The following is excerpted from "End This Depression Now!" available now from W.W. Norton & Company.
CHAPTER ONE: HOW BAD THINGS ARE
I think as those green shoots begin to appear in different markets and as some confidence begins to come back that will begin the positive dynamic that brings our economy back.
Do you see green shoots?
I do. I do see green shoots.
--Ben Bernanke, chairman of the Federal Reserve, interviewed by 60 Minutes, March 15, 2009
In March 2009 Ben Bernanke, normally neither the most cheerful nor the most poetic of men, waxed optimistic about the economic prospect. After the fall of Lehman Brothers six months earlier, America had entered a terrifying economic nosedive. But appearing on the TV show 60 Minutes, the Fed chairman declared that spring was at hand.
His remarks immediately became famous, not least because they bore an eerie resemblance to the words of Chance, aka Chauncey Gardiner, the simpleminded gardener mistaken for a wise man in the movie Being There. In one scene Chance, asked to comment on economic policy, assures the president, "As long as the roots are not severed, all is well and all will be well in the garden. . . . There will be growth in the spring." Despite the jokes, however, Bernanke's optimism was widely shared. And at the end of 2009 Time declared Bernanke its Person of the Year.
Unfortunately, all was not well in the garden, and the promised growth never came.
To be fair, Bernanke was right that the crisis was easing. The panic that had gripped financial markets was ebbing, and the economy's plunge was slowing. According to the official scorekeepers at the National Bureau of Economic Research, the so-called Great Recession that started in December 2007 ended in June 2009, and recovery began. But if it was a recovery, it was one that did little to help most Americans. Jobs remained scarce; more and more families depleted their savings, lost their homes, and, worst of all, lost hope. True, the unemployment rate is down from the peak it reached in October 2009. But progress has come at a snail's pace; we're still waiting, after all these years, for that "positive dynamic" Bernanke talked about to make an appearance.
And that was in America, which at least had a technical recovery. Other countries didn't even manage that. In Ireland, in Greece, in Spain, in Italy, debt problems and the "austerity" programs that were supposed to restore confidence not only aborted any kind of recovery but produced renewed slumps and soaring unemployment.
And the pain went on and on. I'm writing these words almost three years after Bernanke thought he saw those green shoots, three and a half years after Lehman fell, more than four years after the start of the Great Recession. The citizens of the world's most advanced nations, nations rich in resources, talent, and knowledge--all the ingredients for prosperity and a decent standard of living for all--remain in a state of intense pain.
In the rest of this chapter I'll try to document some of the main dimensions of that pain. I'll focus mainly on the United States, which is both my home and the country I know best, reserving an extended discussion of the pain abroad for later in the book. And I'll start with the thing that matters most--and the thing on which we've performed the worst: unemployment.
The Jobs Drought
Economists, the old line goes, know the price of everything and the value of nothing. And you know what? There's a lot of truth to that accusation: since economists mainly study the circulation of money and the production and consumption of stuff, they have an inherent bias toward assuming that money and stuff are what matter. Still, there is a field of economic research that focuses on how self-reported measures of well-being, such as happiness or "life satisfaction," are related to other aspects of life. Yes, it's known as "happiness research"--Ben Bernanke even gave a speech about it in 2010, titled "The Economics of Happiness." And this research tells us something very important about the mess we're in.
Sure enough, happiness research tells us that money isn't all that important once you get to the point of being able to afford the necessities of life. The payoff to being richer isn't literally zero--citizens of rich countries are, on average, somewhat more satisfied with their lives than citizens of less well-off nations. Also, being richer or poorer than the people you compare yourself with is a fairly big deal, which is why extreme inequality can have such a corrosive effect on society. But when all is said and done, money is less important than crude materialists--and many economists--would like to believe.
That's not to say, however, that economic affairs are unimportant in the true scale of things. For there's one economics-driven thing that matters enormously to human well-being: having a job. People who want to work but can't find work suffer greatly, not just from the loss of income but from a diminished sense of self-worth. And that's a major reason why mass unemployment--which has now been going on in America for four years--is such a tragedy.
