Paul Krugman, "The Austerity Debacle": Worse Than the Great Depression?

Paul Krugman is back to telling us -- you would never guess in a million years -- that the US and Europe need to spend their way out of the current economic malaise.

In "The Austerity Debacle" (http://www.nytimes.com/2012/01/30/opinion/krugman-the-austerity-debacle.html?ref=opinion), Krugman observes that the UK did a better job recovering in the 1930s from its economic woes than today. Citing a chart released by National Institute of Economic and Social Research, Krugman observes:

"Britain is doing worse this time than it did during the Great Depression. Four years into the Depression, British G.D.P. had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground."

Krugman claims that the "policy elite" in the UK and elsewhere threw "hard-won knowledge out the window" by slashing spending to promote economic growth. And although the US federal government "avoided all-out austerity," state and local governments are running out of federal aid and being forced to reduce their budgets, thus creating "a major drag on the overall economy." Krugman concludes:

"The infuriating thing about this tragedy is that it was completely unnecessary. Half a century ago, any economist — or for that matter any undergraduate who had read Paul Samuelson’s textbook 'Economics' — could have told you that austerity in the face of depression was a very bad idea. But policy makers, pundits and, I’m sorry to say, many economists decided, largely for political reasons, to forget what they used to know. And millions of workers are paying the price for their willful amnesia."

But have conditions changed since the Great Depression? Manufacturing jobs are being eliminated by robotics. Even in the pharma industry today, one exceptional scientist empowered by a laptop, is worth more than an entire mediocre R&D army.

Could it be that in today's brave new world, money spent on infrastructure, e.g., bullet trains, and education no longer ensures the creation of sustainable jobs? Whereas I agree with Krugman that spending cuts do not create jobs, I am far from convinced that government spending 80 years after the Great Depression necessarily gives rise to sustainable employment.

Sadly, the US may never again see anything approaching full employment, with or without deficit spending.