Keynes Was Right

December 29, 2011

By PAUL KRUGMAN

“The boom, not the slump, is the right time for austerity at the Treasury.” So declared John Maynard Keynes in 1937, even as F.D.R. was about to prove him right by trying to balance the budget too soon, sending the United States economy — which had been steadily recovering up to that point — into a severe recession. Slashing government spending in a depressed economy depresses the economy further; austerity should wait until a strong recovery is well under way.

Unfortunately, in late 2010 and early 2011, politicians and policy makers in much of the Western world believed that they knew better, that we should focus on deficits, not jobs, even though our economies had barely begun to recover from the slump that followed the financial crisis. And by acting on that anti-Keynesian belief, they ended up proving Keynes right all over again.

In declaring Keynesian economics vindicated I am, of course, at odds with conventional wisdom. In Washington, in particular, the failure of the Obama stimulus package to produce an employment boom is generally seen as having proved that government spending can’t create jobs. But those of us who did the math realized, right from the beginning, that the Recovery and Reinvestment Act of 2009 (more than a third of which, by the way, took the relatively ineffective form of tax cuts) was much too small given the depth of the slump. And we also predicted the resulting political backlash.

So the real test of Keynesian economics hasn’t come from the half-hearted efforts of the U.S. federal government to boost the economy, which were largely offset by cuts at the state and local levels. It has, instead, come from European nations like Greece and Ireland that had to impose savage fiscal austerity as a condition for receiving emergency loans — and have suffered Depression-level economic slumps, with real G.D.P. in both countries down by double digits.

This wasn’t supposed to happen, according to the ideology that dominates much of our political discourse. In March 2011, the Republican staff of Congress’s Joint Economic Committee released a report titled “Spend Less, Owe Less, Grow the Economy.” It ridiculed concerns that cutting spending in a slump would worsen that slump, arguing that spending cuts would improve consumer and business confidence, and that this might well lead to faster, not slower, growth.

They should have known better even at the time: the alleged historical examples of “expansionary austerity” they used to make their case had already been thoroughly debunked. And there was also the embarrassing fact that many on the right had prematurely declared Ireland a success story, demonstrating the virtues of spending cuts, in mid-2010, only to see the Irish slump deepen and whatever confidence investors might have felt evaporate.

Amazingly, by the way, it happened all over again this year. There were widespread proclamations that Ireland had turned the corner, proving that austerity works — and then the numbers came in, and they were as dismal as before.

Yet the insistence on immediate spending cuts continued to dominate the political landscape, with malign effects on the U.S. economy. True, there weren’t major new austerity measures at the federal level, but there was a lot of “passive” austerity as the Obama stimulus faded out and cash-strapped state and local governments continued to cut.

Now, you could argue that Greece and Ireland had no choice about imposing austerity, or, at any rate, no choices other than defaulting on their debts and leaving the euro. But another lesson of 2011 was that America did and does have a choice; Washington may be obsessed with the deficit, but financial markets are, if anything, signaling that we should borrow more.

Again, this wasn’t supposed to happen. We entered 2011 amid dire warnings about a Greek-style debt crisis that would happen as soon as the Federal Reserve stopped buying bonds, or the rating agencies ended our triple-A status, or the superdupercommittee failed to reach a deal, or something. But the Fed ended its bond-purchase program in June; Standard & Poor’s downgraded America in August; the supercommittee deadlocked in November; and U.S. borrowing costs just kept falling. In fact, at this point, inflation-protected U.S. bonds pay negative interest: investors are willing to pay America to hold their money.

The bottom line is that 2011 was a year in which our political elite obsessed over short-term deficits that aren’t actually a problem and, in the process, made the real problem — a depressed economy and mass unemployment — worse.

The good news, such as it is, is that President Obama has finally gone back to fighting against premature austerity — and he seems to be winning the political battle. And one of these years we might actually end up taking Keynes’s advice, which is every bit as valid now as it was 75 years ago.

Coming to America…soon!

December 11, 2011

Depression and Democracy

By PAUL KRUGMAN

It’s time to start calling the current situation what it is: a depression. True, it’s not a full replay of the Great Depression, but that’s cold comfort. Unemployment in both America and Europe remains disastrously high. Leaders and institutions are increasingly discredited. And democratic values are under siege.