How severe is the problem of unemployment? That question calls for a bit of discussion.
Clearly, what we're interested in is involuntary unemployment. People who aren't working because they have chosen not to work, or at least not to work in the market economy--retirees who are glad to be retired, or those who have decided to be full-time housewives or househusbands--don't count. Neither do the disabled, whose inability to work is unfortunate, but not driven by economic issues.
Now, there have always been people claiming that there's no such thing as involuntary unemployment, that anyone can find a job if he or she is really willing to work and isn't too finicky about wages or working conditions. There's Sharron Angle, the Republican candidate for the Senate, who declared in 2010 that the unemployed were "spoiled," choosing to live off unemployment benefits instead of taking jobs. There are the people at the Chicago Board of Trade who, in October 2011, mocked anti-inequality demonstrators by showering them with copies of McDonald's job application forms. And there are economists like the University of Chicago's Casey Mulligan, who has written multiple articles for the New York Times website insisting that the sharp drop in employment after the 2008 financial crisis reflected not a lack of employment opportunities but diminished willingness to work.
The classic answer to such people comes from a passage near the beginning of the novel The Treasure of the Sierra Madre (best known for the 1948 film adaptation starring Humphrey Bogart and Walter Huston): "Anyone who is willing to work and is serious about it will certainly find a job. Only you must not go to the man who tells you this, for he has no job to offer and doesn't know anyone who knows of a vacancy. This is exactly the reason why he gives you such generous advice, out of brotherly love, and to demonstrate how little he knows the world."
Quite. Also, about those McDonald's applications: in April 2011, as it happens, McDonald's did announce 50,000 new job openings. Roughly a million people applied.
If you have any familiarity with the world, in short, you know that involuntary unemployment is very real. And it's currently a very big deal.
How bad is the problem of involuntary unemployment, and how much worse has it become?
The U.S. unemployment measure you usually hear quoted in the news is based on a survey in which adults are asked whether they are either working or actively seeking work. Those who are seeking work but don't have jobs are considered unemployed. In December 2011 that amounted to more than 13 million Americans, up from 6.8 million in 2007.
If you think about it, however, this standard definition of unemployment misses a lot of distress. What about people who want to work, but aren't actively searching either because there are no jobs to be had, or because they've grown discouraged by fruitless searching? What about those who want full-time work, but have only been able to find part-time jobs? Well, the U.S. Bureau of Labor Statistics tries to capture these unfortunates in a broader measure of unemployment, known as U6; it says that by this broader measure there are about 24 million unemployed Americans--about 15 percent of the workforce--roughly double the number before the crisis.
Yet even this measure fails to capture the extent of the pain. In modern America most families contain two working spouses; such families suffer, both financially and psychologically, if either spouse is unemployed. There are workers who used to make ends meet with a second job, now down to an inadequate one, or who counted on overtime pay that no longer arrives. There are independent businesspeople who have seen their income shrivel. There are skilled workers, accustomed to holding down good jobs, who have been forced to accept work that uses none of their skills. And on and on.
There is no official estimate of the number of Americans caught up in this sort of penumbra of formal unemployment. But in a June 2011 poll of likely voters--a group probably in better shape than the population as a whole--the polling group Democracy Corps found that a third of Americans had either themselves suffered from job loss or had a family member lose a job, and that another third knew someone who had lost a job. Moreover, almost 40 percent of families had suffered from reduced hours, wages, or benefits.
The pain, then, is very widespread. But that's not the whole story: for millions, the damage from the bad economy runs very deep.
Reprinted from End This Depression Now! by Paul Krugman. Copyright © 2012 by Paul Krugman. With the permission of the publisher, W.W. Norton & Company.
There is always some unemployment in a complex, dynamic economy like that of modern America. Every day some businesses fail, taking jobs with them, while others grow and need more staff; workers quit or are fired for idiosyncratic reasons, and their former employers take on replacements. In 2007, when the job market was pretty good, more than 20 million workers quit or were fired, while an even larger number were hired.
