserve embark on much more aggressive Quantitative Easing. He’d also like to see more homeowner mortgage relief and, in the realm of foreign policy, have Washington take a tougher line on China and other “currency manipulators.” If you’re an investor, the book is worth absorbing, particularly if (or when) it becomes apparent that governments around the world start to adopt such measures.

About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.