On that last point, I am not being alarmist. On the political as on the economic front it’s important not to fall into the “not as bad as” trap. High unemployment isn’t O.K. just because it hasn’t hit 1933 levels; ominous political trends shouldn’t be dismissed just because there’s no Hitler in sight.

Let’s talk, in particular, about what’s happening in Europe — not because all is well with America, but because the gravity of European political developments isn’t widely understood.

First of all, the crisis of the euro is killing the European dream. The shared currency, which was supposed to bind nations together, has instead created an atmosphere of bitter acrimony.

Specifically, demands for ever-harsher austerity, with no offsetting effort to foster growth, have done double damage. They have failed as economic policy, worsening unemployment without restoring confidence; a Europe-wide recession now looks likely even if the immediate threat of financial crisis is contained. And they have created immense anger, with many Europeans furious at what is perceived, fairly or unfairly (or actually a bit of both), as a heavy-handed exercise of German power.

Nobody familiar with Europe’s history can look at this resurgence of hostility without feeling a shiver. Yet there may be worse things happening.

Right-wing populists are on the rise from Austria, where the Freedom Party (whose leader used to have neo-Nazi connections) runs neck-and-neck in the polls with established parties, to Finland, where the anti-immigrant True Finns party had a strong electoral showing last April. And these are rich countries whose economies have held up fairly well. Matters look even more ominous in the poorer nations of Central and Eastern Europe.

Last month the European Bank for Reconstruction and Development documented a sharp drop in public support for democracy in the “new E.U.” countries, the nations that joined the European Union after the fall of the Berlin Wall. Not surprisingly, the loss of faith in democracy has been greatest in the countries that suffered the deepest economic slumps.

And in at least one nation, Hungary, democratic institutions are being undermined as we speak.

One of Hungary’s major parties, Jobbik, is a nightmare out of the 1930s: it’s anti-Roma (Gypsy), it’s anti-Semitic, and it even had a paramilitary arm. But the immediate threat comes from Fidesz, the governing center-right party.

Fidesz won an overwhelming Parliamentary majority last year, at least partly for economic reasons; Hungary isn’t on the euro, but it suffered severely because of large-scale borrowing in foreign currencies and also, to be frank, thanks to mismanagement and corruption on the part of the then-governing left-liberal parties. Now Fidesz, which rammed through a new Constitution last spring on a party-line vote, seems bent on establishing a permanent hold on power.

The details are complex. Kim Lane Scheppele, who is the director of Princeton’s Law and Public Affairs program — and has been following the Hungarian situation closely — tells me that Fidesz is relying on overlapping measures to suppress opposition. A proposed election law creates gerrymandered districts designed to make it almost impossible for other parties to form a government; judicial independence has been compromised, and the courts packed with party loyalists; state-run media have been converted into party organs, and there’s a crackdown on independent media; and a proposed constitutional addendum would effectively criminalize the leading leftist party.

Taken together, all this amounts to the re-establishment of authoritarian rule, under a paper-thin veneer of democracy, in the heart of Europe. And it’s a sample of what may happen much more widely if this depression continues.

It’s not clear what can be done about Hungary’s authoritarian slide. The U.S. State Department, to its credit, has been very much on the case, but this is essentially a European matter. The European Union missed the chance to head off the power grab at the start — in part because the new Constitution was rammed through while Hungary held the Union’s rotating presidency. It will be much harder to reverse the slide now. Yet Europe’s leaders had better try, or risk losing everything they stand for.

And they also need to rethink their failing economic policies. If they don’t, there will be more backsliding on democracy — and the breakup of the euro may be the least of their worries.

Class Matters. Why Won’t We Admit It?

December 11, 2011

By HELEN F. LADD and EDWARD B. FISKE

Durham, N.C.

NO one seriously disputes the fact that students from disadvantaged households perform less well in school, on average, than their peers from more advantaged backgrounds. But rather than confront this fact of life head-on, our policy makers mistakenly continue to reason that, since they cannot change the backgrounds of students, they should focus on things they can control.

No Child Left Behind, President George W. Bush’s signature education law, did this by setting unrealistically high — and ultimately self-defeating — expectations for all schools. President Obama’s policies have concentrated on trying to make schools more “efficient” through means like judging teachers by their students’ test scores or encouraging competition by promoting the creation of charter schools. The proverbial story of the drunk looking for his keys under the lamppost comes to mind.

