Ways out of economic depression


End This Depression Now! by Paul Klugman (book cover)Australia has so far escaped much of the havoc caused by the global financial crisis, but it is not immune from the effects of economic ideology, particularly free-market neoliberalism, which typically calls for reduced public spending, balanced budgets, wage and tax cuts, and a smaller role for governments.

We can see the effects of these views, with the Victorian government recently announcing cuts of 4200 public service jobs, and sharply reduced spending on TAFEs. The Queensland government is abolishing 14,000 public service jobs, many in health services, and reducing spending on social services and housing. Even the Commonwealth government is not immune from pressure, as it struggles to produce a surplus budget.

Political hype about balancing budgets can go to absurd extremes. Tony Abbott warned that Australia could go the way of Greece with excessive debt. Such claims reflect a climate of exaggerated concern about debt. Instead Australia could be taking advantage of historically low interest rates and embark on major infrastructure projects, increasing employment and laying the basis for sustained growth in productivity.

Today's economic debates are similar to those of the 1930s, when people thought of a national economy like that of a household. If you fell into debt, you had to trim back spending. During the Great Depression, governments cut spending as markets collapsed, and sent their economies into a downward spiral only arrested by world war.

Today we face a not dissimilar political climate, with obsessive demands that governments balance budgets by reducing public spending. But cutting budgets will not revive economies.

In the early half of the 20th century, British economist John Maynard Keynes argued that governments could stimulate growth and employment, putting economies back on a growth path. Today one of the clearest voices calling for a return to Keynesian economic policies is Paul Krugman, professor of economics at Princeton University, who won the Nobel Prize in economics in 2008.

In his recent book End this Depression Now! Krugman argues that austerity will only impose more pain, entrenching unemployment.

He argues that the US must vigorously revive its economy, and that warnings about a debt crisis are greatly overstated. US borrowing costs are very low, and have in fact been negative. The US had borrowed $5 trillion in additional debt by early 2012, which meant an interest burden of $125 billion a year. In an economy of $15 trillion a year, this is easily manageable.

Likewise, the European drive to greater austerity is 'deeply destructive'. Krugman says fears of inflation are deluded in such a deep depression, and he suspects that fear is simply a disguise for creditors to insist that governments fully honour debts, and not allow inflation to erode the value of those debts.

Greece aside, the problems of Southern Europe largely stemmed from German capital flooding into Spain and Italy, causing a huge housing bubble, and inflating wages and prices, leaving their industries uncompetitive. Ireland, Spain and Italy had not been profligate, and before the crisis were running budget surpluses, Ireland and Spain with low debt and Italy reducing its debt.

Krugman argues that the way out of the crisis is to allow 'moderate but significant' inflation in surplus countries, and to increase inflation to 3–4 per cent for the Euro zone as a whole, which would gradually erode the pubic debt. This was how the United States managed its debt after the Second World War. Germany and some smaller countries today need to provide fiscal stimulus, not prolonged austerity.

Other economists support stimulus policies. In early October, the chief economist of the International Monetary Fund, Olivier Blanchard, said it was necessary for Germany to allow higher inflation for relative prices to adjust among struggling Euro countries, lest the crisis continue to drag on for years.

Writing in the Australian Financial Review, the economic and political commentator Max Walsh quoted the former chief economist of the IMF, Kenneth Rogoff, that 'a sudden burst of moderate inflation would be extremely helpful in unwinding today's epic debate morass'.

Krugman considers the depression is 'essentially gratuitous: we don't need to be suffering so much pain and destroying so many lives'. He thinks we could end the distress and return to full employment 'very fast, probably in less than two years'.

Bruce Duncan headshotBruce Duncan is a Redemptorist priest lecturing at Yarra Theological Union. He is director of the Yarra Institute for Religion and Social Policy and a founder of Social Policy Connections. 

Topic tags: Bruce Duncan, GFC


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Existing comments

The original 'Official Platform of the Liberal Party of Australia' included the words: "The preparation of a programme of public works, carefully planned, and available to be put into operation at the first sign of any recession in general business conditions". It is sad that this common sense attitude, once shared by both sides of politics in Australia, has been forgotten or ignored by by conservative politicians in so many countries - to the misery of millions of families. In his excellent contribution, Bruce Duncan refers to a number of important economists with commonsense views. I would add another: Joan Robinson, who wrote several books on the subject including a marvellous, simply-worded one entitled 'Economic Philosophy'. , -for anone interest the
Bob Corcoran | 18 October 2012

