Editor's note: Interviewed here, John Case is a frequent contributor to PoliticalAffairs.net.
PA: In your recent article, 'Paul Krugman's Ideological Campaign for the Return of 'Depression Economics,'' you discuss his book The Return of Depression Economics, which was first published in 1999 and has recently been reissued. What is meant by depression economics?
JOHN CASE: “Depression economics” is a term that Krugman came up with over a decade ago. His main point is that monetary policy, once you get into a depression, becomes ineffective, and the only possible way to manage the economy or influence its direction once interest rates have reached zero – which, coincidentally, they are pretty close to right now – is by means of very aggressive financial intervention by the federal government, not just in terms of liquidity, but by employing people directly or indirectly so they have the power to purchase things. This is the only way, according to depression economics, that you can effect a recovery in the economy.
Depression economics overthrows the reigning ideology, which, under the influence primarily of Milton Friedman, has long asserted that it was the failure of an injection of sufficient liquidity by the Fed that caused the Great Depression. Friedmanism maintains that by simply manipulating interest rates you can adequately influence the expansion or contraction of the economy, so that you do not need to think about any federal programs or entitlements, or anything else. This is a conservative view that fits in very nicely with the interests of people who wanted no government. For many years it has been the dominant philosophy, because for years a combination of reasonably steady growth and moderate inflation has allowed interest rates to have enough flexibility. That is, they remained high enough so that if you needed to bring them down a bit you could have an effect. This situation led a wide range of people, from the center to the extreme right wing, to transform Friedmanism into a kind of free market fundamentalism, which probably even Friedman never would have completely endorsed.
However, beginning with the Asian crisis in 1998, which did not respond to the usual International Monetary Fund (heavily influenced by US banks) policy of how to stimulate an economy. Free market fundamentalism certainly didn’t work very well then. And now we have this huge economic crisis, so Krugman is back with a pretty powerful argument, and he is winning quite a bit of support for it, that this is for the return of the economics of John Maynard Keynes.
Keynes, of course, became very influential in government economic and banking policy in the attempt to recover from the Great Depression. Today it turns out that monetarism did not put an end to Mr. Keynes at all, because Krugman and others – and it’s a pretty large collection of others, among them economists like Joseph Stiglitz (like Krugman a Nobel Prize winner), who are taking a very strong and progressive stand that is not just Keynesian, but even goes beyond what Keynesianism or even the New Deal had in mind. This school foresees much greater intervention in the economy in the form of public direction and control – and in many cases outright ownership of distressed assets that are too big to fail. It aims to reorganize the country’s industrial and economic resources in order to provide the stimulus and renew the infrastructure in the manufacturing sector of the economy, as well as in education and health care.
This could lay the groundwork for a new type of economy and a new society. It will create a whole new set of publicly managed institutions – many of which will be totally new. For instance, what kind of publicly-accountable institution will be entrusted with the oversight needed to manage just the bailout of the auto industry? There is a provision in the bailout for an extremely powerful government automobile industry “czar” to oversee the bailout, who will be appointed by the President and will have extraordinary powers. What is that individual going to do with that power? No one has quite figured that out yet.
On a macroeconomic level, Krugman and allies are seizing the commanding heights of the economic profession. They are also attempting to persuade the network of economic advisors and professionals that surround Obama, many of whom are influenced by them, to see things their way – and it is pretty clear that the Obama team in general does agree with them.
The difficulty comes when you get out of the realm of theory and into the world of politics. Now you have to put together political majorities. It is a huge challenge for the Obama administration to take on something of this size and magnitude, with so many risks involved, and with so much experimentation and power to experiment involved. There are political obstacles out there, but I think the ideological struggle between depression economics, as reflected in Krugman’s book, and the vestiges of free-market fundamentalism is an important one. On both a theoretical and policy level, Krugman has launched a very interesting ideological campaign.
PA: You mention the history of some of these ideas, going back to Keynes and Friedman, etc. The way you describe it, the pendulum is now swinging back towards the concept of depression economics. Is depression economics only for depressions, or is the federal intervention that you mention as part of this project a more permanent feature?
CASE: Some things are certainly more permanent. For instance, many of the institutions that came in with the New Deal like Social Security, bank regulation, and the Federal Deposit Insurance Corporation (FDIC) became permanent institutions. And in European countries, of course, a national healthcare system came in around the same time as well. Over here, of course, healthcare remained the domain of private, employer-directed insurance programs, and that didn’t really begin change until the 1960s with Medicare. Nonetheless, there has been a steady advance in what we used to refer to on the Left as social-democratic protections. The public sector has incrementally invaded ever greater segments of society. These are the sectors that provide for the common good and which need to be socialized in order for society not to collapse.
