Krugman: the same old same old

Paul Krugman asked the New York Times if he could publish today’s column on Troppo.  We have of course licensed the content to the NYT.  In fact, ironically, owing to an administrative oversight, the column appeared on the NYT website before it was hoisted here.

Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.

But future historians will tell us that this wasn’t the end of the third depression, just as the business upturn that began in 1933 wasn’t the end of the Great Depression. After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.

OK – time to go to the NYT website to finish reading.

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14 years ago

I suppose the future,”Krugman:the same old same” may be discovered, to some extent, by examining the history of capitalism, from the period of the Dutch era, the British era as they lost their industrial hegemony, when they were unable to abandon their restrained forms of competition for the aggressive methods of corporate capitalism rapidly exploding in the 20th century following the second world war and the initial international finance process coming from Bretton Woods.

Jack Strocchi
14 years ago

I called “bear market rally” on 16 APR 09. Meaning that the rally just underway was the pure result of the financial bail-out and not some underlying “factoral” reform:

I am gloomy about the current stock market bounce.

The current rally on Wall St is not the first stage of recovery. Its the last stage of the rip-off.

Call me an unrepentant bear but I am not convinced that it will be sustained. It will ultimately run out of steam because the underlying state of the US economy and fiduciary is so bad. Neither the bail out or stimulus address the underlying US economic problem, which is the huge legacy of debt linked to unsustainable investments.

The massive public sector debt injection just kicks the problem down the road. Sometime the US will have to recognise that its standard of living has to fall, through tax-hikes or consumption cuts.

Of course the US stock market then chose to make that one of the biggest rallies in history, the Dow rising more than 70%, from 6500 in MAR 09 to 11200 in APR 10. So my trader friends had a good laugh at my bearish expense.

But I am sticking by my prediction. The US has $50 trillion in debt, a huge ratio of this are unfunded public sector liabilities. Plus huge private sector liabilities accumulated due to unsustainable housing investment.

I do not think the US can recover until the US Treasury retrenches its unsustainable committments to be the worlds open border, defender and lender of last resort.