According to Michael Hudson (World Economic Review) some 80% of bank loans in the English speaking world are real estate morgages. Here in Australia we see this as the Reserve Bank is trying to keep a lid on booming property prices without causing a real shake up. All this manipulation while Australian families struggle against the odds to pay morgages oe high rents. The property market does its best to have us believe that high property prices are good for everyone. In the present market an infrastructure drive would merely lead to further boom in a destructive property boom. What is needed is investment in real infrastructure and not real estate. The tax system must make it economical to invest in infrastructure and less incentive to invest in land. This is the real problem. In addressing this issue the Henry Tax Review recommended a flat rate land tax to stimulate the economy. This of course would work in Greece. Land tax stimulates the economy. It is the way of the future.
Anne Schmid | 18 October 2012

What you say is quite correct. We are being very badly led, with Swan talking non-sense and being at least partly taunted into it by Abbott and co being highly irresponsible. It also has to be noted, that a major part of our problem is the almost complete lack of foresight by the Howard/Costello regime in giving away the last boom in populist tax cuts rather than storing the surpluses up to pay for new infrastructure when the economy next got into trouble...which was of course always inevitable given our cyclical economic world. Why no biblical wisdom? Why are we blighted by such poor political governance? That`s a fundamental question that this otherwise very lucky country needs to ask itself.
Eugene | 18 October 2012

Families understand the assets-liabilities relationship - paying off the mortgage on the house. If they obtained a suitable loan and bought a suitable house (and didn't suffer a family calamity). their equity (or net asset situation) would improve. They didn't get paranoid about debt. Governments should study their balance sheets and invest. Governments' investments include health facilities, education facilities, transport facilities … ((Costello should not have sold Telstra - The NBN would have been a simpler exercise)) but also the health services, the education services, … which all lead to a stronger and more civilised community and enriched citizens.
Geoff Baker | 18 October 2012

The Conservative Parties have been in office longer than the Labor Party since Federation. In office Conservative Parties have introduced, Abolition of white Australia policy, Voting rights extended to all indigenous Australians, Extended economic prosperity, Referendum on inclusion of indigenous Australians, Opened Australia to multiethnic immigration, Decimalisation, Increased welfare for pensioners, Free Health Care for the poor, Gun control, Mission to East Timor, 1999 Republic Referendum,and many other reforms.It is strange that some bloggers expressing their opinions, seems to be very left-wing, rubishing John Howard and Tony Abbott and ignoring the great contributions that Conservatives have done to Australia.
Ron Cini | 18 October 2012

Ron, you forgot that Howard led us to invade Iraq, as a result thousands of Iraqis were killed. Oh, don't forget the withdrawal of a number of social services during the global financial prosperity. By the way, I thought Labor introduced universal health system, Medicare, compulsory super, initiated the long overdue apology to the nation's original inhabitants, puts climate change on the country's agenda and making our presence felt in the world's forum (security council). In other words, placing us front and centre in the 21st century and beyond, instead of wallowing in the halcyon days of yesteryears: Menzies, Santamaria et al.
Alex Njoo | 19 October 2012

Krugman! Please. Did this neo-Keynesian forecast the GFC? No. But Peter Schiff and other anti-Keynesian Austrian/free market economists did. (I assume you've all enjoyed the amusing but at the same time tragic youtube of Schiff and Arthur Laffer.) Just as other free market economists and Austrian-aligned companies like Credit-Lyonnais did re. the crash in the late '80s.

Just how, with the unprecedented credit creations via QE 1, 2, .... of the U.S., and the dead cat bounce they evinced, can a neo-Keynesian hold his/her head high? But they purport to! It's one of the wonders of the modern world.

I must add that as a Catholic, Fr Duncan is entitled to his particular economic views as I, another Catholic, am to mine.

Neither of us is more Catholic than the other for the economic opinions we espouse. But you won't glean that from Fr Duncan's corpus.
HH | 19 October 2012

H. H fulminates: "Krugman! Please. Did this neo-Keynesian forecast the GFC?" Did the Chicago school of economics, Milton Friedman (just before he died in 2006), Rothbard supporters, all advocates of the Austrian school of economics, George Bush, the banks, Wall street, Peter Costello, Goldman and Sachs, George Gilder, Alan Greenspan and the Cato Institute? (Actually, P. Krugman did foresee the global financial collapse, as it was for this reason he was one of the few who was voted to win the Revere economics award by economists who subscribe to the real-world economics review). The fact that one or even two defenders of the Austrian school of economics-like Peter Schriff-did is not evidence that their particular economic theories are therefore right, as Stieglitz also foresaw the crash and he argues for social Democracy. Following your logic we should therefore be following him.
D. Papanicolaou | 30 October 2012