End This Depression Now!

paul krugman

W. W. NORTON & COMPANY
NeW  YORk  lONdON
CHapter One
HOW BaD tHIngS are
I think as those green shoots begin to appear in different markets
and as some confidence begins to come back that will begin the positive dynamic that brings our economy back.
Do you see green shoots?
I do. I do see green shoots.
—Ben Bernanke, chairman of the Federal Reserve,
interviewed by 60 Minutes, March 15, 2009
In March 2009 Ben Bernanke, normally neither the most
cheerful nor the most poetic of men, waxed optimistic about
the economic prospect. After the fall of Lehman Brothers six
months earlier, America had entered a terrifying economic
nosedive. But appearing on the TV show 60 Minutes, the Fed
chairman declared that spring was at hand.
His remarks immediately became famous, not least because
they bore an eerie resemblance to the words of Chance, aka
Chauncey Gardiner, the simpleminded gardener mistaken for
a wise man in the movie Being There. In one scene Chance,
asked to comment on economic policy, assures the president,
“As long as the roots are not severed, all is well and all will be
well in the garden. . . . There will be growth in the spring.”
Despite the jokes, however, Bernanke’s optimism was widely
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shared. And at the end of 2009 Timedeclared Bernanke its
Person of the Year.
Unfortunately, all was not well in the garden, and the
promised growth never came.
To be fair, Bernanke was right that the crisis was easing.
The panic that had gripped financial markets was ebbing, and
the economy’s plunge was slowing. According to the official
scorekeepers at the National Bureau of Economic Research,
the so-called Great Recession that started in December 2007
ended in June 2009, and recovery began. But if it was a recovery, it was one that did little to help most Americans. Jobs
remained scarce; more and more families depleted their savings, lost their homes, and, worst of all, lost hope. True, the
unemployment rate is down from the peak it reached in October 2009. But progress has come at a snail’s pace; we’re still
waiting, after all these years, for that “positive dynamic” Bernanke talked about to make an appearance.
And that was in America, which at least had a technical
recovery. Other countries didn’t even manage that. In Ireland,
in Greece, in Spain, in Italy, debt problems and the “austerity”
programs that were supposed to restore confidence not only
aborted any kind of recovery but produced renewed slumps
and soaring unemployment.
And the pain went on and on. I’m writing these words
almost three years after Bernanke thought he saw those green
shoots, three and a half years after Lehman fell, more than four
years after the start of the Great Recession. The citizens of the
world’s most advanced nations, nations rich in resources, talent,
and knowledge—all the ingredients for prosperity and a decent
standard of living for all—remain in a state of intense pain.
In the rest of this chapter I’ll try to document some of
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the main dimensions of that pain. I’ll focus mainly on the
United States, which is both my home and the country I know
best, reserving an extended discussion of the pain abroad for
later in the book. And I’ll start with the thing that matters
most—and the thing on which we’ve performed the worst:
unemployment.
the Jobs Drought
Economists, the old line goes, know the price of everything
and the value of nothing. And you know what? There’s a lot
of truth to that accusation: since economists mainly study the
circulation of money and the production and consumption of
stuff, they have an inherent bias toward assuming that money
and stuff are what matter. Still, there is a field of economic
research that focuses on how self-reported measures of wellbeing, such as happiness or “life satisfaction,” are related to
other aspects of life. Yes, it’s known as “happiness research”—
Ben Bernanke even gave a speech about it in 2010, titled “The
Economics of Happiness.” And this research tells us something
very important about the mess we’re in.
Sure enough, happiness research tells us that money isn’t
all that important once you get to the point of being able to
afford the necessities of life. The payoff to being richer isn’t
literally zero—citizens of rich countries are, on average,
somewhat more satisfied with their lives than citizens of less
well-off nations. Also, being richer or poorer than the people
you compare yourself with is a fairly big deal, which is why
extreme inequality can have such a corrosive effect on society. But when all is said and done, money is less important
than crude materialists—and many economists—would like
to believe.
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That’s not to say, however, that economic affairs are unimportant in the true scale of things. For there’s one economicsdriven thing that matters enormously to human well-being:
having a job. People who want to work but can’t find work suffer greatly, not just from the loss of income but from a diminished sense of self-worth. And that’s a major reason why mass
unemployment—which has now been going on in America
for four years—is such a tragedy.
