This past Wednesday, Larry Summers and Paul Krugman both spoke at different events and both warned of a lost economic decade–or decades–in the United States. While I am loathed to accept anything spewing from the frothy mouth of Larry Summers, he was uncharacteristically cogent in his remarks. Mr. Krugman continued–much to his credit–to pound the drum for decreased austerity, increased stimulus, and more proactive programs to spur employment. Mr. Krugman is widely regarded as championing policies that hang precariously the fringe of mainstream economic thinking, while Mr. Summers has long been a technocratic proponent of free markets.
“For the first time in 75 years, we are experiencing a protracted recession due to a lack of demand,” Summers said during a speech to the Center for Global Development in Washington. “It’s now been about five years since the recession began and it appears the stagnation will be with us for another long interval.”
“There is not enough demand,” Krugman said during an appearance at the Economic Policy Institute, where he gave a talk to promote his new book, End This Depression Now. “We focused a lot – too much – on the financial sector’s problems. Yet that is long since gone and we still don’t have a steady recovery. That tells us the crisis was far more about household debt.”
Summers chose to focus on fixes to income inequality through progressive taxation as medicine for the demand problems in the United States, while Krugman focused on retracing the cuts in government spending at the federal and state level in order to increase expendable income, employment, and certainty. Both men are correct. Summers is correct in that if the United States is to allow the tax system to remedy income inequality rather than to implement tight regulation and limits on executive pay and compensation, then individual–namely wealthy individuals–and corporate tax revenues must necessarily increase. He also points out, falsely I believe, that much of the job losses caused by technological innovation in the manufacturing sector are to blame for much of the income inequality, and that nothing can be done to reverse that trend. Krugman is correct in that it was wholly irresponsible to react to a short term protraction in government revenues by slashing millions of public sector jobs. By failing to recapitalize state and municipal coffers, the federal government has exacerbated the huge demand problem and contracted government tax revenues. Krugman also points out that the long slog of short term fixes to the tax code and stop-gap measures on infrastructure funding have created an uncertain contracting environment for federal and state agencies, leading to the cancellation and procrastination of major improvement and repair projects. In doing so, the government has further dragged down consumer spending, employment, and government revenues. Continue reading