Book Review: The Return of Depression Economics and the Crisis of 2008, by Paul Krugman

The book “The Return of Depression Economics and the Crisis of 2008” by Paul Krugman is a second edition work. The first edition was written in response to the Asian Crisis; the second edition updates and adds material to the various disruptions of the 1990s but adds materials attempting to explain how the United States evolved into the current crisis it now faces.

The effort, Krugman writes, “is not so much about what happened as why it happened.” Since why something happens is interpretation, Krugman inserts his opinions about events and self-selects the factors he includes into his stories so as to provide a coherent line of thought.

The book is well worth reading: It is written in a style that is easily comprehended; it provides a good synopsis of the financial and economic disruptions around the world over the past twenty years or so; and it is thought provoking and should be read even if one does not agree with him.

The bottom line to the book is that it is worth reviewing the Asian crisis because it “turns out to have been a sort of rehearsal for the global crisis now in progress.” Plus, this reprise of the events of the 1990s allows Krugman to proceed to the penultimate chapter of the book, Chapter 10, where he makes some proposals to “get credit flowing again and prop up spending.”

There are five basic proposals that Krugman presents, none of them unexpected, and all of them fitting nicely into what the author refers to as the “Keynesian Compact”, a consensus achieved in the 1950s among most economists, otherwise referred to as the “neoclassical consensus.” His five proposals are:

• Put more capital into the banking system to help unfreeze capital markets;
• Create a lending program for the government to lend to the nonfinancial sector;
• Engage in a global rescue program for developing countries;
• Fiscal stimulus focusing on spending to build infrastructure, etc.;
• Reform and regulate the financial system, especially the non-bank areas.

One can argue with various parts of the histories Krugman presents, his explanation of why things happened. In my case I would take some exception to Krugman’s treatment of the S & L crisis and his discussion about speculative over-investment in physical capital or out-of-date capital leading up to recessions. Also, I am surprised that Krugman spends so much time on the role of the foreign exchange markets in all the historical examples presented and yet, in discussing the ‘bubbles’ of Alan Greenspan, he makes no mention that the value of the United States dollar declined by about 40% during the 2002 to the Summer of 2008 period, and the role the Fed played in this decline. .

I do believe that an understanding of the “Keynesian Compact” is important for policymakers going forward. As Krugman presents it, the Keynesian Compact is an agreement that an economy can achieve and sustain “more or less free markets” when the national government is allowed to follow monetary and fiscal policies that can achieve and sustain “more of less full employment.” That is, relatively stable free markets require the presence of active governmental policies that are aimed at achieving low levels of unemployment.

In the policy realm, Krugman argues that macroeconomic managers — economic policymakers — want three things for their economies: discretion in monetary policy so that they can fight recessions and curb inflation; stable exchange rates so that businesses are not faced with too much uncertainty; and free international trade. He concludes that, in fact, a country can only achieve two of these…it is impossible to achieve all three at the same time. Krugman concludes that “as a general rule, the preferred alternative of most economists — and in particular, the one most consistent with the Keynesian Compact, because it leaves countries free to pursue both free-market and full-employment policies — is a floating exchange rate.”

My problem with this conclusion is that it may be “the preferred alternative of most economists” but it has not turned out to be operationally achievable.

This evolving world may present problems to the United States, as well as to other nations [not unlike Krugman’s story about the Global Reserve Bank (the Glob) and a single global currency (the globo)] but there is strong evidence that nations are not going to act in the future as independently as they have in the past. If the current communications between United States officials and other world officials is any indication, the collaborative efforts have already begun. In fact, to me, nation after nation in the latter part of the 20th century found that they could not dismiss what world financial markets were telling them about their economic policies. Nation after nation stepped into line in trying to act as partners…except the United States. Maybe now!

The Return of Depression Economics and the Crisis of 2008, by Paul Krugman. Dec. 2008: W.W. Norton, hardcover, 224 pp.

Comments

[whidbey:]

Paul received the second Nobel for his contribution to bashing Geo Bush's presidency. This book is about as useful as his prior efforts which to say diatribes and opinion pieces have little attraction unless delivered by a great man. There is the rub, Paul is left in the cold. He is not a philosopher prince! He is the frog of Princeton and the New York Times.

His "one world thinking" is very discouraging when you recall that diversity is its own virtue in avoiding systemic collapse. Put one institution in charge of the earth's carbon (Al's Nobel) or the earth's money is not wise or even likely. But the Swedish Academy will keep on try to run the world while masquerading as intellectuals and Bush critics.

2008 Dec 09 01:59 PM

[Ferdinand E...:]

Hmm. I didn't know that Krugman wanted a global rescue program for what has come to be known as developing countries. Sounds to me like he is aiming for one of those beautiful jobs in the UN - you know, the kind that were held by the morons I worked for during my long tours for that outfit in Senegal and Geneva.

BUT, what he could have said was that President Bush already has one of those programs, although it appears that he is in the mood to destroy a part of the developing world in order to rescue it. Even if the commander-in-chief wasn't in Nam in person, he might have been there in his day dreams.

Aside from that, I don't like the comment above which suggests that the economics section of the Swedish academy is masquerading as intellectuals. Those people might be phonies and ignoramuses, but they know that they can't make anybody with anything at all up-stairs believe that they are...intellectuals.

Professor Ferdinand E. Banks

2008 Dec 10 10:50 AM

[Jack Walker:]

John,

It is a pity that Milton Friedman is not available to respond to Paul Krugman’s book.

Jack

2008 Dec 10 11:46 AM

[woodsey:]

Wealth is created by work; PERIOD. By all means put people to work.

2008 Dec 10 02:25 PM

[Morrison Bo...:]

You are right that nations need to work together on finance and currency issues. They can work together to standardize money, just as we now have standardized computer and other measurement standards. The recent G20 conference and coordinated interest rate changes are first steps toward part of the long range solution to the world's global financial instability, which is a Single Global Currency, managed by a Global Central Bank within a Global Monetary Union.
The success of the euro shows that monetary union is the best way to
ensure monetary stability. The primary problem with the euro and
currencies of other monetary unions is the multi-currency system itself
where currencies fluctuate in value against each other. If 16 countries
can use the same currency, why not 192?
In addition to eliminating currency risk, the use of a Single Global
Currency would eliminate the current foreign exchange trading expense of $400 billion annually, eliminate current account imbalances, eliminate the need for foreign exchange reserves (now totalling more than $3 trillion); and bring other benefits worth trillions.
The Single Global Currency Assn. promotes the implementation of a Single Global Currency by 2024, the 80th anniversary of the 1944 conference.
That’s only 16 years away. The world is moving toward a Single Global
Currency through the creation of monetary unions in Asia, North and South America, Africa and the Middle East and the expansion of monetary unions in West Africa, the Caribbean and Europe.
The Assn’s website is singleglobalcurrency.o.... See the book, “The
Single Global Currency - Common Cents for the World."
Morrison Bonpasse
President
Single Global Currency Assn.
Newcastle, Maine, USA

2008 Dec 13 12:46 PM