Allan Powell: Nobel Prize winning economist defends crisis views

June 29, 2012|By ALLAN POWELL

For some time, I have been an admirer of Paul Krugman. Reading his latest book, “End This Depression Now!” was a real joy because he writes as though he is talking directly to each reader. His command of his subject is masterful and if one wants to understand the place of John M. Keynes in depression economics, this is the book that you want to read. Time permits only a bare bones sketch of the causes and cure for our present ailments.

Much of our present economic woes originated in 1999 when the Gramm-Leach-Bliley Act was passed. It, in effect, repealed the Glass-Steagall Act. This very clever political maneuver brought to an end the law that separated savings banks from investment banking. Sen. Phil Gramm engineered the law that bears his name to legalize the merger of an investment bank with a savings bank and retroactively create Citigroup by the merger of Citicorp and Travelers Group. Thus began the new era of risky investment banking: Deregulation was the wind that reaped a whirlwind.

This event also illustrates one of the sleazy practices in our political system known as the “revolving door” routine. While in the Senate, Gramm received a large portion of his campaign funds from financial sources. When he retired, he began serving on the board of directors of UBS — an established giant in finance. This symbiotic friendship smells of conflict of interest. It is futile to debate if Gramm was “bought and paid for.” No one involved in the “revolving door” practice admits to a conflict of interest. As novelist Upton Sinclair observed, “It is difficult to get a man to understand something when his salary depends on his not understanding it.”

When it comes to the attempts to cure the effects of such a huge malfunction of our financial system, we face the issue of how much stimulus is enough. Krugman makes it quite clear that, from his perspective, the stimulus package of $787 billion was far short of the mark. Two bits of evidence will support his argument. First, that $787 billion is no threat to our debt because our economy generates $15 trillion annually — making the stimulus fund only 2 percent of our spending. In addition, this inadequate stimulus is only enough to raise unemployment by about 2 percent.

There is yet another complaint make by Krugman with respect to the target of the stimulus funds. While he approves of funds directed to states, counties and cities to aid in employment, he is not pleased with the amount spent on infrastructure such as roads, bridges and public projects. Those of us who lived through the Great Depression remember what a beehive of activity was created in this region by projects under the “alphabet agencies” such as the WPA, PWA, CWA, NYA and CCC. While there was hunger and suffering, there was also hope. 

This deficiency was critical because it fails to employ the most powerful aspect of Keynesian economics — the power of money to multiply and trickle up through the economy and revitalize purchasing power. In his view, it was an absolute necessity that workers can buy the products they helped create. This means that employment must be regular and dependable. If the system collapses because capitalists will no longer hire to keep the system in play, it is the proper role of government to step in and provide the stimulus. This is the substance of Keynesian thought. While we hear much about “trickle down” theory, Keynes makes a plea for the proper place for “trickle up” thinking.

It is hard to predict what the future status of Keynes’ ideas will be. There is much resistance in mainline university economic departments to Keynesian theory. They seem to prefer the “trickle down” thought of earlier and conservative economists that object to any involvement of the government in the workings of the economy (except, of course, when a bailout is needed).

Republican politicians are ever ready to repeat the old song, “Government is not the solution to the problem; it is the problem.” However, we have learned that “Republicans are people that declare that government does not work. They then get elected to a government job and prove it.” They might belittle the brilliance of John M. Keynes, but every time there is a depression, they turn to him for a solution.

Allan Powell is a professor emeritus of philosophy at Hagerstown Community College.

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