What role has politics played in the Great Recession? Did politics play a causal role in creating and prolonging the recession? Or was the recession created by underlying economic forces? Economists have traditionally insisted on the primacy of economic
factors. In studying growing inequality, for instance, they have focused
on economic forces like trade and technological change. However, according to Jacob Hacker (Yale University) and Paul Pierson (UC Berkeley) the most compelling counter argument to the traditional economic story comes, ironically, from two Nobel price-winning economists. Hacker and Pierson state that "in recent
years (in part through the urgings of iconoclasts like Krugman and
Stiglitz) has there been a turn to politics to explain America’s
distinctive economic challenges—a reorientation that brings economics
back toward its original conception as the science of political economy. No
one can doubt that the American political economy has changed
dramatically over the last generation. Perhaps most fundamental is a
transformation that Stiglitz and Krugman seem to assume and barely
mention: the huge shift in the relative influence of business and labor."
NEW YORK - Five years after the onset of the financial crisis that badly damaged
the US economy, the nation remains mired in chronic joblessness. The
unemployment rate, stubbornly above 8 percent, actually makes the
situation look better than it is. Many millions have given up looking
for work and no longer figure in the statistics. Long-term unemployment
remains at levels unseen since the Great Depression. Young Americans are
entering the worst job market in at least a half-century. For both the
long-term unemployed and new job seekers, this sustained absence from
the workforce will have permanent effects on both their earnings and
their well-being. And not just theirs. We have all lost, and continue to
lose, from the prolonged mass idleness of potentially productive
workers.
Yet Washington is stuck in neutral. Worse than neutral;
it is in reverse. As the last elements of the 2009 stimulus phase out,
the initial flood of federal aid has slowed to a trickle. If no
agreement is reached before early next year, the trickle will become a
huge backward flow, as President Obama’s payroll tax cut and all the
Bush tax cuts expire while automatic spending cuts agreed to in previous
legislative sessions kick in. Already, Republican leaders are
threatening to replay last year’s standoff over the debt ceiling.
Meanwhile, state and local governments—prohibited from running sustained
deficits, increasingly dominated by anti-spending forces—continue to
cut aid to those out of work and slash programs that invest in the
nation’s future while laying off teachers and other public workers.
Without those layoffs, the current unemployment rate would probably be
around 7 percent.
Against this backdrop, no book could be more timely than Paul Krugman’s End This Depression Now!
Since the crisis began, Krugman has argued with consistency and
increasing frustration that the United States has become caught not in a
normal recession, but in a “liquidity trap.” Since interest rates are
already at rock bottom, normal measures, such as easy credit, won’t
work, and expanded government expenditures must play a central part in
boosting anemic demand. Otherwise, the efforts of private citizens to
pay down debts laid bare by the financial crisis will continue to hold
the economy back.
To Krugman, this is all the more regrettable because it is almost
wholly preventable. We know what to do, he argues: increase public
spending and make it clear that monetary expansion will continue until
the economy fully recovers. Krugman advocates greater federal aid to
state and local governments, as well as an aggressive effort to relieve
private mortgage debts. He also argues that the Fed has been too timid
in setting higher inflation targets to restore expectations of growth.
“Unfortunately,” Krugman writes,
we’re not using the knowledge we have, because too many people who matter—politicians, public officials, and the broader class of writers and talkers who define the conventional wisdom—have, for a variety of reasons, chosen to forget the lessons of history and the conclusions of several generations’ worth of economic analysis, replacing that hard-won knowledge with ideologically and politically convenient prejudices.Krugman is at once ruthless and humorous in taking on these prejudices. (read more)
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