All this churning means that some unemployment remains even when times are good, because it often takes time before would-be workers find or accept new jobs. As we saw, there were almost seven million unemployed workers in the fall of 2007 despite a fairly prosperous economy. There were millions of unemployed Americans even at the height of the 1990s boom, when the joke was that anyone who could pass the "mirror test"--that is, anyone whose breath would fog a mirror, indicating that they were actually alive--could find work.
In times of prosperity, however, unemployment is mostly a brief experience. In good times there is a rough match between the number of people seeking work and the number of job openings, and as a result most of the unemployed find work fairly quickly. Of those seven million unemployed Americans before the crisis, fewer than one in five had been out of work as much as six months, fewer than one in ten had been out of work for a year or more.
That situation has changed completely since the crisis. There are now four job seekers for every job opening, which means that workers who lose one job find it very hard to get another. Six million Americans, almost five times as many as in 2007, have been out of work for six months or more; four million have been out of work for more than a year, up from just 700,000 before the crisis.
This is something almost completely new in American experience--I say almost completely, because long-term unemployment was obviously rife during the Great Depression. But there's been nothing like this since. Not since the 1930s have so many Americans found themselves seemingly trapped in a permanent state of joblessness.
Long-term unemployment is deeply demoralizing for workers anywhere. In America, where the social safety net is weaker than in any other advanced country, it can easily become a nightmare. Losing your job often means losing your health insurance. Unemployment benefits, which typically make up only about a third of lost income anyway, run out--over the course of 2010-11 there was a slight fall in the official unemployment rate, but the number of Americans who were unemployed yet receiving no benefits doubled. And as unemployment drags on, household finances fall apart--family savings are depleted, bills can't be paid, homes are lost.
Nor is that all. The causes of long-term unemployment clearly lie with macroeconomic events and policy failures that are beyond any individual's control, yet that does not save the victims from bearing a stigma. Does being unemployed for a long time really erode work skills, and make you a poor hire? Does the fact that you were one of the long-term unemployed indicate that you were a loser in the first place? Maybe not, but many employers think it does, and for the worker that may be all that matters. Lose a job in this economy, and it's very hard to find another; stay unemployed long enough, and you will be considered unemployable.
To all this add the damage to Americans' inner lives. You know what I mean if you know anyone trapped in long-term unemployment; even if he or she isn't in financial distress, the blow to dignity and self-respect can be devastating. And matters are, of course, worse if there is financial distress too. When Ben Bernanke spoke about "happiness research," he emphasized the finding that happiness depends strongly on a sense of being in control of your own life. Think about what happens to that sense of being in control when you want to work, yet many months have gone by and you can't find a job, when the life you built is falling apart because funds are running out. It's no wonder that the evidence suggests that long-term unemployment breeds anxiety and psychological depression.
Meanwhile, there's the plight of those who don't have a job yet, because they're entering the working world for the first time. Truly, this is a terrible time to be young.
Unemployment among young workers, like unemployment for just about every demographic group, roughly doubled in the immediate aftermath of the crisis, then drifted down a bit. But because young workers have a much higher unemployment rate than their elders even in good times, this meant a much larger rise in unemployment relative to the workforce.
And the young workers one might have expected to be best placed to weather the crisis--recent college graduates, who presumably are much more likely than others to have the knowledge and skills a modern economy demands--were by no means insulated. Roughly one in four recent graduates is either unemployed or working only part-time. There has also been a notable drop in wages for those who do have full-time jobs, probably because many of them have had to take low-paying jobs that don't make use of their education.
One more thing: there has been a sharp increase in the number of Americans aged between twenty-four and thirty-four living with their parents. This doesn't represent a sudden rush of filial devotion; it represents a radical reduction in opportunities to leave the nest.
