Good Read on Economic Solutions

Paul Krugman teaches economics at Princeton University and won the 2008 Nobel Prize in Economics for his work on international trade and production.  He also writes a regular column for the New York Times.  I recently read his book The Conscience of a Liberal.  Using words and concepts a layperson can understand, this work provides a clear understanding of the processes that have put the American middle class into increasingly difficult straits.  I recommend it to anyone who is concerned about growing the economy and reversing these trends.

Given the title, Krugman's work was not exactly what I expected it to be.  I envisioned a philosophical examination of Krugman's idea of what a liberal is, or perhaps a personal epiphany of how he came to his perspectives.  While these topics are implicit in the book, it is primarily a no-nonsense, nuts and bolts explication of trends over the past thirty-plus years that have resulted in an ever-growing concentration of wealth in fewer people at the top and a commensurately ever-diminishing level of services, income and consequently, opportunities for everyone else.  The author backs his conclusions up with plenty of data.  He wrote the hardcover edition in 2007, before the recent crash, but the paperback edition has a new introduction written in 2009 that takes it into account.  Regardless, the points and facts are still valid and on point.

Central to Krugman's point is that from the Great Depression of the 1930s through a period of over 40 years, government policy intentionally favored and fostered an economy that spread benefits widely throughout the labor force.   He starts out with a survey of "The Way We Were," an economic picture of America of the 1950s and 1960s, a time when there were far fewer mega rich and an enormous and growing middle class of shared prosperity.  He calls this period of lessening inequality and widespread improvement in the financial well-being of the broad majority the "Great Compression."  

Krugman shows how benefits like Social Security, universal education, the public university systems, the GI Bill and Medicare, spending and research programs such as the interstate highway system and the space program, a government stance that protected the union movement, and a tax policy that funded these initiatives and encouraged companies to invest broadly in their people while dissuading the paying of astronomical sums to individuals worked to the end of a society that produced a rising tide that raised all boats. 

As a consummate international economist, Krugman is specifically able to refute the contention that simple market forces alone have caused the growing concentration of wealth of recent decades by comparing the American experience to those of other countries who have followed different policies than the U.S. such as Germany and Canada.  Such countries have retained high union membership,  broad-based income gains shared by all income levels levels within the labor force and a superior level of services than here.

Krugman next turns to a survey of the growth of extreme conservatism, its policy victories and their pernicious effects on society as a whole as it enormously aggrandizes a few while progressively pauperizing the rest.  In his section "Confronting Inequality" he administers his prescriptions for reversing these lamentable trends.  Among these are restoring greater progressivity to the income tax, taxing capital gains like regular income, raising the minimum wage (it's still far below where it was in 1955 in inflation-adjusted dollars), guaranteeing universal health care, providing far greater assistance to education and college affordability, making much greater investment in social and tangible assets, and returning to union-friendly policies.     

History Provides Guide for Ending Recession

Paul Krugman, winner of the Nobel Prize in Economics in 2008, has written a cogent and timely op-ed in the New York Times illuminating what is currently going on at the nexus of economics and politics. For Krugman's biography click here. What is especially fascinating is his analysis of how reminiscent the present situation is of the dynamics existing in 1938 during the New Deal. Then as now, the United States stood at the crossroads of deciding whether to continue or contract government stimulus of the economy.

Krugman's piece, "1938 in 2010," begins with a setting up of the parallel scenario: "Here's the situation: The U.S. economy has been crippled by a financial crisis. The President's policies have limited the damage, but they were too cautious, and unemployment remains disastrously high. More action is clearly needed. Yet the public has soured on government activism, and seems poised to deal Democrats a severe defeat in the midterm elections." Sound familiar? It ought to. The situations facing Franklin Roosevelt in 1938 and Barack Obama in 2010 are eerily alike.

Krugman goes into how FDR listened to the deficit hawks in 1937 and pulled back New Deal expenditures, only to see the economy begin to soften alarmingly. He was able to rush some emergency funding through, which stabilized the situation, but public opinion had begun to set against any more deficit spending-just like today. The Gallup poll in March 1938 found that 63% favored cutting taxes on business and only 15% favored additional spending to improve the economy. In the midterms the Democrats "lost 70 seats in the House and 7 in the Senate."

Fortunately for the economy, the situation was retrieved by the need to rearm as the clouds of war began to gather over Europe in 1939. You ought to take a look at Krugman's piece to see how massive this government stimulus on an epic scale really was. For in economic terms, that is what the war footing essentially was from 1939 to 1945, an immense government spending and jobs program that achieved full employment and actually reduced the debt as a percentage of GDP as the national economy exploded.

Today we are again faced with the same dynamics, though there appears to be little chance of an overwhelming set of circumstances arising (such as the need to prepare for and fight WWII) to fortuitously restore the consensus for government spending to prime demand and end the Recession. In that sense, Krugman is right to make the case that we seem too often not to learn from history, that too many politicians and economists have been "unlearning the lessons of the 1930s" and appear ready to commit "all the same mistakes."

Krugman is right on the mark in closing with, "But always remember: this slump can be cured. All it will take is a little bit of intellectual clarity, and a lot of political will. Here's hoping we find those virtues in the not too distant future."