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The Return of Depression Economics and the Crisis of 2008
by Paul Krugman
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Staff Pick
We could have prevented this economic free-fall, Paul Krugman believes. He wrote the first edition of The Return of Depression Economics in response to the Asian crisis of the 1990s, which he saw as a warning to economies around the world. Now Krugman has revised and expanded the original work to explain our current state of affairs; he also addresses how to contain the situation before it gets worse. Winner of the 2008 Nobel Prize in Economics, Krugman is arguably our best guide to the subject; he's certainly the most accessible. ("Don't expect a solemn, dignified book," he warns in the introduction.)
Recommended by Dave, Powells.com
We could have prevented this economic free-fall, Paul Krugman believes. He wrote the first edition of The Return of Depression Economics in response to the Asian crisis of the 1990s, which he saw as a warning to economies around the world. Now Krugman has revised and expanded the original work to explain our current state of affairs; he also addresses how to contain the situation before it gets worse. Winner of the 2008 Nobel Prize in Economics, Krugman is arguably our best guide to the subject; he's certainly the most accessible. ("Don't expect a solemn, dignified book," he warns in the introduction.)
Recommended by Dave, Powells.com
"'We sometimes, for example, hear it said,' writes John Stuart Mill in his Principles of Political Economy, 'that governments ought to confine themselves to affording protection against force and fraud'; that people should otherwise be 'free agents, able to take care of themselves.' But why, he asks, considering all the 'other evils' of a market society, should people not be more widely protected by government — that is, 'by their own collective strength'? Much like Mill, Paul Krugman likes capitalism's innovations but not its crises and thinks that government has a duty to facilitate the former and protect us from the latter. He doubts that citizens will get much protection from moguls — or from most economists, for that matter — unless we trouble to grasp how the whole intricate game works, so that our legislators will form a consensus about how to regulate it. Mill supposed that we needed to see 'the Dynamics of political economy,' not just 'the Statics.' Krugman knows we need Liquidity Traps for Dummies." Bernard Avishai, The Nation (read the entire Nation review)
Synopses & Reviews In this new, greatly updated edition of The Return of Depression Economics, Krugman shows how the failure of regulation to keep pace with an increasingly out-of-control financial system set the United States, and the world as a whole, up for the greatest financial crisis since the 1930s. He also lays out the steps that must be taken to contain the crisis, and turn around a world economy sliding into a deep recession. Brilliantly crafted in Krugman's trademark style 'lucid, lively, and supremely informed', this new edition of The Return of Depression Economicswill become an instant cornerstone of the debate over how to respond to the crisis. Review: In 1975, when I first arrived in Washington to work as a Senate staffer, I was taken aback by a comment from the economist Arthur Okun at a congressional hearing. Inflation was then gaining momentum. Okun, one of the most distinguished U.S. economic thinkers, bluntly admitted that we don't understand inflation — and never have. Rarely before or since has Washington witnessed such ... Washington Post Book Review (read the entire Washington Post review) humility about economic policy. Overall, the past five decades have been an age of economic hubris. In the 1960s, we sought to end poverty through federal spending. By the late '70s, we thought that controlling the money supply could solve everything. In the '80s, tax incentives were seen as capable of dramatically increasing the rate at which people saved. By the '90s, it seemed to many that Alan Greenspan could fine-tune the business cycle out of existence by tinkering with the Federal Reserve's interest rates. Now comes Treasury Secretary Henry Paulson, offering a new taxpayer-funded bailout scheme nearly as often as he changes his shirt. Almost overnight, it seems, we have become convinced that massive infrastructure spending can save us. The dangers of this constant search for an economic panacea are clear from two important new books: Robert J. Samuelson's "The Great Inflation and Its Aftermath" and Paul Krugman's "The Return of Depression Economics and the Crisis of 2008." Samuelson, a longtime economic columnist for The Washington Post and its sister publication Newsweek, has become the Cal Ripken of economic journalism. His meaty body of work serves as a kind of national economic encyclopedia. At first glance, Samuelson's book, which describes the implications of the great inflation of the 1970s, may seem irrelevant or out of touch, given today's growing fears of deflation. Nothing could be further from the truth. What screams out from this book is the need for policymakers to admit, as Samuelson puts it, "how little — not how much — we know." He describes the great economic overreach of the 1960s, when Federal Reserve policymakers aimed to produce full employment, thinking they could trade a slight increase in inflation for a significant increase in jobs. As a result, Samuelson says, "too much money chased too few goods," the classic recipe for inflation. In 1962, a Hershey bar cost a few pennies and a full-sized Chevrolet $2,529. By 1994, the candy bar had jumped to 75 cents and the Chevy to $19,495. Samuelson calls this rapid rise in prices "a self-inflicted wound that resulted from collective hopefulness and intellectual overconfidence." "With hindsight, we know that the idea that the economy's adequate, if imperfect, performance could be substantially improved was a pipe dream," he writes. "The resulting policies not only didn't do what they promised, they actually did the opposite — led to more, not fewer, recessions; to higher, not lower, unemployment; to slower, not faster, economic growth. ... What is relevant for our era is that these policies were not undertaken on ignorant whim. Rather, they embodied the thinking of most of the nation's top economists." Samuelson's book also describes the painful cure administered by Paul A. Volcker, chairman of the Federal Reserve from 1979 to 1987 and now Barack Obama's pick to head the White House Economic Recovery Advisory Board. In an unspoken alliance with Ronald Reagan, Volcker "bludgeoned the economy" with interest-rate hikes, deliberately producing the recession of 1981-82. As the economy stumbled, cars went unsold, office space lay vacant, and unemployment topped 10 percent. This "glut" of labor and goods finally broke the back of inflation; though