This situation is deeply frustrating for young people. They're supposed to be getting on with their lives, but instead they find themselves in a holding pattern. Many understandably worry about their future. How long a shadow will their current problems cast? When can they expect to fully recover from the bad luck of graduating into a deeply troubled economy?
Basically, never. Lisa Kahn, an economist at Yale's School of Management, has compared the careers of college graduates who received their degrees in years of high unemployment with those who graduated in boom times; the graduates with unlucky timing did significantly worse, not just in the few years after graduation but for their whole working lives. And those past eras of high unemployment were relatively short compared with what we're experiencing now, suggesting that the long-term damage to the lives of young Americans will be much greater this time around.
Dollars and Cents
Money? Did someone mention money? So far, I haven't, at least not directly. And that's deliberate. Although the disaster we're living through is in large part a story of markets and money, a tale of getting and spending gone wrong, what makes it a disaster is the human dimension, not the money lost.
That having been said, we're talking about a lot of money lost.
The measure most commonly used to track overall economic performance is real gross domestic product, or real GDP for short. It's the total value of goods and services produced in an economy, adjusted for inflation; roughly speaking, it's the amount of stuff (including services, of course) that the economy makes in a given period of time. Since income comes from selling stuff, it's also the total amount of income earned, determining the size of the pie that gets sliced between wages, profits, and taxes.
In an average year before the crisis, America's real GDP grew between 2 and 2.5 percent per year. That's because the economy's productive capacity was growing over time: each year there were more willing workers, more machines and structures for those workers to use, and more sophisticated technology to be employed. There were occasional setbacks--recessions--in which the economy briefly shrank instead of growing. I'll talk in the next chapter about why and how that can happen. But these setbacks were normally brief and small, and were followed by bursts of growth as the economy made up the lost ground.
Until the recent crisis, the worst setback experienced by the U.S. economy since the Great Depression was the "double dip" of 1979 to 1982--two recessions in close succession that are best viewed as basically a single slump with a stutter in the middle. At the bottom of that slump, in late 1982, real GDP was 2 percent below its previous peak. But the economy proceeded to bounce back strongly, growing at a 7 percent rate for the next two years--"morning in America"--and then returned to its normal growth track.
The Great Recession--the plunge between late 2007 and the middle of 2009, when the economy stabilized--was steeper and sharper, with real GDP falling 5 percent over the course of eighteen months. More important, however, there has been no strong bounce-back. Growth since the official end of the recession has actually been lower than normal. The result is an economy producing far less than it should.
The Congressional Budget Office (CBO) produces a widely used estimate of "potential" real GDP,
defined as a measure of "sustainable output, in which the intensity of resource use is neither adding to nor subtracting from inflationary pressure." Think of it as what would happen if the economic engine were firing on all cylinders but not overheating--an estimate of what we could and should be achieving. It's pretty close to what you get if you take where the U.S. economy was in 2007, and project what it would be producing now if growth had continued at its long-run average pace.
Some economists argue that estimates like this are misleading, that we've taken a major hit to our productive capacity; I'll explain in chapter 2 why I disagree. For now, however, let's take the CBO estimate at face value. What it says is that as I write these words the U.S. economy is operating about 7 percent below its potential. Or to put it a bit differently, we're currently producing around a trillion dollars less of value each year than we could and should be producing.
That's an amount per year. If you add up the lost value since the slump began, it comes to some $3 trillion. Given the economy's continuing weakness, that number is set to get a lot bigger. At this point we'll be very lucky if we get away with a cumulative output loss of "only" $5 trillion.
These aren't paper losses like the wealth lost when the dot-com or housing bubble collapsed, wealth that was never real in the first place. We're talking here about valuable products that could and should have been manufactured but weren't, wages and profits that could and should have been earned but never materialized. And that's $5 trillion, or $7 trillion, or maybe even more that we'll never get back. The economy will eventually recover, one hopes--but that will, at best, mean getting back to its old trend line, not making up for all the years it spent below that trend line.
I say "at best" advisedly, because there are good reasons to believe that the prolonged weakness of the economy will take a toll on its long-run potential.
