It's True: An Economy Can Be Damaged by Too Little Spending

Thursday, 15 May 2014 00:00 By Paul Krugman, Krugman & Co. | Op-Ed
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A house under construction last month in Salem, Virginia. The housing market has not fully rebounded since the recession. (Photo: Sam Dean for The New York Times).A house under construction last month in Salem, Virginia. The housing market has not fully rebounded since the recession. (Photo: Sam Dean for The New York Times)

Back in 2009, when President Obama was proposing a spending plan to boost the economy and some of us were pleading for a bigger plan, it was common to hear people from both the right and the crazy center declaring that it was all a ruse, an attempt to smuggle in liberal priorities under the guise of fiscal stimulus.

This was, as it happens, completely false -and in the case of the right-wingers, a case of projection. After all, Mr. Obama didn't try to sell permanent spending increases as short-term stimulus measures - but President George W. Bush did exactly that when pushing his tax cuts.

And what's more, it wouldn't have worked. If anything, the best bet in such situations is to try it the other way - to push proposals that will stimulate the economy while also building infrastructure and/or reducing inequality, and to make the long-term, class-warfare aspects the heart of your sales pitch.

This may seem odd. Shouldn't it be easier to sell win-win ideas, which will make everyone (or almost everyone) better off? Well, it would be if the public "got" Keynesian economics. But even educated readers tend not to understand the idea that the economy as a whole can suffer from inadequate demand (hey, lots of University of Chicago professors don't get it either). And I don't think it's for want of efforts to get the point across.

The key sticking point is right at the beginning. Never mind monetary and fiscal policy; the very notion that the economy can suffer from too little spending turns out to be inherently difficult. When I give public talks, I get some traction (I think) by asking the audience what happens if everyone tries to cut his or her spending at the same time, then pointing out that my spending is your income and your spending is my income. But I don't think it sticks for many people: the appeal of the economy-as-household metaphor usually takes over.

I'm not making this judgment entirely based on gut feelings. We do have some metrics here - imperfect metrics, but still useful.

Look, for example, at book sales. Has there ever been a monster bestseller about fighting recessions, or even about growth for its own sake? I don't think so. The blockbusters are always, one way or another, about us versus them - going head to head, competing in a flat world, or, now, trying to stop the rise of the 1 percent. In saying this I don't mean to denigrate the last entry: Thomas Piketty's Capital in the Twenty-First Century is awesomely good, and deserves all the acclaim it's getting. But it is notable that at a time when labor markets are deeply depressed, our biggest concern is long-run inequality.

Or closer to home, I do of course track how my New York Times columns perform on the most-emailed list; and there's no question that columns about inequality get a bigger response than those about demand-side macroeconomics.

This doesn't mean that we should (or that I will) stop trying to get the truth across about depression economics. But it's an interesting observation, and I think it has implications for how politicians should go about doing the right thing.

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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008. Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including "The Return of Depression Economics" (2008) and "The Conscience of a Liberal" (2007).
Copyright 2014 The New York Times.

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