So now we are faced with a whole new set of challenges, which Krugman’s Depression Economics puts into sharp focus, because we have to make some real decisions. We now have an extremely huge stimulus package. Well, what should the government spend that money on? Also, when you attempt to make fundamental changes in the economy or in regulatory institutions, they don’t change easily. They are changing now because the old ways of doing things have collapsed and, in the absence of the ones we need, it has led to a catastrophe.
Nonetheless, there have to be new institutions created, and they are going to have much greater powers obviously than the ones that went before. So it is not clear that we are necessarily going to head right back into monetarism the minute this much-expanded role of government direction, intervention and management in the overall economy is put in place and advances.
I think we should be careful not to presume what the end-point, or even what the next phase will be. It is even possible, in my view, that if we had national healthcare and a secure retirement system, along with a fairer and more equitable educational system (that is, a more broadly funded one) – that if all these things were firmly in place, then it could potentially create a safer domain for private enterprise and finance to operate in, in markets that don’t endanger the fundamentals of society, health, retirement, education, etc. Such markets might even become a bit less regulated than they are now. That is, if you had federally-funded health and retirement protection, so many things that are now just a tax expense to businesses, would no longer be such a huge cost to them, so they could compete on the basis of other economic values. If you could achieve economic stability based on the greater good of society (socialization, if I can use that word), then I think there is a real opportunity here, and that just like you did in the 50s and 60s, with the invention of the Internet and the whole modern electronic period, you will see the same kind of market freedom – the things that markets do well, but without the danger of bringing down the financial system next time or wiping out manufacturing. These are all fascinating topics to think about that have just been opened up. I wouldn’t say that the Krugman group and depression economics are seeking to answer all these things, but these are all questions that are on the table right now. The question is what do you spend the money on?
PA: Are there limits to what depression economics can do in terms of the liberation and empowerment of the working class?
CASE: I think the limitation is that, from a socialist perspective, depression economics maybe gets us out of the depression, but it doesn’t tell you where you are going from there. When societies have a shared sense of purpose, a direction in which they want things to go (such as the communist ideal and the principles of socialism), then the most important thing, in order to move society forward, is for the income of workers to increase relative to their share of the national wealth and in proportion to worker productivity. In the US, however, the income of working people has been flat or falling for the past 30 years. In this new period, what are the guarantees that this gets corrected? It is not something that is necessarily guaranteed by a stimulus package. You hope you are going to influence employment, but until and unless that is corrected, then you are not going to have a true recovery. I think that the traditional Keynesian approach tends to skirt that issue a little.
There is a strong group of economists, that focuses on employment. They are called the post-Keynesians. Hyman Minsky is one, and he has a strong argument that full employment, using the government as a last-resort employer, is a non-inflationary and stabilizing policy that should be adopted in place of the ones that we currently have, which is basically involves transfer payments, unemployment benefits, etc. Transfer payments are only for folks who are not actually working, but the national service program proposed by Obama, however, of which a huge expansion is being planned, could provide a path to implementing a full-employment program.
This is an important direction to move in, and it may even be one that is absolutely necessary to get us out of the recession/depression we are in. Nobody knows how big unemployment is going get. The people doing the forecasting are now generally predicting a 10, 11 or 12 percent official unemployment rate, which really means in the 20+ range, because the official figures don’t count discouraged workers and people only working part-time, etc. So we need a serious full-employment program. Krugman’s depression economics doesn’t quite address that. It also doesn’t go into exactly how the automobile industry is going to be restructured. Yes, we are going to fund it – it has to be done – but how precisely are we going to do it? And the bailout of the financial industry? What are we talking about here really? You hear a lot of money being talked about, but where are all those billions going to go. Right now, the executive authority is basically totally in the hands of the Treasury Secretary Henry Paulson, formerly of Goldman Sachs. so both with the automobile and financial bailouts there are a lot of how-tos and where-tos involved.
In addition to these questions, another important point to remember is that no single nation can solve this crisis on its own. There is a real chance, even if you put forward a gigantic stimulus program, that the imbalances in world current accounts (who is in debt and who is holding the notes and the reserves) will grow even worse. In this case it is the emerging countries that are mostly holding the reserves, and actually the US, the UK and EU are holding most of the debt. And if you pile on tons and tons more debt in stimulus efforts trying to revive the US economy, that just increases the imbalances. Maybe it does return some growth, but it doesn’t do anything about the imbalances – it makes them worse, so there is the potential that things could crash again without a coordinated effort.
