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Does Keynes have the answer?


The U.S. economy has been growing at a pace slower than was expected. Treasury note yields sank to a 66-year low. The number of folks seeking unemployment benefits is up. And all that bad news is causing stocks to fall.

Things are looking pretty gloomy. So what do we do about it?

Nobel prize-winning economist Paul Krugman says there is an easy solution, which he makes a passionate case for in his book "End This Depression Now!".


Here is how Julian Brookes sums it up in an interview with Krugman in Rolling Stone magazine:

The basic issue, says Krugman, is a lack of demand. American consumers and businesses, aren't spending enough, and efforts to get them to open their wallets have gone nowhere. Krugman's solution: The federal government needs to step in and spend. A lot. On debt relief for struggling homeowners; on infrastructure projects; on aid to states and localities; on safety-net programs. Call it "stimulus" if you like. Call it Keynesian economics, after the great economic thinker (and Krugman idol) John Maynard Keynes, who first championed the idea that government has an essential role in saving the free market from its own excesses. Whatever you call it, it worked in the late nineteen-thirties and forties, when the U.S. government started shelling out on the military in the build-up to World War II, bringing an abrupt end to years of economic misery and laying the foundation for decades of prosperity.

It's a solution so simple that it has been proposed many times before since the Great Recession began. But there are plenty of people who believe the approach won't work, and who disagree that similar programs are what pulled this country out of the Great Depression.

Two economists at UCLA are among folks who say Keynesian policies prolonged the Great Depression by seven years:


Specifically Harold L. Cole and Lee E. Ohanian blame President Roosevelt's anti-competition and pro-labor measures:

"President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services," said Cole, also a UCLA professor of economics. "So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies," they write in their report.
But Krugman's idea is that not all stimulus programs are created equally and that modified versions could work very well today.

 Henry Blodget on the Daily Ticker writes:

But what about those who say that we can't afford additional stimulus--that we're already so overloaded with debt that if we don't immediately start cutting the deficit, interest rates will soar and the currency will collapse.

Just look at the reality, Krugman says. People have been predicting hyperinflation and runaway interest rates for years, and they're just not happening. The best way to fix our problem, Krugman adds, is to grow our way out of the problem and to generate modest inflation to gradually reduce the real (inflation-adjusted) burden of debt. But instead of focusing on these two goals, Krugman observes, our government keeps cutting spending and obsessing about 2% inflation.

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