End This Depression Now: A Review

End This Depression Now: A Review

This book by Paul Krugman was published in 2012. The essence of his idea is summarized in the following passages of the book.

In the summer of 1940 the U.S. economy went to war. Long before Pearl Harbor, military spending soared as America rushed to replace the ships and other armaments sent to Britain as part of the lend-lease program, and as army camps were quickly built to house the millions of new recruits brought in by the draft. As military spending created jobs and family incomes rose, consumer spending also picked up (it would eventually be restrained by rationing, but that came later). As businesses saw their sales growing, they also responded by ramping up spending.

And just like that, the Depression was over, and all those “unadaptable and untrained” workers were back on the job.

Did it matter that the spending was for defense, not domestic programs? In economic terms, not at all: spending creates demand, whatever it’s for. In political terms, of course, it mattered enormously: all through the Depression influential voices warned about the dangers of excessive government spending, and as a result the job-creation programs of the New Deal were always far too small, given the depth of the slump. What the threat of war did was to finally silence the voices of fiscal conservatism, opening the door for recovery—which is why I joked back in the summer of 2011 that what we really need right now is a fake threat of alien invasion that leads to massive spending on anti-alien defenses.

But the essential point is that what we need to get out of this current depression is another burst of government spending.

Is it really that simple? Would it really be that easy? Basically, yes. (p 24)

This idea is really the mainstream idea. Most governments, from US to China, are heavily in debt from heavy spending. Does it work? From the hefty US stock market, the idea seems work wonderfully. However, from the depressed US fertility rates after 2008, one might have a different opinion. But few economists pay attention to fertility numbers.

What is the problem with the argument of Krugman, and the mainstream economists in general. 1930s was a decade of extreme abundance and cheapness of energy resources. Many large oil fields were discovered. Government spending, such as road building, speed up the utilization of this cheap and abundant energy resource. Today, however, the physical cost of extracting oil has become much higher on average. Aggressive government spending only stimulating inflation in asset prices, which is welcomed by asset rich class but causes great harm to the general public. Since the mainstream opinion is the opinion of the asset rich class, the idea of Paul Krugman is warmly embraced in mainstream institutions and the plight of the general public is largely ignored.