Reprinted from End This Depression Now! by Paul Krugman. Copyright © 2012 by Paul Krugman. With the permission of the publisher, W.W. Norton & Company.
Losing the Future
Amid all the excuses you hear for not taking action to end this depression, one refrain is repeated constantly by apologists for inaction: we need, they say, to focus on the long run, not the short run.
This is wrong on multiple levels, as we'll see later in this book. Among other things, it involves an intellectual abdication, a refusal to accept responsibility for understanding the current depression; it's tempting and easy to wave all this unpleasantness away and talk airily about the long run, but that's taking the lazy, cowardly way out. John Maynard Keynes was making exactly this point when he wrote one of his most famous passages: "This long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the sea is flat again."
Focusing only on the long run means ignoring the vast suffering the current depression is inflicting, the lives it is ruining irreparably as you read this. But that's not all. Our short-run problems--if you can call a slump now in its fifth year "short-run"--are hurting our long-run prospects too, through multiple channels.
I've already mentioned a couple of those channels. One is the corrosive effect of long-term unemployment: if workers who have been jobless for extended periods come to be seen as unemployable, that's a long-term reduction in the economy's effective workforce, and hence in its productive capacity. The plight of college graduates forced to take jobs that don't use their skills is somewhat similar: as time goes by, they may find themselves demoted, at least in the eyes of potential employers, to the status of low-skilled workers, which will mean that their education goes to waste.
A second way in which the slump undermines our future is through low business investment. Businesses aren't spending much on expanding their capacity; in fact, manufacturing capacity has fallen about 5 percent since the start of the Great Recession, as companies have scrapped older capacity and not installed new capacity to replace it. A lot of mythology surrounds low business investment--It's uncertainty! It's fear of that socialist in the White House!--but there's no actual mystery: investment is low because businesses aren't selling enough to use the capacity they already have.
The problem is that if and when the economy finally does recover, it will bump up against capacity limits and production bottlenecks much sooner than it would have if the persistent slump hadn't given businesses every reason to stop investing in the future.
Last but not least, the way the economic crisis has been (mis)handled means that public programs that serve the future are being savaged.
Educating the young is crucial for the twenty-first century--so say all the politicians and pundits. Yet the ongoing slump, by creating a fiscal crisis for state and local governments, has led to the laying off of some 300,000 schoolteachers. The same fiscal crisis has led state and local governments to postpone or cancel investments in transportation and water infrastructure, like the desperately needed second rail tunnel under the Hudson River, the high-speed rail projects canceled in Wisconsin, Ohio, and Florida, the light-rail projects canceled in a number of cities, and so on. Adjusted for inflation, public investment has fallen sharply since the slump began. Again, this means that if and when the economy finally does recover, we'll run into bottlenecks and shortages far too soon.
How much should these sacrifices of the future worry us? The International Monetary Fund has studied the aftermath of past financial crises in a number of countries, and its findings are deeply disturbing: not only do such crises inflict severe short-run damage; they seem to take a huge long-term toll as well, with growth and employment shifted more or less permanently onto a lower track. And here's the thing: the evidence suggests that effective action to limit the depth and duration of the slump after a financial crisis reduces this long-run damage too--which means, conversely, that failing to take such action, which is what we're doing now, also means accepting a diminished, embittered future.
Up to this point I've been talking about America, for two obvious reasons: it's my country, so its pain hurts me most, and it's also the country I know best. But America's pain is by no means unique.
Europe, in particular, presents an equally dismaying picture. In aggregate, Europe has suffered an employment slump that's not quite as bad as America's, but terrible all the same; in terms of gross domestic product, Europe has actually done worse. Moreover, the European experience is highly uneven across nations. Although Germany is relatively unscathed (so far--but watch what happens next), the European periphery is facing utter disaster. In particular, if this is a terrible time to be young in America, with its 17 percent unemployment rate among those under twenty-five, it's a nightmare in Italy, where the youth unemployment rate is 28 percent, in Ireland, where it's 30 percent, and in Spain, where it's 43 percent.