The Occupy movement has catalyzed rising anxiety over income inequality; we desperately need a similar reminder of the relationship between economic advantage and student performance.

The correlation has been abundantly documented, notably by the famous Coleman Report in 1966. New research by Sean F. Reardon of Stanford University traces the achievement gap between children from high- and low-income families over the last 50 years and finds that it now far exceeds the gap between white and black students.

Data from the National Assessment of Educational Progress show that more than 40 percent of the variation in average reading scores and 46 percent of the variation in average math scores across states is associated with variation in child poverty rates.

International research tells the same story. Results of the 2009 reading tests conducted by the Program for International Student Assessment show that, among 15-year-olds in the United States and the 13 countries whose students outperformed ours, students with lower economic and social status had far lower test scores than their more advantaged counterparts within every country. Can anyone credibly believe that the mediocre overall performance of American students on international tests is unrelated to the fact that one-fifth of American children live in poverty?

Yet federal education policy seems blind to all this. No Child Left Behind required all schools to bring all students to high levels of achievement but took no note of the challenges that disadvantaged students face. The legislation did, to be sure, specify that subgroups — defined by income, minority status and proficiency in English — must meet the same achievement standard. But it did so only to make sure that schools did not ignore their disadvantaged students — not to help them address the challenges they carry with them into the classroom.

So why do presumably well-intentioned policy makers ignore, or deny, the correlations of family background and student achievement?

Some honestly believe that schools are capable of offsetting the effects of poverty. Others want to avoid the impression that they set lower expectations for some groups of students for fear that those expectations will be self-fulfilling. In both cases, simply wanting something to be true does not make it so.

Another rationale for denial is to note that some schools, like the Knowledge Is Power Program charter schools, have managed to “beat the odds.” If some schools can succeed, the argument goes, then it is reasonable to expect all schools to. But close scrutiny of charter school performance has shown that many of the success stories have been limited to particular grades or subjects and may be attributable to substantial outside financing or extraordinarily long working hours on the part of teachers. The evidence does not support the view that the few success stories can be scaled up to address the needs of large populations of disadvantaged students.

A final rationale for denying the correlation is more nefarious. As we are now seeing, requiring all schools to meet the same high standards for all students, regardless of family background, will inevitably lead either to large numbers of failing schools or to a dramatic lowering of state standards. Both serve to discredit the public education system and lend support to arguments that the system is failing and needs fundamental change, like privatization.

Given the budget crises at the national and state levels, and the strong political power of conservative groups, a significant effort to reduce poverty or deal with the closely related issue of racial segregation is not in the political cards, at least for now.

So what can be done?

Large bodies of research have shown how poor health and nutrition inhibit child development and learning and, conversely, how high-quality early childhood and preschool education programs can enhance them. We understand the importance of early exposure to rich language on future cognitive development. We know that low-income students experience greater learning loss during the summer when their more privileged peers are enjoying travel and other enriching activities.

Since they can’t take on poverty itself, education policy makers should try to provide poor students with the social support and experiences that middle-class students enjoy as a matter of course.

It can be done. In North Carolina, the two-year-old East Durham Children’s Initiative is one of many efforts around the country to replicate Geoffrey Canada’s well-known successes with the Harlem Children’s Zone.

Say Yes to Education in Syracuse, N.Y., supports access to afterschool programs and summer camps and places social workers in schools. In Omaha, Building Bright Futures sponsors school-based health centers and offers mentoring and enrichment services. Citizen Schools, based in Boston, recruits volunteers in seven states to share their interests and skills with middle-school students.

Promise Neighborhoods, an Obama administration effort that gives grants to programs like these, is a welcome first step, but it has been under-financed.

Other countries already pursue such strategies. In Finland, with its famously high-performing schools, schools provide food and free health care for students. Developmental needs are addressed early. Counseling services are abundant.

But in the United States over the past decade, it became fashionable among supporters of the “no excuses” approach to school improvement to accuse anyone raising the poverty issue of letting schools off the hook — or what Mr. Bush famously called “the soft bigotry of low expectations.”

Such accusations may afford the illusion of a moral high ground, but they stand in the way of serious efforts to improve education and, for that matter, go a long way toward explaining why No Child Left Behind has not worked.

