Gift This Book: The Return of Depression Economics, by Paul Krugman 12 comments
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The Return of Depression Economics, by Paul Krugman, is certain to be one of the most gifted books this holiday season; that’s what happens when you combine a Nobel Prize with a massive economic crisis and book with the word “depression” in the title. Here’s another reason to buy it for someone, as I found out: it’s so short you can read it in a couple of hours before wrapping it up.
The title of the book refers broadly to the recurrence of a need to deal with Depression-style economic threats, a theme that originally (in the 1999 edition) referred to the emerging markets crisis of 1997-98 and the stagnation in Japan caused by the collapse of their housing bubble at the beginning of the 1990s.
More particularly, however, it refers to the problems brought on by a collapse in economic demand - “insufficient private spending to make use of the available productive capacity,” as Krugman puts it. And it seems clear that that’s where we are today. The Case-Shiller index of housing prices reached its peak in real terms sometime in 2006, but the economy continued to grow until the end of 2007, even as housing prices fell significantly. Although the negative wealth effect of falling housing must have had some effect, people still wanted to spend. When the severe phase of the crisis began in September 2008, it was widely described as a credit crunch, meaning that reductions in the supply of credit were making it difficult for borrowers to get the money they needed, either for investment or consumption.
Today, however, as Simon [Johnson, blog co-author-Ed.] has said before, falling demand for credit may be just as big a problem. People just don’t want to borrow money any more, and if that’s the case, then increasing the supply of credit (by funneling cash into banks) will have only a limited effect, as we’ve seen. This is what Krugman finds most worrying about the current situation: the “loss of policy traction,” in which even dramatic moves by the Fed have only a limited impact on the real economy.
He doesn’t quite come out and say it in so many words, but a lot of Krugman’s story has to do with what might be called psychology. He describes how economic crises may be the product of poor governmental policies and weak economic fundamentals - or they may be entirely the product of panics that have the very real effect of destroying wealth and setting countries back for years. Seen from this perspective, the scale of the current crisis may not have any proportional relationship to the fundamental flaws of our economy (or the global economy). It may simply reflect the fact that the scale, liquidity, and leverage of the global financial system have made it possible for panics to have much greater damage than they did in the past. (I know we’re still not dealing with anything on the scale of the Great Depression, but while the financial system was simpler then, it also had a simpler flaw - the lack of deposit insurance - and a simpler mistake - the failure to expand monetary policy in response to the downturn.)
The fact that you are reading this blog probably means that you would not learn a lot about the current crisis from Krugman’s book (especially if you’ve already read his article in The New York Review of Books), but you might learn something about the crisis of the 1990s, and the dynamics of currency crises. In 1997-98, multiple unrelated emerging market countries suffered panics and currency crises, and the response of “Washington” (the U.S. and the IMF) was to demand fiscal austerity - higher interest rates, lower government spending, higher taxes - in exchange for bailout loans. Now, of course, when large parts of wealthy country economies need to be bailed out, few people are calling for austerity; in the U.S., liberals and (most) conservatives differ only on whether the deficit should be increased through government spending or through tax cuts.
Ten years ago, perhaps the austerity argument was defensible: in order for countries to gain credibility (and be able to pay back their loans), they needed to improve their government balance sheets. And at the time, the U.S. could be confident that reduced purchasing power in Thailand, South Korea, and Russia would have little effect on our economy. Today, however, the entire world is facing a steep downturn, and an economic stimulus will be most effective if it is roughly coordinated across countries, including emerging markets. So far the IMF appears to be using a gentler hand than last time, although so far most countries are attempting to steer clear unless absolutely necessary. The fact is that preventing an economic collapse in emerging markets will be an important part of our recovery this time, both because of the importance of foreign trade and because of the amount of cross-border investment (think about the massive inflows into international stock funds in the past ten years).
In any case, it’s a quick read, and for those who are nervous about Krugman’s politics, they make only a very brief entry near the end.
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Great, more Keynesian economics is the solution? Well ladies and gentlemen, they think we can spend OUR debt dollars to prosperity without any regard for what it is we are spending those debt dollars on. Sad, really, as it does matter what we spend debt dollars on. We don't need more debt either as that is part of the problem.
Is spending vast amounts of debt dollars on homes and consumer items going to increase the wealth of the nation or its economic output? Is spending debt dollars to buy tvs, dvds, etc, going to increase our economic output or increase the wealth of our nation? Do we really need to prop up blind consumerism? I'd say the only time debt dollars are useful is when they are used to develop an economy to build/innovate/invent/ new companies and real technologies to help create a productive economy. We haven't been using our debt dollars to rebuild the economy into something more productive. Most of our dollars were squandered on items we did not need made in foreign lands. I'm not against consumerism, some is great - but we did go a bit overboard, as is evident by our vast quantities of junk in many of our homes (including mine) and the masses of debt which many of us have little to show for.
We need to be careful what we (as consumers, business managers, entrepreneur's, etc) spend any future debts on - to make sure it is healthy debt (if we do decide to take on more) that is going to increase the wealth of our nation while solving problems, employing fellow countrymen and trying to create a more productive society. Then we need to try and pay down the debts when times are good - we can't ignore this! We can't continue to grow an economy based solely on debt without creating a dangerous ponzi scheme (or pyramid scheme) that relies on infinite growth of the debt and inflation. If we ignore the basic economics and blindly spend beyond our means, the outcome will not be healthy. We should not look to government to "bail" us out by spending vast sums of debt dollars - it will only further indebted the nation to others. Who bails the government out?
If you think you can spend your way to prosperity with debt dollars, without any regard to what you spend your money on (any old consumer item, a bridge to no where, etc), the outcome will be a nasty one and one that is inevitable.
