The governments should finally start spending, Nobel laureate in economics Paul Krugman recommends in his new book End This Depression Now, where he sharply criticizes the austerity programs. So let's look a bit closer.
First of all, Krugman's book is probably coming out in the most appropriate moment. Europe is still writhing in the pains of crisis, and the doubts in the austerity course are getting louder. The troubled European countries are in dire need of perspectives for economic growth. This appeal can be heard from Paris to Rome and from Athens to Madrid. The IMF insists on more growth programs. Meanwhile, the US economy still hasn't fully recovered from the crisis, the unemployment level is 8.3%, which is too high from a US standpoint. Politics could not sustain such a development for too long, Krugman argues in the book.
He's also saying the current situation resembles that of the Great Depression, if we're to look at things in detail. During the Great Depression, a recession situation was reached twice, and twice it was followed by economic growth, but as a whole, unemployment remained too high and the US economy was stuck way below its full capacity. And the present situation resembles that time.
Krugman also gives a negative evaluation for the efforts of the US politicians so far. He's particularly critical about Ben Bernanke, although it was Bernanke himself who did exactly what Krugman now insists: he flooded the markets with liquidity. President Obama isn't spared either: although the Democrats approved a 787 billion dollar stimulus package, Krugman's assessment is scathing - too little, too late, buddies!
His argument is well known. During heavy crisis, the government should provide not billions but trillions. His theory rests upon the primacy of market demand, which should stimulate the economy toward recovery. When the markets become dysfunctional and everyone is thinking about saving money (despite the low interest rates and enough liquidity on the markets), it's then when the state is supposed to intervene, supported by the bank of issue. In his mind it's the state programs for stimulating the economy that should create the jobs that are so desperately needed. The austerity programs only shrink economic power, and cause stagnation. The result from them is that fewer tax revenues arrive into the budget, and the share of the social programs, despite them being severely cut and crippled, increases dangerously, and suffocates the remaining economy. Ultimately, cutting the deficit in such difficult times becomes useless, because it costs too dearly in the long run.
Krugman also argues that as soon as the economy is back on its feet and is again strong enough, the bank of issue could afford to raise the interest rates in order to curb any further inflation tendencies. And that is the moment when deficits could begin to be addressed, and cuts to be made, without affecting the unemployment levels too much. But of course we're all still too far from anything resembling such a situation for the time being. Only when the economy is fortified sufficiently and the populace enjoys relative prosperity, cutting debt would make a lot of sense - not now. The problem is, it is then when people tend to care about accumulating debt the least. Such is the human psychology.
Sure, his new book could serve as a guideline only to a certain extent. Granted, the economic factors and relations, the reasons for the various influences and effects are described in a very comprehensive language, as well as the errors that had been made at the time of the creation of the common European currency. On the other hand, let's not forget that his conclusions and recommendations are simply in line with the tradition of classic Keynesianism, and that's hardly a surprise. After all, the reader should decide for themselves whoever they're going to trust - Krugman the Keynesian, who never msises a chance to emphasize on the role of the government at times of crisis, or Ludwig Erhard, who, conversely, argues that wealth and prosperity could never originate from the state, and neither from the money-printing machine that is the central bank, but instead it should be earned entirely through personal means and solely thanks to one's individual skills. And that's a debate that will probably never cease.