At a time of slow growth and high unemployment, cutting spending is the last thing the U.S. government should be doing, despite its trillions of dollars of debt, according to Nobel Prize-winning economist Paul Krugman. In End This Depression Now! the Princeton professor and New York Times columnist diagnoses the disease that ails the economy and offers his treatment for reviving it. Krugman spoke with U.S. News about what America can learn from the euro crisis and why banks need more regulation. Excerpts:
Why should the U.S. government be spending, not cutting back, considering the national debt?
Think about what happens if a lot of people have gotten into debt, which is what has happened to the U.S. economy. It's the private sector, it's households, that are in big debt trouble, not the government. If you are an individual, your response is, "Well, I will slash my spending, and I will cut way back, and that way I can work off my debt." But if everyone tries to do that at the same time, it fails, it's counterproductive, because we're an economy. People are going to do what's in their own interest, but we have this thing called the government, which is in a position to not be a part of this general scramble to pay down debt. The government can instead spend more, it can support jobs, it can support employment, as long as it's able to borrow, and it is able to borrow.
What are some of the lessons we can learn from the situation in Europe?
Spending cuts do make the situation worse. If you don't have to do it while you are in a depression, don't do it. And we don't. The Greeks and the Irish and the Spaniards do, but we aren't in their position, so let's not suffer that pain when we don't have to. What's happened to a large extent is people have looked at the European [situation] and they have drawn the wrong lesson. They've looked at Greece and said, running big deficits can get you into trouble, which is true. But Greece is not America. First of all, it doesn't have its own currency. It's very different.
Is the big loss at J.P. Morgan proof that we need tougher bank regulations?
It is proof, because, yes, this loss is not going to sink J.P. Morgan, but what we've just seen is a demonstration that J.P. Morgan was in fact gambling with what amounts to other people's money. That is, J.P. Morgan is a bank whose deposits are guaranteed by the taxpayers. If they have a big enough loss, it's our loss, not just the stockholders'. They're also strategically important. They're a critical financial institution, which means that we know if they should get into deep trouble they will be bailed out. They have a public responsibility not to take excessive risks. And yet there they were, doing stuff that was, clearly, highly risky.
What role do economists in the academic sphere play in shaping economic policy?
It makes a huge difference, particularly in a time like this, whether, for the most part, the economics profession speaks with one voice. As opposed to economists basically offering a huge variety of opinions, with half of the people saying, do nothing, government is bad. Basically, we've had some very bad instincts on the part of our politicians. And unfortunately, we have had a large number of economists with sterling credentials who have been providing intellectual cover for those prejudices. That's been a real source of trouble.
What can President Obama do before the election?
There's not that much he can do to affect the economy's trajectory. But he can make the case. And he can point to what's happening. We've actually seen what happens if you slash government spending precipitously in the face of a depressed economy. We can look over there [Europe]. For a while there, the right was trying to make the story of Greece as an argument for their point of view. The right tried and, I'm afraid, sort of succeeded in making stimulus a dirty word. But right now I think everybody is seeing what austerity does.
What happens if Mitt Romney wins?
First of all, the question is: What does Romney actually believe? I actually say in the book he's not a stupid man. But given some of the things he's said lately, I've started to reconsider that. Arguably, Romney, in his inner beliefs, if he has any inner beliefs, is actually more of a Keynesian than he would ever let on. In a way, the Romney election slogan should be: Vote for Romney, he doesn't mean anything he is saying. But I am not sure that he would actually have the ability to do it, even if he believes that this Republican approach to macroeconomics is all wrong. He's going to have the problem that he has a rabid congressional party. I think that your best bet, if Romney is in fact elected, is that he, either out of personal conviction or out of sheer inability and unwillingness to stand up to the crazies, will send us down the road to a European-type slump.
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