There is a lot more to it, I think, than just depression economics, but as a way of pointing out some constructive alternatives to current neoliberal fundamentalist free-market thinking about both theoretical and practical economic policy, I think depression economics is an excellent contribution to the current debate, and it also raises important questions for social-democrats, socialists and communists.
PA: On the issue of the political power of the working class and increasing the influence of organized labor, how do the economists who advocate depression economics stand on things like the Employee Free Choice Act or equal pay for equal work?
CASE: Krugman favors the Employee Free Choice Act, but he is a little tricky on the subject of unions generally. There was time in the 1970s when he criticized the auto workers union, and in the past he has been on both sides, positive and negative towards unions. But currently he is a supporter of the Employee Free Choice Act. I don’t think he is on record with some of the other post-Keynesian faction about supporting full employment. If he is I haven’t read about it.
In general you will see the left wing of the 'depression economics' group increasing in influence, organizations such as the Economic Policy Institute, a think tank with a strong relationship with the labor movement co-directed by Dean Baker. They go further than the Krugman position in terms of prioritizing and directly advocating for issues related to raising workers’ incomes, for example, and not allowing national health care or the Employee Free Choice Act to be put off the agenda, the things that are directly related to labor organizations and working class communities. But I think they are mostly all part of an active coalition here.
But it’s interesting – even Bush’s economic advisors and people like that in the profession are now paying attention to depression economics. They have sort of conceded the fact that “we are all Keynesians now.” But there are a lot of different sides to Keynes, and some that are very unaddressed, and the question of what actually constitutes the reforms required, he puts front and center. And I think that is where the debate is going to be going forward.
PA: In your article you talk about how you don’t see what you call a Wall of Jericho between the depression economics of people like Krugman and a more fundamental reorganizing of society.
CASE: That is true.
PA: How do we make that transition then?
CASE: Take, for example, all the organizational restructuring in terms of the regulation of finance, the regulation of manufacturing, national service programs, and huge infrastructure investments. All of this means a huge restructuring of the economy, and in restructurings people have to change their jobs, the ways they work, and their way of life. Whole parts of the economy may die out, and new ones will have to be created. We are also talking about a process to which many public institutions and public policies are tied, and these too will have to change. So you are talking about a period of instability just in order to accomplish the restructuring that is currently being proposed – never mind the additional restructuring that it is likely to be entailed further down the road.
Right now the question is whether the democratic institutions of the United States – especially given the new political coalition that has won the presidency – can accommodate and manage this change peacefully and effectively. I think the answer we have to give to that is Yes, that it is possible. But at any point in this process, we could be tempted by the severity of the crisis and by the intensity of a lot of people’s reactions to it to lose confidence in that process. There will be many challenges in all this. We are going to spend all this money – there is obviously going to be a bunch of it – and some of it is going to be ripped off by some of the same people that perpetrated the crisis. Some of that is going to happen.
The question is not is it or isn’t it going to happen, but how much of it is going to happen, and how much influence the people can have through their own struggle and their impact on Congress, etc., to insure that the benefits of the stimulus and stabilization start flowing back into areas of the economy where it is putting people back to work and raising incomes again. If we are able to make this turn and accomplish this huge reform without civil war or lawless patches (I consider, for example, the Bush administration a kind of lawless patch), then I think we need to begin to think about the socializing tendencies of society and the ideas of socialism: “From each according to their ability, to each according to their work,” and a wide range of other socialist values that are actually shared by most of the American people.
We will also have the chance to make the achievement of those ideals – the ultimate objectives of the socialization process – more democratic and more working-class in orientation, and to do all this in an incremental and peaceful fashion. That is the way things need to go. We need to understand those points in policy-making where a more socialist perspective contends with a “free market” one. The test must be what is best for society as a whole. We now have the ability to test these concepts concretely, to see how they work, and how to democratize the process.
This is a more realistic way to transform society than to say, “Well, I’m frustrated because of all the difficulties, so there’s no point in even getting into all that, until there is a revolutionary transformation, because until real socialism it’s not going to happen.” I think that attitude leads you to a place where you don’t have much of practical value to propose in the immediate situation. I also think that that kind of argument is more concerned with doctrine than with facts. I really think that we need to be focused on gathering and analyzing facts to support our interpretations, so that the conclusions we reach are sustained by facts and by things that we can see in front of us. I don’t mind doctrinal discussions, I kind of enjoy them, but I don’t think they are a reliable guide on how to go forward from here.