Yes, we need to make sure that all children, and particularly disadvantaged children, have access to good schools, as defined by the quality of teachers and principals and of internal policies and practices.

But let’s not pretend that family background does not matter and can be overlooked. Let’s agree that we know a lot about how to address the ways in which poverty undermines student learning. Whether we choose to face up to that reality is ultimately a moral question.

Helen F. Ladd is a professor of public policy and economics at Duke. Edward B. Fiske, a former education editor of The New York Times, is the author of the “Fiske Guide to Colleges.”

All the G.O.P.’s Gekkos

December 8, 2011

By PAUL KRUGMAN

Almost a quarter of a century has passed since the release of the movie “Wall Street,” and the film seems more relevant than ever. The self-righteous screeds of financial tycoons denouncing President Obama all read like variations on Gordon Gekko’s famous “greed is good” speech, while the complaints of Occupy Wall Street sound just like what Gekko says in private: “I create nothing. I own,” he declares at one point; at another, he asks his protégé, “Now you’re not naïve enough to think we’re living in a democracy, are you, buddy?”

Yet, with the benefit of hindsight, we can see that the movie went a little off at the end. It closes with Gekko getting his comeuppance, and justice served thanks to the diligence of the Securities and Exchange Commission. In reality, the financial industry just kept getting more and more powerful, and the regulators were neutered.

And, according to the prediction market Intrade, there’s a 45 percent chance that a real-life Gordon Gekko will be the next Republican presidential nominee.

I am not, of course, the first person to notice the similarity between Mitt Romney’s business career and the fictional exploits of Oliver Stone’s antihero. In fact, the labor-backed group Americans United for Change is using “Romney-Gekko” as the basis for an ad campaign. But there’s an issue here that runs deeper than potshots against Mr. Romney.

For the current orthodoxy among Republicans is that we mustn’t even criticize the wealthy, let alone demand that they pay higher taxes, because they’re “job creators.” Yet the fact is that quite a few of today’s wealthy got that way by destroying jobs rather than creating them. And Mr. Romney’s business history offers a very good illustration of that fact.

The Los Angeles Times recently surveyed the record of Bain Capital, the private equity firm that Mr. Romney ran from 1984 to 1999. As the report notes, Mr. Romney made a lot of money over those years, both for himself and for his investors. But he did so in ways that often hurt ordinary workers.

Bain specialized in leveraged buyouts, buying control of companies with borrowed money, pledged against those companies’ earnings or assets. The idea was to increase the acquired companies’ profits, then resell them.

But how were profits to be increased? The popular image — shaped in part by Oliver Stone — is that buyouts were followed by ruthless cost-cutting, largely at the expense of workers who either lost their jobs or found their wages and benefits cut. And while reality is more complex than this image — some companies have expanded and added workers after a leveraged buyout — it contains more than a grain of truth. One recent analysis of “private equity transactions” — the kind of buyouts and takeovers Bain specialized in — noted that business in general is always both creating and destroying jobs, and that this is also true of companies that were buyout or takeover targets. However, job creation at the target firms is no greater than in similar firms that aren’t targets, while “gross job destruction is substantially higher.”

So Mr. Romney made his fortune in a business that is, on balance, about job destruction rather than job creation. And because job destruction hurts workers even as it increases profits and the incomes of top executives, leveraged buyout firms have contributed to the combination of stagnant wages and soaring incomes at the top that has characterized America since 1980.

Now I’ve just said that the leveraged buyout industry as a whole has been a job destroyer, but what about Bain in particular? Well, by at least one criterion, Bain during the Romney years seems to have been especially hard on workers, since four of its top 10 targets by dollar value ended up going bankrupt. (Bain, nonetheless, made money on three of those deals.) That’s a much higher rate of failure than is typical even of companies going through leveraged buyouts — and when the companies went under, many workers ended up losing their jobs, their pensions, or both.

So what do we learn from this story? Not that Mitt Romney the businessman was a villain. Contrary to conservative claims, liberals aren’t out to demonize or punish the rich. But they do object to the attempts of the right to do the opposite, to canonize the wealthy and exempt them from the sacrifices everyone else is expected to make because of the wonderful things they supposedly do for the rest of us.

