No economist has been more outspoken about the causes and consequences of the “Great Panic” and “Great Recession” than Nobel prize winner Paul Krugman. He is one of a golden generation of economic thinkers, spawned by the Massachusetts Institute of Technology (MIT), that have emerged to dominate the debate about the causes and consequences of slump.
Krugman has gained particular prominence and notoriety because he has escaped the elevated world of academia to become the voice of liberal Keynesian economics on the opinion pages of the New York Times. He is also a prolific blogger.
But as time has moved on and the crisis that began in 2007-08 in the American sub-prime mortgage market has stretched into 2012, his prophesies of doom, unless Western governments radically change direction, have started to gain increasing traction.
It has been almost impossible to escape the Krugman view of the world over the past month as he has toured radio and TV stations on both sides of the Atlantic, promoting his populist book End this Depression Now (published by Norton). Krugman has been consistent in his criticism of global political leaders regardless of their stripe.
A critic of George W Bush when he was in the White House, he has been equally scathing about President Obama’s tentative responses to ending America’s slow growth and unemployment.
He is one of the few people to have praised former British Prime Minister Gordon Brown for his actions in trying to stabilise the financial system in the immediate aftermath of the Lehman Brothers collapse in September 2008. In the British political dialogue Brown is the person most often blamed for the boom and bust that has laid growth in the UK low, with output running at more than 4 per cent below where it was in 2007, ahead of the panic.
MIT is the powerhouse of American economic research producing more Nobel prize winners and policymakers than any other leading US university. This is largely due to the leadership of Paul Samuelson, known to many undergraduate students as the author of their standard economic textbook.
Samuelson — himself a Nobel economics prize winner — gravitated to MIT when it became clear to him that he was unlikely to get the support he needed from the university’s Cambridge Massachusetts neighbour, Harvard, because of Jewish quotas that existed at the time.
The result has been that MIT has outshone Harvard as a powerhouse of economics, producing, among others, Lawrence Summers, a nephew of Samuelson, who went on to become US Treasury Secretary under Bill Clinton.
It counts Joseph Stiglitz among its other Nobel prize winners. The current Jewish chairman of the Federal Reserve Ben Bernanke is also an MIT PhD, having written the classic works on the causes of the Great Depression of the 1930s.
Over the past five years, with his extreme Keynesian views, Krugman has been regarded as something of a pariah. The political and economic world viewed high debt levels in the Western economies as the fundamental cause of the slump. In austerity Britain, for instance, George Osborne and the coalition have argued that by shrinking the size of government and the deficit, enough room would be created in the economy for the private sector to expand and take up the slack.
Osborne and his crew have had some success. Britain’s international borrowing rates are some of the lowest in the world along with Germany and the United States, and alarmist predictions that the jobless rate would jump to three million people have not been proven. In fact the labour market has stabilised.
But the growth promised, which flickered in 2010 and early 2011, has faded away. And without expansion, tax revenues fall, the welfare budgets increase and reducing debt becomes harder, so it is a bit like running on the spot. Thus, the government needs to find some method of opening the pathways to growth.
In Krugman’s view, the answers are self-evident. If private sector demand is shrinking, because households and companies are hording cash rather than spending, then it is up to the government to fill the gap. This is how Franklin D Roosevelt guided the US out of the Great Depression in the 1930s.
Whitehall is starting to listen. In the 1930s in Britain it was house-building that helped to bridge the gap with the government organising the production of 300,000 new homes a year. Some seven decades on and the output of the house builders is just 130,000 even though the population is growing by leaps and bounds.
Osborne and the Treasury are looking at measures to support both demand for houses, by making mortgage finance more freely available, and the supply of housing, by offering loan guarantees to builders. The government is also looking at ways of using its credit rating to speed up critical infrastructure projects such as highway maintenance and the Thames super sewage project, as well as improvement to the rail network.
It is a start. But infrastructure projects are notoriously slow in delivering growth and jobs.
Nevertheless, the Krugman message may finally be gaining ground, even in the home of austerity economics.