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Clearest explanation of why it happened and what can be done
am 25. Oktober 2012
Krugman makes it clear in the kind of prose that even middle school students can appreciate that what we need now is more spending not less. The problem for most of us is that we think about the US government's finances in the way we think about our household or small business finances. If we spend more than we take in we are in trouble. However the US economy as a whole doesn't work that way and neither does the government. As Krugman observes in reference to why we are still in what he calls (variously) "a slump," "a great recession," and in the title, "a depression": "...your spending is my income and my income is your spending." He asks, "if ordinary citizens are tightening their belts--spending less--and the government also spends less, who is going to buy American products?" (p. 28)
So the solution to our economic problem, Krugman insists, is not austerity (which might work for households) but the opposite. We need the government to spend money to create jobs so that people can buy other people's goods and services. We especially need some infrastructure building here at home instead of in the Middle East.
"Collectively," Krugman asserts, "the world's residents are trying to buy less stuff than they are capable of producing, to spend less than they earn. That's possible for an individual, but not for the world as a whole. And the result is the devastation all around us." (p. 30)
The other thing to understand about governments, especially huge governments like the US with a $15-trillion a year economy is that government intervention can smooth out a crisis. This is because the US will not run out of people to buy its debt since its tax base is so huge that the risk of default is miniscule. When the economy gets back on its feet tax revenues will increase and the debts will be paid. Well, not paid in full. That is unlikely to ever happen, since it makes little sense. To borrow to buy something you don't need like luxuries is not wise. (Wars are usually luxuries for governments.) But to borrow to help grow the economy is a fine investment. Sound companies borrow because borrowing allows them to take advantage of their knowhow in producing goods and services that people will buy allowing the company to make money. Borrowing to party big time to impress the neighbors or your girlfriend grows no wealth. (Wars are sometimes shock and awe parties for heads of state looking to stay in power.)
Aside from offering the solution to our economic woes in simple, straightforward terms, Krugman also does an outstanding job of explaining how we got into this mess in the first place. I've read several books and a number of articles explaining the mortgage crisis, the "too big to fail" bank welfare fraud and the derivatives hustles, but nowhere is this spelled out in as clear as fashion as Krugman does here. He is simply the best economist writing for an informed non-professional public at work today. This is not to mention that he is also a Nobel Prize winning economist.
As for wages being too high, Krugman writes:
"...today it's often argued that more labor market `flexibility'--a euphemism for wage cuts--is what we really need" (to cure high unemployment). "But while an individual worker can improve his chances of getting a job by accepting a lower wage, because that makes him more attractive compared to other workers, an across-the-board cut in wages leaves everyone in the same place, except for one thing: it reduces everyone's income, but the level of debt remains the same. So more flexibility in wages (and prices) would just make matters worse." (pp. 52-53)
I think the average person, even the fairly well educated average person, doesn't really understand how banks work and how they make money. I didn't until I was well into my fifties. Certainly the core of the Tea Party doesn't, although some of the supporters of financial institution deregulation do and that is precisely why they want deregulation. Here's how Krugman explains this in part:
First he notes that the Glass-Steagall act of 1933 primarily did two things. It "established the Federal Deposit Insurance Corporation (FDIC) which guaranteed (and still guarantees) depositors against loss if their bank should happened to fail" (p. 59) Additionally, "Glass-Steagall limited the amount of risk banks could take. This was especially necessary given the establishment of deposit insurance, which could have created enormous `moral hazard.' That is, it could have created a situation in which bankers could raise lots of money, no questions asked--hey, it's all government-insured--then put that money into high-risk, high stakes investments, figuring that it was heads they win, tails the taxpayers lose."
Krugman then reminds us that this is exactly what happened during the savings and loan scandal of the Reagan administration. Likewise, the big investments banks knew during the later years of the George W. Bush administration that they were in fact too big to fail and the government in order to prevent a massive financial meltdown would have to bail them out if their Pandora's Box of risky derivatives (and other "financial instruments") went toxic. This knowledge gave them free rein to gamble like drunken sailors--well, that knowledge and the (how sweet it is!) deregulation of investment banking that took place primarily in the Reagan, Clinton and George W. Bush administrations. Toxic those gambles went and both the Bush and the Obama administrations found themselves with no choice but to bail the banks out lest the whole economy come tumbling down.
One of the results of deregulation has been the enormous increase in the wealth of the top one percent (yes, those people) and what has happened to the real income of most of the rest of us. Krugman has two charts on page 74 showing the growth in household income from 1947 to the present. While the rich have indeed gotten richer the average family has seen its income growth "slowed to a crawl."
But it's even worse than Krugman makes it appear. That's because the only reason middle income Americans have been able to tread water is because many of those families became two income families. In other words the head of household's real income has actually fallen.
Another factor in the actual decline in the average worker's buying power and the amazing increase in CEO compensation comes about, Krugman suggests, because worker's unions have lost a lot of their power. "It's surely relevant here to note the sharp decline in unionization during the 1980s, which removed one major player that might have protested huge paychecks for executives." (p. 82)
One more point. Krugman argues that the harsh austerity measures currently being acted out in Greece and other places in Europe are not only mistaken but based on a kind of "morality play" mentality. We all understand how it feels when our neighbors get away with something like buying houses they can't afford. We don't want the government to bail them out. They were fiscally irresponsible and should have to pay the piper. However even if that is true it doesn't help us by administering punishment in the form taking place in Greece, Ireland, Spain, and elsewhere. Our standard of living will suffer if we place our desire to punish others ahead of our doing what is necessary to grow the economy. It would help a lot if somehow some of the mortgage indebtedness were to be forgiven, is what Krugman suggests.
In short, there's a tremendous amount of economic wisdom in this book, so much so I would recommend it as a supplement to a college macroeconomics text. You'll find that a number of the sometimes difficult ideas in those texts are illuminated almost incidentally by Krugman as he explains how we got into this mess and how we can get out. I wish this were required reading for high school students and the members of the Congress of the United States.
--Dennis Littrell, author of "The World Is Not as We Think It Is"