From CNN's new series Parker Spitzer, Paul Krugman says it's time to borrow and spend and worry about the deficit after the economy recovers. You can read more from Krugman on what's behind the unemployment numbers here as well.
Mike Konczal, a fellow at the Roosevelt Institute, recently posted an excellent piece on his blog in which he examined why unemployment remains so high. He points out: “There are two theories at work. The first is a story of aggregate demand. The second theory is one of a mismatch in skills.”
What he doesn’t say explicitly — although it’s clearly implied — is that these two theories have very different policy implications. [...]
The answer is to look at the evidence — specifically, to ask whether what we see bears the signature of one story or the other. The aggregate demand story suggests that we should see depressed employment in all industries as workers of every skill type face a poor job market. The mismatch story says that we should see surpluses of labor in some places and shortages in others.
And Mr. Konczal shows that the data overwhelmingly fits the demand story, not the mismatch story. Every major industry in the United States has seen a rise in involuntary part-time work; so has every key occupation. There is no hint that labor in any sector is in short supply. Read on...
Full transcript via CNN below the fold.
SPITZER: The unemployment numbers that came out today -- and at the top of the show, I was talking about it's not really 9.6. It's either 12.9 or maybe even higher, depending on what you build into that number. How serious is this embedded structural unemployment problem now?
KRUGMAN: The unemployment problem is enormous. It's terrible.
Long-term unemployment, people who are unemployed six months, a year or more, are at unprecedented levels. You have to go back to the 1930s to see anything like this. That does terrible, terrible harm.
Now, structural has a very specific meaning. It's a term of art. Structural means you have unemployment that you could not solve just by increasing demand, that you have unemployment that even if the Federal Reserve prints a lot more money, and even if the federal government goes and does a lot more spending, we have people who are unemployable, because they have the wrong skills or in the wrong places.
There is no sign that we have a lot of that. We have -- think about it. We're talking about things like infrastructure spending. We have 1.5 million unemployed construction workers. Those people are not structurally unemployed. They're unemployed because we are choosing not to have the policies to put them to work.
So I think that's a terrible dodge, saying, oh, it's beyond our control. It's structural. It's not.
SPITZER: So you think there's an answer?
KRUGMAN: Oh, if we had no political constraints and complete unanimity among economists, who would all agree with me...
KRUGMAN: ... then, in 18 months, we could make the unemployment problem go away. It's not -- there is nothing wrong -- Americans have not forgotten how to work in the last three years.
SPITZER: So, then let me ask the political question. Where in the White House is the opposition to what -- I'm totally in agreement with you. I'm one of those people who is on your side.
Where is the opposition to saying in a very loud, clear way, this is the answer?
KRUGMAN: I think what happens -- and, to some extent, this is theory, though I know a little bit about it -- but what happened was the White House right at the beginning, January 2009, went for an underpowered stimulus because -- in part because they thought they couldn't get a bigger one through Congress, and then made the political decision not to say this really isn't as big as it should be, but it's all we think we can get, but instead the decision to pretend that they were getting -- that it was exactly right.
And to the bitter end, they have stuck through claiming that this was exactly right. They have never found a way to step off that initial claim and say, look, we're sorry, this wasn't big enough, we really need more.
And now they're stuck. Now it's very, very hard for them to talk about the issue in any coherent way.
PARKER: I want to try to clarify something for the average viewer at home. You're a big fan of deficit spending. You say we have to -- to get something, we have to spend more.
But for the average American at home who may already be in debt, the idea of spending when you don't have money doesn't make a whole lot of sense. Can you explain why that's a good economic model?
Now, it's not in all times, right? When the economy has recovered, once we're back at a point where we have a self-sustaining expansion, when businesses are spending because they're using their capacity, then you actually want to try and pay down the debt, certainly stop borrowing so much.
But, right now, nobody wants to spend. Businesses don't want to spend, because consumers don't want to spend. And the economy is deeply depressed. And the only player out there who can get this economy moving is the government.
So, now is the time for the government to go ahead and borrow, spend, get this economy moving, and then be responsible, then pull back, but only after we have got this thing going.
SPITZER: So, this is primarily a matter of sequencing?
KRUGMAN: Yes. It's a question -- give me a situation in which the unemployment rate has dropped to -- it doesn't even have to be full employment, but down below 7 percent, a situation where the Federal Reserve is thinking maybe we need to start raising interest rates, because we're worried about inflation.
That's a time when the government can start to pull back. But right now, it's even self-defeating in pure budget terms. The government pulls back, the economy will shrink further, tax revenues will fall. This isn't the time for austerity.
SPITZER: The critical question is, what do you then buy? What should government invest in?
KRUGMAN: Well, actually, that's less of a critical question than people imagine.
In a way, look, what ended the Great Depression? The Great Depression was ended by massive government spending on stuff that was not only useless, but destructive, namely World War II, right? So, the most important thing is to get a lot of spending.
But since we aren't fighting a war, it should be on useful stuff. We should be building another tunnel under the Hudson River. We should be building roads, bridges, fixing our sewer systems, which are creaking and falling apart. So, there's lots of good stuff to spend on, but, above all, spend.
SPITZER: China, which is, of course, the great threat or partner, depending how you see it, across the Pacific. What is your answer to the trade deficit, the concern that all our middle-class jobs are migrating overseas? What is our best answer to this?
Well, there's a general issue of the rise of China, which is, that's mixed. And I think in a lot of ways that's a good thing for the world, even for us. It has negatives. But right now, the Chinese are deliberately keeping their currency undervalued.
In effect, they're subsidizing their exports and protecting against imports. And then it means that they are quite literally stealing jobs from the rest of the world. Under current circumstances -- things aren't always like this -- but the way they are now, the Chinese policy is predatory, and its destructive.
And at the moment, they see no reason to stop, because no one seems willing to take action against them. But I'm willing.
SPITZER: I have seen your columns, where you basically say to the White House, come on, to use our phrase, man up, get a little tougher.
Again, every now and then, Tim Geithner mumbles a few words, and then nothing more. What is happening?
KRUGMAN: They're afraid of two things, one of which I think is wrong, the other which I understand, if you're -- they're afraid that the financial markets will be upset.
And that's a terrible way to make policy, try and run your policy to -- you know, to maintain confidence sort of unrelated to the realities. The realities is, getting tough on China is the right thing to do, and I think the financial markets will eventually recognize that if you do it.
Also, it is a big step. We would be talking about a level of really getting tough on trade policy that we haven't done for a long time, really we haven't done since Richard Nixon took action on the dollar.
SPITZER: On the gold standard.
KRUGMAN: But -- and so people are a little bit afraid that, well, if you start to say, well, we're going to really play tough, maybe the whole world starts going crazy.
But there comes a point when you have to act. You cannot -- we cannot be the people who bear sole responsibility for maintaining civility in the world economy, while the Chinese go and take advantage of us.
SPITZER: Is the concern that the Chinese would no longer buy our debt a real concern?
KRUGMAN: No. No. We are awash in savings with nowhere to go.
As my friend and colleague the economist Dean Baker says, the Chinese have got an empty water pistol pointed at our head. They have no leverage under the current circumstances.
SPITZER: So, this is the perfect time to actually go to the plate and start swinging at this one?
KRUGMAN: The same reasons that make the Chinese policy so destructive right now, which is that we have a depressed economy in which businesses are sitting on trillions of dollars of cash and don't want to spend it, make this also a period in which the Chinese have no leverage over us.
Cash, which is what they have, is -- there's too much cash out there. We don't need theirs.
Look, we have to take a quick break, but don't go away. Fun with politics is next.