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In his new book, Paul Krugman, the Nobel laureate in economics and New York Times columnist, makes a dramatic statement in the title which ends with an exclamation point. It's called "End This Depression Now!" And the dramatic implicit statement is that the U.S. economy is in a depression.
Krugman proceeds to argue that once we recognize that fact, we should know what we do. Keynesian economics got us out of a much worse depression in the 1930s, so follow Keynesian prescriptions and we'll get out of this one, and get out of it pretty easily too.
Paul Krugman joins us.
DR. PAUL KRUGMAN: Hi there.
SIEGEL: And let's start with what we commonly describe as this weak recovery or these tough economic times, this stubbornly high unemployment rate. What makes all of this a depression?
KRUGMAN: The reason I use depression in the title is that it's qualitatively similar to the Great Depression. I mean, the Great Depression, the period we call the Great Depression included two recessions and two periods of recovery, but throughout, unemployment was high. The economy was clearly operating below capacity. A lot of ongoing human suffering even when the economy was growing. And that describes what's going on right now too.
It's not as bad as 1930s, but that's not much of a criterion. It is a sustained period of really lousy economic performance, and we've become accustomed to it. I'd say we just kind of settled into the notion that this is kind of the new normal. But it shouldn't be, and it's not something we should accept.
SIEGEL: You argue that policymakers in the 1930s had an excuse for fumbling their way out of the Great Depression because there was no track record of successful economic policies. But today, you say we know what worked. Of course, your critics say the Democrats tried the same thing that worked in the '30s - a stimulus package that was out of the Keynesian playbook - and it didn't work or it didn't work well enough.
What's the response to that?
KRUGMAN: The answer is that it was way too small and that's not 20/20 hindsight. I, among other people, was screaming at the time, tearing my hair out very publicly in The Times, that to say that this was too small. We had an epochal financial shock, something that was pretty much as big a financial shock as the one that happened in the 1930s. And we responded to it with a policy that was really quite modest, that was not nearly enough to offset that shock.
And particularly, since the stimulus such as it was has expired, what we've actually had is a lot of fiscal austerity. If you include the state and local governments, which you should, then what we've actually had is a record-breaking decline in government payrolls, a really major drag from governments cutting back rather than expanding.
So the people have said about the 1930s that fiscal policies, Keynesian policies didn't really work because they weren't really tried. And that applies with extra force to this depression.
SIEGEL: Well, let's say that you could make economic policy by fiat and you could apply Keynesian solutions to our current mess. What would you do?
KRUGMAN: Well, that's an interesting thing because it's now much easier than it was because we've now had three years of what amount to quite sharp austerity at the state and local level. We've had - normally, state and local employment grows with population. Instead it has shrunk by 600,000 over this period. So that if we were simply to rehire those fired schoolteachers, go back to the kind of employment that we should've had on a normal track at the state and local level, right there, we could add well over a million jobs. And before you know it, we'd be back to something that felt a lot more like prosperity.
SIEGEL: But at the end of several discussions in the book, when you talk about the arguments of debt, you're saying don't worry so much about borrowing more. The interest rates are practically zero or in real terms they're zero. Borrow now. Don't worry so much about the short-term debt. You always end up by saying, yeah, I'm not saying you don't worry at all. At some point, you have to deal with that.
Conservative critics say when is that point that Keynesians will always say, it's important, but not now? When is that now, when it is important to reduce our debt?
KRUGMAN: OK, (unintelligible) about self-justification here. I was - and I think most people who are Keynesians in this crisis were very much concerned about measures that increased the deficit when the economy was doing relatively well. Back when, you know, Bush was pushing through his tax cuts and his unfunded wars, we were the people who were saying don't do that. You really need to save that borrowing capacity for when you need it.
So there's a lot of role reversal. The same people who were blithely unworried about deficits back when deficits really were a bad thing are now the ones who are crusading against deficits now, except not if it means increasing taxes on rich people. But the answer is actually - it's a quite straightforward one.
If you get to the point where the economy is strong enough that the Federal Reserve is starting to raise interest rates so as to avoid an inflationary overheating, that's the time when you can, in fact, start to do some fiscal austerity. And it won't cause higher unemployment because the Fed can simply put off those interest rate hikes. But we're not in that situation now.
We're in a situation now where the interest rate is zero, which means any austerity policy, any cutbacks in spending just lead to unemployment. They actually did very little to reduce the budget deficit. They probably make, in the long run, fiscal position worse. Once the economy has recovered enough, then you'll find me turn into a fiscal hawk, but not now.
SIEGEL: As you write in the book, the simple solution that we have here is simple economics. It's not simple politics. You grant that much.
KRUGMAN: That's right. It would be nice if we had a political system in which important figures from both parties understood textbook macroeconomics 'cause that's all we're talking about here. The odd thing is I'm not a radical. I'm actually calling for believing your Econ 101 textbooks and acting on what they say. And we don't, so it's going to be very difficult, but that's not a reason to stop trying to get the truth out there and try to push policy in the right direction.
SIEGEL: Well, Paul Krugman, thanks a lot for talking with us today.
KRUGMAN: And thank you for having me on.
SIEGEL: And Paul Krugman's new book is called "End This Depression Now!"
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