Paul Krugman has just passed 1 million followers on Twitter. Not bad for an academic economist, albeit one with a Nobel prize under his arm, a prominent position at Princeton University and a New York Times blog.
His following is a reward for battling the conventional wisdom that austerity can foster recovery. From the moment Lehman Brothers was allowed to crash it seemed only Krugman, Joseph Stiglitz (another Nobel prizewinner for the liberal cause) and New York professor Nouriel Roubini, who had loudly predicted the crash, have consistently confronted the “austerians” in Washington, Brussels and Britain.
More than four years on, austerity is being questioned as never before, not least because most countries implementing a deficit-reduction policy have failed to grow. Krugman, his blog and comments on Twitter have become the focal point for objectors worldwide.
Speaking to publicize the second edition of his book End This Depression Now, he says his battle will go on until policymakers realize their reliance on deficit reduction is a “delusional” misreading of basic economics.
For such a sophisticated thinker, Krugman’s solution — which upsets some supporters — is straightforward. Asked if he is concerned a splurge of borrowing would trigger a repeat of the bubbles that caused the crash and spur inflation, he is dismissive.
“As far as planting the seeds of the next crisis, bear in mind that leverage is still falling, so I don’t see the problem at this point,” he says.
In Krugman’s view, concerns about aging populations, looming health costs, the changing nature of the workforce in a digital age and competition from Asian economies for jobs are for another time.
“Should we be having more spending? The answer must be yes. Why? Because there is plenty of slack in the labor market and investment needs to increase. To me it is clear that there is plenty of room to increase spending without increasing inflation,” he says.
“What many people fail to see is that macroeconomics moves much more slowly than they think. You can read academic papers from the 1930s and after you strip out the arcane academic language, they could be written today,” he adds.
Krugman says texts by economists such as Hyman Minsky, Michal Kalecki and John Maynard Keynes show Olli Rehn, the EU finance commissioner, is misguided in promoting austerity. Why reinvent the wheel, he asks, when today’s economic problems were solved by theories developed in the 1930s.
Minsky, for instance, argued that bankers and others simply forgot about the risks that come with higher debt levels. Forgetfulness is a cornerstone of Krugman’s analysis of the crisis.
“I’d go with Minsky: that the best explanation of the crisis is simply that with the passage of time, everybody, including policymakers, forgot about the risks. The economics profession in a way was part of the same phenomenon,” he says.
“Things like real business cycle theory, which considers recessions to represent voluntary withdrawal of labor in favor of leisure, would have been rejected as obviously ludicrous when the memory of the Great Depression was still fresh, but could flourish once that memory had faded,” he adds.
Five years after the crash, with memories still fresh, Rehn’s failure is one of misunderstanding, he argues. Krugman dismisses concerns that Germany and Britain are run by politicians who want to protect their assets at the expense of people who depend on public services.