How severe is the problem of unemployment? That question calls for a bit of discussion.
Clearly, what we’re interested in is involuntaryunemployment. People who aren’t working because they have chosen
not to work, or at least not to work in the market economy—
retirees who are glad to be retired, or those who have decided
to be full-time housewives or househusbands—don’t count.
Neither do the disabled, whose inability to work is unfortunate, but not driven by economic issues.
Now, there have always been people claiming that there’s
no such thing as involuntary unemployment, that anyone can
find a job if he or she is really willing to work and isn’t too
finicky about wages or working conditions. There’s Sharron
Angle, the Republican candidate for the Senate, who declared
in 2010 that the unemployed were “spoiled,” choosing to live
off unemployment benefits instead of taking jobs. There are
the people at the Chicago Board of Trade who, in October
2011, mocked anti-inequality demonstrators by showering
them with copies of McDonald’s job application forms. And
there are economists like the University of Chicago’s Casey
Mulligan, who has written multiple articles for the New York
Timeswebsite insisting that the sharp drop in employment
after the 2008 financial crisis reflected not a lack of employment opportunities but diminished willingness to work.
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The classic answer to such people comes from a passage
near the beginning of the novel The Treasure of the Sierra Madre
(best known for the 1948 film adaptation starring Humphrey
Bogart and Walter Huston): “Anyone who is willing to work
and is serious about it will certainly find a job. Only you must
not go to the man who tells you this, for he has no job to
offer and doesn’t know anyone who knows of a vacancy. This
is exactly the reason why he gives you such generous advice,
out of brotherly love, and to demonstrate how little he knows
the world.”
Quite. Also, about those McDonald’s applications: in April
2011, as it happens, McDonald’s did announce 50,000 new job
openings. Roughly a million people applied.
If you have any familiarity with the world, in short, you
know that involuntary unemployment is very real. And it’s
currently a very big deal.
How bad is the problem of involuntary unemployment,
and how much worse has it become?
The U.S. unemployment measure you usually hear quoted
in the news is based on a survey in which adults are asked
whether they are either working or actively seeking work.
Those who are seeking work but don’t have jobs are considered unemployed. In December 2011 that amounted to more
than 13 million Americans, up from 6.8 million in 2007.
If you think about it, however, this standard definition of
unemployment misses a lot of distress. What about people who
want to work, but aren’t actively searching either because there
are no jobs to be had, or because they’ve grown discouraged
by fruitless searching? What about those who want full-time
work, but have only been able to find part-time jobs? Well, the
U.S. Bureau of Labor Statistics tries to capture these unfortunates in a broader measure of unemployment, known as U6;
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it says that by this broader measure there are about 24 million unemployed Americans—about 15 percent of the workforce—roughly double the number before the crisis.
Yet even this measure fails to capture the extent of the
pain. In modern America most families contain two working
spouses; such families suffer, both financially and psychologically, if either spouse is unemployed. There are workers who
used to make ends meet with a second job, now down to an
inadequate one, or who counted on overtime pay that no longer arrives. There are independent businesspeople who have
seen their income shrivel. There are skilled workers, accustomed to holding down good jobs, who have been forced to
accept work that uses none of their skills. And on and on.
There is no official estimate of the number of Americans
caught up in this sort of penumbra of formal unemployment.
But in a June 2011 poll of likely voters—a group probably
in better shape than the population as a whole—the polling
group Democracy Corps found that a third of Americans had
either themselves suffered from job loss or had a family member lose a job, and that another third knew someone who had
lost a job. Moreover, almost 40 percent of families had suffered
from reduced hours, wages, or benefits.
The pain, then, is very widespread. But that’s not the whole
story: for millions, the damage from the bad economy runs
very deep.
ruined lives
There is always some unemployment in a complex, dynamic
economy like that of modern America. Every day some businesses fail, taking jobs with them, while others grow and need
more staff; workers quit or are fired for idiosyncratic reasons,
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and their former employers take on replacements. In 2007,
when the job market was pretty good, more than 20 million
workers quit or were fired, while an even larger number were
hired.