Volcker's policies were "punishing," the nation went on to experience two decades of vigorous, non-inflationary growth. To Samuelson, the overconfidence of 1960s policymakers should give us pause: "The law of unintended consequences went into overdrive," he warns, "and might again." Krugman, a New York Times columnist and last year's recipient of the Nobel Prize for economics, is perhaps his generation's greatest expert on foreign exchange, the flow of money across borders. He argues that the Asian financial crisis of the late 1990s, in which several nations' currencies collapsed, was a dress rehearsal for our current global crisis, in which stocks and bonds in many countries have plummeted. In both cases, he writes, policymakers practiced "amateur psychology" in a futile effort to move markets. In the earlier crisis, the U.S. Treasury Department and the International Monetary Fund encouraged countries to raise interest rates to bolster their currencies, a policy that Krugman says "exacerbated slumps instead of relieving them." Krugman's book, an updated version of his 1999 volume "The Return of Depression Economics," contends that the Federal Reserve is now mired in a Japan-style "liquidity trap" in which interest rates are so low that cutting them has little impact. We also have an essentially unregulated banking system — the root of the credit crisis — that is unable or unwilling to lend. While a depression isn't likely, Krugman concludes, "depression economics" — "the kinds of problems that characterized much of the world economy in the 1930s but have not been seen since" — has returned. The value of virtually every asset in the world, from corporate shares to real estate to oil reserves, has fallen. This is destroying demand, making it harder to get lenders to lend and spenders to spend. Reading both books, I wondered about President-elect Barack Obama's intellectually gifted economic policymakers, including Volcker, economic czar-in-waiting Larry Summers, Treasury Secretary-designate Timothy Geithner and future Council of Economic Advisors director Christina Romer. Will they, too, succumb to hubris? America's roads and bridges are crumbling. But it would be dangerously over-confident to believe that infrastructure spending alone constitutes a recovery program. How will building a bridge thaw frozen credit markets? And how will construction projects revive an economy that is 85-percent service oriented? In the 1990s, Japan offered no fewer than eight massive infrastructure spending programs, each to little avail because its financial system remained unreformed. The Japanese economy survived its "lost" decade largely because its corporate sector could export goods to a booming world economy. If only we were so lucky today. My suspicion is that American consumption patterns (what economists call the marginal propensity to consume) are returning to the lower levels that prevailed before the last few decades. Thus, the Obama stimulus plan may be far too small to dramatically effect the economy. Team Obama will, I suspect, have no choice but to cajole the Federal Reserve to buy massive numbers of mortgages directly and try to stop the slide in housing prices by creating an explosion of mortgage refinancing. But this is no time for policy arrogance. Samuelson's and Krugman's books suggest that economics should be viewed less as a science than as a social art. How quickly the global economy recovers will depend on more than numbers: interest rates and the size of a fiscal stimulus package. It will depend on psychology: whether Obama can restore confidence and optimism. The world desperately needs a big-think financial doctrine. The problem is not a lack of capital or liquidity, but a lack of trust in the financial system. Team Obama needs to use its considerable brainpower to outline nothing less than a global financial architecture for the 21st century. This, however, will be a process of muddling through, a sorting out of possible solutions by trial and error. As Samuelson and Krugman show, there are no quick-fix panaceas. The age of hubris is, or should be, over. David Smick is chairman of the financial advisory firm Johnson Smick International and the author, most recently, of "The World Is Curved: Hidden Dangers to the Global Economy." Reviewed by David Smick, Washington Post Book World (Copyright 2006 Washington Post Book World Service/Washington Post Writers Group)
(hide most of this review)Synopsis: Our newest Nobel Prize-winning economist shows how today"s crisis parallels the events that caused the Great Depression'"and explains what it will take to avoid catastrophe. Synopsis: In 1999, in The Return of Depression Economics, Paul Krugman surveyed the economic crises that had swept across Asia and Latin America, and pointed out that those crises were a warning for all of us: like diseases that have become resistant to antibiotics, the economic maladies that caused the Great Depression were making a comeback. In the years that followed, as Wall Street boomed and financial wheeler-dealers made vast profits, the international crises of the 1990s faded from memory. But now depression economics has come to America: when the great housing bubble of the mid-2000s burst, the U.S. financial system proved as vulnerable as those of developing countries caught up in earlier crises'"and a replay of the 1930s seems all too possible. In this new, greatly updated edition of The Return of Depression Economics, Krugman shows how the failure of regulation to keep pace with an increasingly out-of-control financial system set the United States, and the world as a whole, up for the greatest financial crisis since the 1930s. He also lays out the steps that must be taken to contain the crisis, and turn around a world economy sliding into a deep recession. Brilliantly crafted in Krugman"s trademark style'"lucid, lively, and supremely informed'"this new edition of The Return of Depression Economicswill become an instant cornerstone of the debate over how to respond to the crisis. About the Author Paul Krugman is the recipient of the 2008 Nobel Prize in Economics. He writes a twice-weekly op-ed column for the New York Times and a blog named for his 2007 book, The Conscience of Liberal. He teaches economics at Princeton University.
Product Details
- ISBN:
- 9780393071016
- Author:
- Krugman, Paul
- Publisher:
- W. W. Norton & Company
- Subject:
- Economics - General
- Subject:
- Economic Conditions
- Subject:
- History
- Subject:
- Depressions
- Subject:
- Public Policy - Economic Policy
- Subject:
- Economic History
- Subject:
- Depressions -- 1929.
- Subject:
- Recessions - History - 21st century
- Copyright:
- 2008
- Edition Description:
- New edition
- Publication Date:
- December 2008
- Binding:
- Hardcover
- Grade Level:
- General/trade
- Language:
- English
- Pages:
- 191
- Dimensions:
- 950x650x85 82
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