Paul Krugman’s (2013) book, End This Depression Now documents how governments in Europe and the US adopted conventional textbook fiscal and monetary stimulus only in the beginning of the economic crisis of 2008. Then Krugman says, “A funny thing happened in 2010: much of the world’s policy elite—the bankers and financial officials who define conventional wisdom—decided to throw out the textbooks and lessons of history, and declare that down is up.” Instead of preaching for increased monetary and fiscal stimulus to fight high unemployment, Krugman says, “it suddenly became the fashion to call for [government] spending cuts, tax hikes, and even higher interest rates even in the face of mass unemployment.” The world’s policy elite became ‘Austerians’ who want job-killing austerity despite high unemployment.
Krugman theorizes that the reason policy elites don’t care about unemployment is class warfare. The Austerians are led by the rich who like high interest rates because they lend to the young, poor, and middle classes. They are fighting for the rich against the rest of us. Bruce Bartlet recently theorized that this was also why the financial elite opposed monetary stimulus during the Great Depression: “bondholders enjoyed getting back 25 percent more than they had lent in real terms.” Plus, the elites like elevated unemployment because it suppresses the wages of their employees and it makes it easier for them to keep workers in line when workers are scared of economic ruin. When unemployment is low like in 2000 when it averaged 4%, Krugman says that employers were forced to hire any workers who passed the “mirror test”. That is, if someone had enough breath to fog a mirror, they were good enough to hire. But that meant that employers were feeling pretty desperate and they prefer times when they have the power to be more selective in screening potential employees.
The class-warfare theory is an interesting possibility for why the policy elites ignored high unemployment after 2010, but Krugman overlooks another important reason. The policy elite did not really abandon textbook economics. Textbooks are mutilitarian and worship GDP growth. GDP growth had officially returned by the end of 2009. The recession was officially over by the middle of 2009 and there is nothing in the textbooks that says we should fight a recession after it is over. During times of GDP growth, the textbooks say we should focus on keeping inflation low and balancing government budget deficits, and this is what the policy elite have done. This is an unethical value judgement, but the textbooks say nothing about unemployment being more important than government deficits or the remote possibility of inflation. The policy elites did not abandon textbook economics. The policy elites abandoned the unemployed because the textbooks are mutilitarianist and the policy elites followed textbook priorities.
Plus, the fact that GDP growth had returned despite a stagnant employment ratio as seen in the following graph bolsters Krugman’s theory that the elites preferred the high-unemployment policies in place in 2010. That is because the elites’ income was growing robustly and they saw no reason to change anything.
The above graph shows the official recession dates shaded gray. The recession officially ended in 2009 when GDP began growing again. But It was a period of growing inequality where the elites were happy with their growing income and meanwhile the majority of Americans were still in a deepening recession. The median household income was still dropping as most American’s real incomes continued falling. Unfortunately, the data in this graph comes from the Fed and they do not even track median income. This reveals their preference for the 83,000 different data series that they do track over median income. So I’ll have to post median household income in a separate graph from a private think tank below. As you can see, when the recession officially ended (at the right side of the gray bar), the majority of households (represented by the median in red) had not even seen half of the fall in their incomes that was to come. And there is still no significant recovery in sight for most households.
Krugman should adopt a medianist view of recessions. Economic stimulus should continue not just until the mean income (GDP) increases again, but until the median income increases again. That way the majority of Americans can see the income growth that signifies the end to a recession rather than just the elites whose income growth caused the end of the official recession in 2009. The textbooks should prioritize median income rather than aggregate income (GDP).
Unemployment is also an important indicator that is neglected by our mmutilitarian overemphasis on GDP. Economists should research the link between unemployment and median income. From eyeballing the data, it appears that high unemployment leads to stagnant wages and stagnant median income which makes sense, but I have never seen a statistical analysis of the relationship. Governments should prioritize fighting unemployment over budget deficits when interest rates are historically low and inflation is historically low as is the case today. A medianist definition of recessions would help reinforce this priority.