The truth is that what’s good for the 1 percent, or even better the 0.1 percent, isn’t necessarily good for the rest of America — and Mr. Romney’s career illustrates that point perfectly. There’s no need, and no reason, to hate Mr. Romney and others like him. We do, however, need to get such people paying more in taxes — and we shouldn’t let myths about “job creators” get in the way.

The state of American protest…

Send in the Clueless

December 4, 2011

By PAUL KRUGMAN

There are two crucial things you need to understand about the current state of American politics. First, given the still dire economic situation, 2012 should be a year of Republican triumph. Second, the G.O.P. may nonetheless snatch defeat from the jaws of victory — because Herman Cain was not an accident.

Think about what it takes to be a viable Republican candidate today. You have to denounce Big Government and high taxes without alienating the older voters who were the key to G.O.P. victories last year — and who, even as they declare their hatred of government, will balk at any hint of cuts to Social Security and Medicare (death panels!).

And you also have to denounce President Obama, who enacted a Republican-designed health reform and killed Osama bin Laden, as a radical socialist who is undermining American security.

So what kind of politician can meet these basic G.O.P. requirements? There are only two ways to make the cut: to be totally cynical or to be totally clueless.

Mitt Romney embodies the first option. He’s not a stupid man; he knows perfectly well, to take a not incidental example, that the Obama health reform is identical in all important respects to the reform he himself introduced in Massachusetts — but that doesn’t stop him from denouncing the Obama plan as a vast government takeover that is nothing like what he did. He presumably knows how to read a budget, which means that he must know that defense spending has continued to rise under the current administration, but this doesn’t stop him from pledging to reverse Mr. Obama’s “massive defense cuts.”

Mr. Romney’s strategy, in short, is to pretend that he shares the ignorance and misconceptions of the Republican base. He isn’t a stupid man — but he seems to play one on TV.

Unfortunately from his point of view, however, his acting skills leave something to be desired, and his insincerity shines through. So the base still hungers for someone who really, truly believes what every candidate for the party’s nomination must pretend to believe. Yet as I said, the only way to actually believe the modern G.O.P. catechism is to be completely clueless.

And that’s why the Republican primary has taken the form it has, in which a candidate nobody likes and nobody trusts has faced a series of clueless challengers, each of whom has briefly soared before imploding under the pressure of his or her own cluelessness. Think in particular of Rick Perry, a conservative true believer who seemingly had everything it took to clinch the nomination — until he opened his mouth.

So will Newt Gingrich suffer the same fate? Not necessarily.

Many observers seem surprised that Mr. Gingrich’s, well, colorful personal history isn’t causing him more problems, but they shouldn’t be. If hypocrisy is the tribute vice pays to virtue, conservatives often seem inclined to accept that tribute, voting for candidates who publicly espouse conservative moral principles whatever their personal behavior. Did I mention that David Vitter is still in the Senate?

And Mr. Gingrich has some advantages none of the previous challengers had. He is by no means the deep thinker he imagines himself to be, but he’s a glib speaker, even when he has no idea what he’s talking about. And my sense is that he’s also very good at doublethink — that even when he knows what he’s saying isn’t true, he manages to believe it while he’s saying it. So he may not implode like his predecessors.

The larger point, however, is that whoever finally gets the Republican nomination will be a deeply flawed candidate. And these flaws won’t be an accident, the result of bad luck regarding who chose to make a run this time around; the fact that the party is committed to demonstrably false beliefs means that only fakers or the befuddled can get through the selection process.

Of course, given the terrible economic picture and the tendency of voters to blame whoever holds the White House for bad times, even a deeply flawed G.O.P. nominee might very well win the presidency. But then what?

The Washington Post quotes an unnamed Republican adviser who compared what happened to Mr. Cain, when he suddenly found himself leading in the polls, to the proverbial tale of the dog who had better not catch that car he’s chasing. “Something great and awful happened, the dog caught the car. And of course, dogs don’t know how to drive cars. So he had no idea what to do with it.”

The same metaphor, it seems to me, might apply to the G.O.P. pursuit of the White House next year. If the dog actually catches the car — the actual job of running the U.S. government — it will have no idea what to do, because the realities of government in the 21st century bear no resemblance to the mythology all ambitious Republican politicians must pretend to believe. And what will happen then?