Losing the Future
Amid all the excuses you hear for not taking action to end this depression, one refrain is repeated constantly by apologists for inaction: we need, they say, to focus on the long run, not the short run.
This is wrong on multiple levels, as we'll see later in this book. Among other things, it involves an intellectual abdication, a refusal to accept responsibility for understanding the current depression; it's tempting and easy to wave all this unpleasantness away and talk airily about the long run, but that's taking the lazy, cowardly way out. John Maynard Keynes was making exactly this point when he wrote one of his most famous passages: "This long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the sea is flat again."
Focusing only on the long run means ignoring the vast suffering the current depression is inflicting, the lives it is ruining irreparably as you read this. But that's not all. Our short-run problems--if you can call a slump now in its fifth year "short-run"--are hurting our long-run prospects too, through multiple channels.
I've already mentioned a couple of those channels. One is the corrosive effect of long-term unemployment: if workers who have been jobless for extended periods come to be seen as unemployable, that's a long-term reduction in the economy's effective workforce, and hence in its productive capacity. The plight of college graduates forced to take jobs that don't use their skills is somewhat similar: as time goes by, they may find themselves demoted, at least in the eyes of potential employers, to the status of low-skilled workers, which will mean that their education goes to waste.
A second way in which the slump undermines our future is through low business investment. Businesses aren't spending much on expanding their capacity; in fact, manufacturing capacity has fallen about 5 percent since the start of the Great Recession, as companies have scrapped older capacity and not installed new capacity to replace it. A lot of mythology surrounds low business investment--It's uncertainty! It's fear of that socialist in the White House!--but there's no actual mystery: investment is low because businesses aren't selling enough to use the capacity they already have.
The problem is that if and when the economy finally does recover, it will bump up against capacity limits and production bottlenecks much sooner than it would have if the persistent slump hadn't given businesses every reason to stop investing in the future.
Last but not least, the way the economic crisis has been (mis)handled means that public programs that serve the future are being savaged.
Educating the young is crucial for the twenty-first century--so say all the politicians and pundits. Yet the ongoing slump, by creating a fiscal crisis for state and local governments, has led to the laying off of some 300,000 schoolteachers. The same fiscal crisis has led state and local governments to postpone or cancel investments in transportation and water infrastructure, like the desperately needed second rail tunnel under the Hudson River, the high-speed rail projects canceled in Wisconsin, Ohio, and Florida, the light-rail projects canceled in a number of cities, and so on. Adjusted for inflation, public investment has fallen sharply since the slump began. Again, this means that if and when the economy finally does recover, we'll run into bottlenecks and shortages far too soon.
How much should these sacrifices of the future worry us? The International Monetary Fund has studied the aftermath of past financial crises in a number of countries, and its findings are deeply disturbing: not only do such crises inflict severe short-run damage; they seem to take a huge long-term toll as well, with growth and employment shifted more or less permanently onto a lower track. And here's the thing: the evidence suggests that effective action to limit the depth and duration of the slump after a financial crisis reduces this long-run damage too--which means, conversely, that failing to take such action, which is what we're doing now, also means accepting a diminished, embittered future.
Up to this point I've been talking about America, for two obvious reasons: it's my country, so its pain hurts me most, and it's also the country I know best. But America's pain is by no means unique.
Europe, in particular, presents an equally dismaying picture. In aggregate, Europe has suffered an employment slump that's not quite as bad as America's, but terrible all the same; in terms of gross domestic product, Europe has actually done worse. Moreover, the European experience is highly uneven across nations. Although Germany is relatively unscathed (so far--but watch what happens next), the European periphery is facing utter disaster. In particular, if this is a terrible time to be young in America, with its 17 percent unemployment rate among those under twenty-five, it's a nightmare in Italy, where the youth unemployment rate is 28 percent, in Ireland, where it's 30 percent, and in Spain, where it's 43 percent.
The good news about Europe, such as it is, is that because European nations have much stronger social safety nets than the United States, the immediate consequences of unemployment are much less severe. Universal health care means that losing your job in Europe doesn't mean losing health insurance too; relatively generous unemployment benefits mean that hunger and homelessness are not as prevalent.
But Europe's awkward combination of unity and disunity--the adoption by most nations of a common currency without having created the kind of political and economic union that such a common currency demands--has become a gigantic source of weakness and renewed crisis.
In Europe, as in America, the slump has hit regions unevenly; the places that had the biggest bubbles before the crisis are having the biggest slumps now--think of Spain as being Europe's Florida, Ireland as being Europe's Nevada. But the Florida legislature doesn't have to worry about coming up with the funds to pay for Medicare and Social Security, which are paid for by the federal government; Spain is on its own, as are Greece, Portugal, and Ireland. So in Europe the depressed economy has caused fiscal crises, in which private investors are no longer willing to lend to a number of countries. And the response to these fiscal crises--frantic, savage attempts to slash spending--has pushed unemployment all around Europe's periphery to Great Depression levels, and seems at the time of writing to be pushing Europe back into outright recession.
The Politics of Despair
The ultimate costs of the Great Depression went far beyond economic losses, or even the suffering associated with mass unemployment. The Depression had catastrophic political effects as well. In particular, while modern conventional wisdom links the rise of Hitler to the German hyperinflation of 1923, what actually brought him to power was the German depression of the early 1930s, a depression that was even more severe than that in the rest of Europe, thanks to the deflationary policies of Chancellor Heinrich Brüning.
Can anything like that happen today? There's a well-established and justified stigma attached to invoking Nazi parallels (look up "Godwin's law"), and it's hard to see anything quite that bad happening in the twenty-first century. Yet it would be foolish to minimize the dangers a prolonged slump poses to democratic values and institutions. There has in fact been a clear rise in extremist politics across the Western world: radical anti-immigrant movements, radical nationalist movements, and, yes, authoritarian sentiments are all on the march. Indeed, one Western nation, Hungary, already seems well on its way toward reverting to an authoritarian regime reminiscent of those that spread across much of Europe in the 1930s.
Nor is America immune. Can anyone deny that the Republican Party has become far more extreme over the past few years? And it has a reasonable chance of taking both Congress and the White House later this year, despite its radicalism, because extremism flourishes in an environment in which respectable voices offer no solutions as the population suffers.
Don't Give Up
I've just painted a portrait of immense human disaster. But disasters do happen; history is replete with floods and famines, earthquakes and tsunamis. What makes this disaster so terrible--what should make you angry--is that none of this need be happening. There has been no plague of locusts; we have not lost our technological know-how; America and Europe should be richer, not poorer, than they were five years ago.
Nor is the nature of the disaster mysterious. In the Great Depression leaders had an excuse: nobody really understood what was happening or how to fix it. Today's leaders don't have that excuse. We have both the knowledge and the tools to end this suffering.
Yet we aren't doing it. In the chapters that follow I'll try to explain why--how a combination of self-interest and distorted ideology has prevented us from solving a solvable problem. And I have to admit that watching us fail so completely to do what should be done occasionally gives me a sense of despair.
But that's the wrong reaction.
As the slump has gone on and on, I have found myself listening often to a beautiful song
originally performed in the 1980s by Peter Gabriel and Kate Bush. The song is set in an unidentified time and place of mass unemployment; the despairing male voice sings of his hopelessness: "For every job, so many men." But the female voice encourages him: "Don't give up."
These are terrible times, and all the more terrible because it's all so unnecessary. But don't give up: we can end this depression, if we can only find the clarity and the will.
Reprinted from End This Depression Now! by Paul Krugman. Copyright © 2012 by Paul Krugman. With the permission of the publisher, W.W. Norton & Company.
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