His following is a reward for battling the conventional wisdom that austerity can foster a recovery. From the moment Lehman Brothers was allowed to crash, it seemed that only Krugman, his compatriot Joseph Stiglitz, another Nobel prizewinner for the liberal cause, and New York professor Nouriel Roubini, who had loudly predicted the crash, consistently confronted the "austerians" in Washington, Brussels and the UK Treasury.
More than four years on, austerity is being questioned as never before, not least because most countries implementing a deficit-reduction policy have failed to grow. Krugman, his blog and comments on Twitter, have become the focal point for objectors worldwide.
Speaking to the Guardian to publicise the second edition of his book End This Depression Now, he argues that his battle will go on until policymakers realise that their reliance on deficit reduction is a "delusional" misreading of basic economics. But despite his persistent criticism, austerity remains the default position for most western governments.
For such a sophisticated thinker, Krugman's solution – which upsets some liberal supporters – is straightforward. Asked if he is concerned a splurge of borrowing will trigger a repeat of the financial bubbles that caused the crash and spur inflation as too much money chases too few goods, he is dismissive. "As far as planting the seeds of the next crisis, bear in mind that leverage is still falling, so I don't see the problem at this point," he says.
In Krugman's view, concerns about ageing populations, looming health costs, the changing nature of the workforce in a digital age and competition from Asian economies for jobs, are for another time. "Should we be having more spending? The answer must be yes. Why? Because there is plenty of slack in the labour market and investment needs to increase. To me it is clear that there is plenty of room to increase spending without increasing inflation.
"What many people fail to see is that macro economics moves much more slowly than they think. You can read academic papers from the 1930s and after you strip out the arcane academic language, they could be written today."
Speaking from his office in Princeton, Krugman says texts by economists Hyman Minsky, Michal Kalecki and most of all John Maynard Keynes show Olli Rehn, the EU's finance commissioner and other top Brussels officials are misguided in promoting austerity.
Why reinvent the wheel, he asks, when all today's economic problems were solved by theories developed in the 1930s. Minsky, for instance, argued that bankers and others simply forgot about the risks that come with higher debt levels. Forgetfulness is a cornerstone of Krugman's analysis of the crisis.
"I'd go with Minsky: that the best explanation of the crisis is simply that with the passage of time, everybody, including policymakers, forgot about the risks. The economics profession in a way was part of the same phenomenon.
"Things like real business cycle theory, which considers recessions to represent voluntary withdrawal of labour in favour of leisure, would have been rejected as obviously ludicrous when the memory of the Great Depression was still fresh, but could flourish once that memory had faded."
Five years after the crash, with memories still fresh, Rehn's failure is one of misunderstanding, a failure of intellect, he argues. Krugman dismisses concerns that Germany and the UK are run by politicians of a prime minister Angela Merkel, George Osborne and the eurocracy may represent of a class or generation who want to protect their assets at the expense of people who depend on public services.
Robert Shapiro, under secretary of commerce for economic affairs in Bill Clinton's second government and later an economic adviser to Tony Blair, says Krugman has failed to win over many policymakers because he ignores concerns about the re-emergence of a housing bubble and the failure to tackle Wall Street's power. Voters are reluctant to hand power back to governments that blindly led them into the financial crisis, even when it is not solely the politicians' fault.
"It is not irrational that support for government and government solutions has been badly damaged. Governments failed to see the crash coming along with everyone else. So small government is seductive to people who are still sensitive to government failures in the stewardship of the economy," says Shapiro.
Like Krugman, Shapiro backs the central Keynesian argument for a government spending boost, but urges him to engage with concerns from left and right about what happens to that money.
Will the money be spent wisely? "Some people say a fiscal stimulus will create a new housing bubble, but there haven't been many houses built in the last five years. They say workers have out-of-date skills. But history tells us that if you create jobs people will fill them," says Krugman.
Are central banks helping? "I wouldn't say that quantitative easing [QE] has been decisive. It is a fragile and fairly weak tool, so to ask it to override fiscal austerity is asking too much." But he wants more QE and is relaxed about inflation at 4% or 5%.
Maybe the simplicity of his message is driven by a daily bout with Tea Party representatives and assorted Republicans on his blog and straight jabs from a wide range of austerians on TV talkshows and radio phone-ins.
Recently he went head to head with David Stockman, Ronald Reagan's budget director. Stockman said much of the $1.6tn spent by the Federal Reserve as part of its QE policy was swallowed by Wall Street and simply made bankers richer. To back up his argument he pointed to JP Morgan, which made record profits last year.
Reluctant to defend profits made by banks using cheap QE funds, Krugman accused his rival of being a "cranky old man" and using "context and model-free numbers embedded in a rant".
Those who argue that extra government spending today could prove as beneficial as in the 1930s still want safeguards and a little circumspection. Krugman refuses to play ball.
Original Article
Source: guardian.co.uk
Author: Phillip Inman
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