All this churning means that some unemployment remains
even when times are good, because it often takes time before
would-be workers find or accept new jobs. As we saw, there
were almost seven million unemployed workers in the fall of
2007 despite a fairly prosperous economy. There were millions of unemployed Americans even at the height of the 1990s
boom, when the joke was that anyone who could pass the
“mirror test”—that is, anyone whose breath would fog a mirror, indicating that they were actually alive—could find work.
In times of prosperity, however, unemployment is mostly a
brief experience. In good times there is a rough match between
the number of people seeking work and the number of job
openings, and as a result most of the unemployed find work
fairly quickly. Of those seven million unemployed Americans
before the crisis, fewer than one in five had been out of work
as much as six months, fewer than one in ten had been out of
work for a year or more.
That situation has changed completely since the crisis.
There are now four job seekers for every job opening, which
means that workers who lose one job find it very hard to get
another. Six million Americans, almost five times as many as
in 2007, have been out of work for six months or more; four
million have been out of work for more than a year, up from
just 700,000 before the crisis.
This is something almost completely new in American
experience—I say almostcompletely, because long-term unemployment was obviously rife during the Great Depression. But
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there’s been nothing like this since. Not since the 1930s have
so many Americans found themselves seemingly trapped in a
permanent state of joblessness.
Long-term unemployment is deeply demoralizing for
workers anywhere. In America, where the social safety net
is weaker than in any other advanced country, it can easily
become a nightmare. Losing your job often means losing your
health insurance. Unemployment benefits, which typically
make up only about a third of lost income anyway, run out—
over the course of 2010–11 there was a slight fall in the official
unemployment rate, but the number of Americans who were
unemployed yet receiving no benefits doubled. And as unemployment drags on, household finances fall apart—family savings are depleted, bills can’t be paid, homes are lost.
Nor is that all. The causes of long-term unemployment
clearly lie with macroeconomic events and policy failures that
are beyond any individual’s control, yet that does not save the
victims from bearing a stigma. Does being unemployed for a
long time really erode work skills, and make you a poor hire?
Does the fact that you were one of the long-term unemployed
indicate that you were a loser in the first place? Maybe not, but
many employers thinkit does, and for the worker that may be
all that matters. Lose a job in this economy, and it’s very hard
to find another; stay unemployed long enough, and you will
be considered unemployable.
To all this add the damage to Americans’ inner lives. You
know what I mean if you know anyone trapped in long-term
unemployment; even if he or she isn’t in financial distress, the
blow to dignity and self-respect can be devastating. And matters are, of course, worse if there is financial distress too. When
Ben Bernanke spoke about “happiness research,” he empha-
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sized the finding that happiness depends strongly on a sense of
being in control of your own life. Think about what happens
to that sense of being in control when you want to work, yet
many months have gone by and you can’t find a job, when the
life you built is falling apart because funds are running out. It’s
no wonder that the evidence suggests that long-term unemployment breeds anxiety and psychological depression.
Meanwhile, there’s the plight of those who don’t have a job
yet, because they’re entering the working world for the first
time. Truly, this is a terrible time to be young.
Unemployment among young workers, like unemployment
for just about every demographic group, roughly doubled in
the immediate aftermath of the crisis, then drifted down a bit.
But because young workers have a much higher unemployment rate than their elders even in good times, this meant a
much larger rise in unemployment relative to the workforce.
And the young workers one might have expected to be
best placed to weather the crisis—recent college graduates,
who presumably are much more likely than others to have the
knowledge and skills a modern economy demands—were by
no means insulated. Roughly one in four recent graduates is
either unemployed or working only part-time. There has also
been a notable drop in wages for those who do have full-time
jobs, probably because many of them have had to take lowpaying jobs that don’t make use of their education.
One more thing: there has been a sharp increase in the
number of Americans aged between twenty-four and thirtyfour living with their parents. This doesn’t represent a sudden rush of filial devotion; it represents a radical reduction in
opportunities to leave the nest.
This situation is deeply frustrating for young people. They’re
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supposed to be getting on with their lives, but instead they find
themselves in a holding pattern. Many understandably worry
about their future. How long a shadow will their current problems cast? When can they expect to fully recover from the bad
luck of graduating into a deeply troubled economy?