The good news about Europe, such as it is, is that because European nations have much stronger social safety nets than the United States, the immediate consequences of unemployment are much less severe. Universal health care means that losing your job in Europe doesn't mean losing health insurance too; relatively generous unemployment benefits mean that hunger and homelessness are not as prevalent.
But Europe's awkward combination of unity and disunity--the adoption by most nations of a common currency without having created the kind of political and economic union that such a common currency demands--has become a gigantic source of weakness and renewed crisis.
In Europe, as in America, the slump has hit regions unevenly; the places that had the biggest bubbles before the crisis are having the biggest slumps now--think of Spain as being Europe's Florida, Ireland as being Europe's Nevada. But the Florida legislature doesn't have to worry about coming up with the funds to pay for Medicare and Social Security, which are paid for by the federal government; Spain is on its own, as are Greece, Portugal, and Ireland. So in Europe the depressed economy has caused fiscal crises, in which private investors are no longer willing to lend to a number of countries. And the response to these fiscal crises--frantic, savage attempts to slash spending--has pushed unemployment all around Europe's periphery to Great Depression levels, and seems at the time of writing to be pushing Europe back into outright recession.
The Politics of Despair
The ultimate costs of the Great Depression went far beyond economic losses, or even the suffering associated with mass unemployment. The Depression had catastrophic political effects as well. In particular, while modern conventional wisdom links the rise of Hitler to the German hyperinflation of 1923, what actually brought him to power was the German depression of the early 1930s, a depression that was even more severe than that in the rest of Europe, thanks to the deflationary policies of Chancellor Heinrich Brüning.
Can anything like that happen today? There's a well-established and justified stigma attached to invoking Nazi parallels (look up "Godwin's law"), and it's hard to see anything quite that bad happening in the twenty-first century. Yet it would be foolish to minimize the dangers a prolonged slump poses to democratic values and institutions. There has in fact been a clear rise in extremist politics across the Western world: radical anti-immigrant movements, radical nationalist movements, and, yes, authoritarian sentiments are all on the march. Indeed, one Western nation, Hungary, already seems well on its way toward reverting to an authoritarian regime reminiscent of those that spread across much of Europe in the 1930s.
Nor is America immune. Can anyone deny that the Republican Party has become far more extreme over the past few years? And it has a reasonable chance of taking both Congress and the White House later this year, despite its radicalism, because extremism flourishes in an environment in which respectable voices offer no solutions as the population suffers.
Don't Give Up
I've just painted a portrait of immense human disaster. But disasters do happen; history is replete with floods and famines, earthquakes and tsunamis. What makes this disaster so terrible--what should make you angry--is that none of this need be happening. There has been no plague of locusts; we have not lost our technological know-how; America and Europe should be richer, not poorer, than they were five years ago.
Nor is the nature of the disaster mysterious. In the Great Depression leaders had an excuse: nobody really understood what was happening or how to fix it. Today's leaders don't have that excuse. We have both the knowledge and the tools to end this suffering.
Yet we aren't doing it. In the chapters that follow I'll try to explain why--how a combination of self-interest and distorted ideology has prevented us from solving a solvable problem. And I have to admit that watching us fail so completely to do what should be done occasionally gives me a sense of despair.
But that's the wrong reaction.
As the slump has gone on and on, I have found myself listening often to a beautiful song
originally performed in the 1980s by Peter Gabriel and Kate Bush. The song is set in an unidentified time and place of mass unemployment; the despairing male voice sings of his hopelessness: "For every job, so many men." But the female voice encourages him: "Don't give up."
These are terrible times, and all the more terrible because it's all so unnecessary. But don't give up: we can end this depression, if we can only find the clarity and the will.
Reprinted from End This Depression Now! by Paul Krugman. Copyright © 2012 by Paul Krugman. With the permission of the publisher, W.W. Norton & Company.