Written for children ages 4 to 99, the fable unfolds in the prairie of Prax, where a North-Going Zax and a South-Going Zax collide and stop in their tracks, each refusing to step aside.
“Never budge! That’s my rule,” yells one spiky-haired beast. “Never budge in the least! Not an inch to the west! Not an inch to the east!”
The Zax game of chicken resembles today’s stalemate over how to speed recovery in the U.S. and Europe. On one side stand the Austerians, as Krugman calls them: They are determined to slash deficits. On the other loom what we might call the Stimulators, who seek more government spending to create jobs.
Krugman’s own stance is clear. A Princeton University professor who won the 2008 Nobel Prize in economics, he’s best known as a New York Times columnist who hews to the teachings of John Maynard Keynes.
“Now is the time for the government to spend more, not less, until the private sector is ready to carry the economy forward again,” he writes, seeking to light a bonfire under policy makers.
The U.S. is suffering from what Keynes called “magneto trouble,” Krugman says. Our economic engine remains strong; it’s just the alternator that’s kaput. Stimulus can provide the sparks to get the car cruising again.
We’ve heard the argument before, of course. What sets this book apart is Krugman’s readiness to address the anxieties of the Right-Going Zax.
Yes, says the Left-Going Zax (taking a step to one side), we shouldn’t minimize what a burden heavy government borrowing can be: Consider Ireland. And, yes, excessive debt did cause the crisis, he says, embracing Hyman Minsky’s explanation of how insouciant leverage in good times gives way to panicked deleveraging in bad.
Krugman even takes up the trepidation of people scarred by the memory of 1970s stagflation (though he doesn’t mention how neo-Keynesian efforts to suppress the business cycle stoked that wage-price spiral).
Now, however, is the wrong moment to worry about all that, he says. The U.S. and many other nations are, after all, mired in a slump that has entered its fifth year.
About 15 percent of the American workforce is unemployed or underemployed, and things are even grimmer for the young. Youth unemployment has reached 17 percent in the U.S., 28 percent in Italy, 30 percent in Ireland and 43 percent in Spain, he says.
The suffering is gratuitous, he argues, citing the torrent of government spending during World War II that dragged America out of the Great Depression. Now as then, we need to “spend now, pay later,” he says.
What would he have the U.S. government do? For starters, it could give states and local governments enough aid to rehire some of the workers -- including about 300,000 schoolteachers -- let go during recent budget cuts.
Another way to get people back to work fast: Restart investments in roads, rails and water systems that austerity measures delayed or canceled. And it’s time to get less timid about debt forgiveness for the more than one in five U.S. mortgage borrowers now under water.
Krugman is aware of the arguments against these proposals. Sure, he says, the Obama administration tried stimulus with the $787 billion American Recovery and Reinvestment Act of 2009. It didn’t fail, he says; it was just too small and too poorly designed, as he and economist Joseph Stiglitz said at the time.
He recognizes, too, that debt relief will be seen as rewarding profligates. Get over it, he says: “Economics is not a morality play.”
Maybe not, but economics does hinge on human behavior. And humans hate unfairness, as today’s polarization shows.
The Zax who scrimped to buy their homes and save for retirement are reluctant to bail out the prodigal Zax who partied with fatted calves on the barbecues next door. The prudent Zax also remain skeptical about the Federal Reserve’s ability to restrain inflation.
Krugman argues that central banks should aim for 4 percent inflation rather than 2 percent. Can the Wizard of Fed keep 4 from becoming 6? Research by economist William Barnett suggests not. The Fed’s monetary data are so poor, he says, that it may have inadvertently fueled the last two asset bubbles.
Cautious Zax also know that the government, come what may, will grow, as Paul Samuelson noted in his classic textbook “Economics.”
“Each period of emergency -- each war, each depression, each epoch of enhanced concern over poverty and inequality -- expands the activity of government,” he wrote. “After such a period is over, expenditures never seem to go back to previous levels.”
The Other Keynes
As you can see, the two little Zax inside me are torn. If the answer is “spend now, pay later,” let’s remember where Keynes himself stood on the subject. Though Keynes is thought of as a champion of cheap money, he also called for dear money to choke inflation once recovery returns.
“Just as it was advisable for the Government to incur debt during the slump,” he wrote in 1937, “so for the same reason it is now advisable that they should incline to the opposite policy.”
Will our political leaders remember that when the next boom rolls around?
(James Pressley writes for Muse, the arts and leisure section of Bloomberg News. The opinions expressed are his own.)
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