Basically, never. Lisa Kahn, an economist at Yale’s School
of Management, has compared the careers of college graduates
who received their degrees in years of high unemployment
with those who graduated in boom times; the graduates with
unlucky timing did significantly worse, not just in the few
years after graduation but for their whole working lives. And
those past eras of high unemployment were relatively short
compared with what we’re experiencing now, suggesting that
the long-term damage to the lives of young Americans will be
much greater this time around.
Dollars and Cents
Money? Did someone mention money? So far, I haven’t, at least
not directly. And that’s deliberate. Although the disaster we’re
living through is in large part a story of markets and money,
a tale of getting and spending gone wrong, what makes it a
disaster is the human dimension, not the money lost.
That having been said, we’re talking about a lot of money
lost.
The measure most commonly used to track overall economic performance is real gross domestic product, or real
GDP for short. It’s the total value of goods and services produced in an economy, adjusted for inflation; roughly speaking,
it’s the amount of stuff (including services, of course) that the
economy makes in a given period of time. Since income comes
from selling stuff, it’s also the total amount of income earned,
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determining the size of the pie that gets sliced between wages,
profits, and taxes.
In an average year before the crisis, America’s real GDP
grew between 2 and 2.5 percent per year. That’s because the
economy’s productive capacity was growing over time: each
year there were more willing workers, more machines and
structures for those workers to use, and more sophisticated
technology to be employed. There were occasional setbacks—
recessions—in which the economy briefly shrank instead of
growing. I’ll talk in the next chapter about why and how that
can happen. But these setbacks were normally brief and small,
and were followed by bursts of growth as the economy made
up the lost ground.
Until the recent crisis, the worst setback experienced by
the U.S. economy since the Great Depression was the “double
dip” of 1979 to 1982—two recessions in close succession that
are best viewed as basically a single slump with a stutter in
the middle. At the bottom of that slump, in late 1982, real
GDP was 2 percent below its previous peak. But the economy
proceeded to bounce back strongly, growing at a 7 percent
rate for the next two years—“morning in America”—and then
returned to its normal growth track.
The Great Recession—the plunge between late 2007 and
the middle of 2009, when the economy stabilized—was steeper
and sharper, with real GDP falling 5 percent over the course
of eighteen months. More important, however, there has been
no strong bounce-back. Growth since the official end of the
recession has actually been lower than normal. The result is an
economy producing far less than it should.
The Congressional Budget Office (CBO) produces a widely
used estimate of “potential” real GDP, defined as a measure of
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“sustainable output, in which the intensity of resource use is
neither adding to nor subtracting from inflationary pressure.”
Think of it as what would happen if the economic engine
were firing on all cylinders but not overheating—an estimate
of what we could and should be achieving. It’s pretty close to
what you get if you take where the U.S. economy was in 2007,
and project what it would be producing now if growth had
continued at its long-run average pace.
Some economists argue that estimates like this are misleading, that we’ve taken a major hit to our productive capacity;
I’ll explain in chapter 2 why I disagree. For now, however,
let’s take the CBO estimate at face value. What it says is that
as I write these words the U.S. economy is operating about 7
percent below its potential. Or to put it a bit differently, we’re
currently producing around a trillion dollars less of value each
year than we could and should be producing.
That’s an amount per year. If you add up the lost value since
the slump began, it comes to some $3 trillion. Given the economy’s continuing weakness, that number is set to get a lot
bigger. At this point we’ll be very lucky if we get away with a
cumulative output loss of “only” $5 trillion.
These aren’t paper losses like the wealth lost when the dotcom or housing bubble collapsed, wealth that was never real in
the first place. We’re talking here about valuable products that
could and should have been manufactured but weren’t, wages
and profits that could and should have been earned but never
materialized. And that’s $5 trillion, or $7 trillion, or maybe
even more that we’ll never get back. The economy will eventually recover, one hopes—but that will, at best, mean getting
back to its old trend line, not making up for all the years it
spent below that trend line
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I say “at best” advisedly, because there are good reasons to
believe that the prolonged weakness of the economy will take
a toll on its long-run potential.
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 “shortrun”—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
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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
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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 longrun 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.
pain abroad
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
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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.
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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.
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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.