About this depression thing: forget it. When the last depression began the governments of many countries were prisoners of stupidity. That is no longer the case, although I would sleep easier if Mr Bernanke were banished to academia, and another treasury secretary had been chosen - although Mr Secretary might turn out to be all right.
Ferdinand E. Banks.
For those who haven't read HOW TO LIE WITH STATISTICS. it is essential to know how economic numbers are derived before making analyses based on them. In the 'home equity refi years', the government counted equity taken out of homes as income. Really. What the government showed as an expanding, growing economy through all the early years of the 21st century, was made possible only by a combination of debt and new money flooding the markets by el maestro "bubbles" Greenspin. It wasn't real. Or, more accurately, it was really DEBT.
You can't determine the financial status of any entity by looking at only one portion of the balance sheet. The government "statistics" behind so many economic analyses are more thoroughly cooked than Aunt Evelyn's baked beans. And like her beans, it's impossible to figure out what went into them after that much cooking.
Analysis and conclusions are only as accurate as the assumptions on which they are based.
The real economy has not grown in many years. But we spent as if it had.
Suppose most people decided to quit smoking and only buy one car every ten years instead of every three years? That decision alone would probably crater the economy.
Krugman, along with most intellectuals, including me, thinks that homo economicus is not rational but instead buys too much stuff, and moreover, too much of the wrong stuff:
Too many cars and gadgets, too much fast food, alcohol, cigarettes and Viagra (have I missed something?) not to mention all the illegal stuff.
The great temptation of rational people like Krugman (and me) is to try to induce (force) other people to live rationally, the way they (we) do.
Note, that temptation is not socialist or communist but totalitarian and totalitarianism can exist under any economic arrangement. For example, on paper, Soviet Russia and Maoist China had constitutions that were as good as, if not better than, the American constitution. So did Nazi Germany. On paper.
The future may see the American government using the immense power it has accumulated since World War II to tell us how to spend our money and when.
"That will be two veggie burgers and one bag of organic potatoes, please."
In 2012, the Supreme Court rules: "Don't complain. Eat your vegetables."
Excellent comment stream. A new factoid I have picked up over the week-end is that the Peterson Foundation has estimated that the National Debt is passing the collective net worth of all U.S. citizens. This relates to the appropriate comments relating to consumerism.
carey_jim, we need better nutrition in this country, but I agree with your contention (implied) that legislating vegetable consumption would be undesirable. I would maintain it would also be ineffective. How successful was prohibition? How successful is the "War on Drugs"?
The nutrition problem can only be addressed if people like to eat well. We have a society that lives on fast food with a lot of cheap, empty calories. Many cases of obesity are abetted, not only by the low cost of the "wrong" foods, but by the acquired taste for them.
Part of the problem is the government subsidy programs that support the growing of such things as sugar, corn and soybeans, but do nothing comparable for grains, fruits and vegetables. That has reinforced the cost advantage of the wrong foods. Most schools, running under a budget gun, overuse the cheap food option, conditioning our children to follow the path to poor diet.
The problem should be addressed by figuring out a way to encourage (but not require) good diet. One way to start is to remove government subsidies for the "bad guys". Another way is to support good nutrition at the school lunch counter. There are probably many more suggestions, and I hope other commenters may have some ideas to offer.
I will conclude with a bad pun: We will get a lot farther in addressing the national nutritional problem with a carrot than a stick.
Civilizations have defined themselves with, among other things, their stances towards the problem of freedom vs equality, or if you are religious/philosophica... freedom vs determinism.
The Catholic Church, contrary to what some people think, believes in free will and individual choice while the protestant churches, starting with John Calvin and Martin Luther tend to believe in determinism, e.g., that God decides from the beginning of time everything that happens and everyone's salvation or damnation and there is nothing anyone can do about it.
This extreme determinism probably came from the new scientific world view started by Galileo and brought to perfection by Isaac Newton, But whatever the reason the rise of scientific determinism coincided with the Protestant Reformation in the 16th century and its radical doctrine of predestination.
America started as a Puritan society where all all behavior was regulated by church fathers and there was very little freedom. Paradoxically however, the philosophy of absolute determinism slowly gave rise to freedom for the very reason that IF there is nothing you can do to change your fate, well, then it doesn't matter WHAT you do. Enlightened early Puritan church fathers such as John Winthrop actually came very close to this view.
Even so, there was a very strong tendency for religious folks to preach to sinners and to tell them what to do in various periods of Great Religious Revivals in America.
But by the end of the 18th century Americans had had enough of being told what to do by religious authorities and the American Revolution was founded on the principle of disestablishmentariani... which meant, in principle, separating church and state and removing the moral authority of the church in politics and trade (which was in a much more rudimentary stage in those days.)
What we have had, ever since, is an emphasis on freedom at the expense of equality (which expresses itself in moral and legal principles regulating behavior.)
We still have an angry church telling us what to do but they seem to be much more interested in sex than nutrition and other social issues.
Whatever the case, and to "come to a point" America is at the other end of the freedom/freewill spectrum and the old Soviet Union and Mao's China were at the other end at the determinism/equality end. (Things can change pretty quickly of course.)
Unless they are forced to change by economic/social necessity, American citizens aren't going to listen to those moralists and politicians who have the audacity (or stupidity) to tell them to stop smoking, stop eating at McDonald's or stop doing anything the moralists and politicians think is destructive to our society as a whole.
And I think that kind of excessive selfish and sometimes aggressive "know-nothingism" of the average American citizen is at the bottom of the excesses that got us into the mess we seem to be headed towards.
Obviously, I just sketched the bare outlines of a very complicated problem and a lot more could be added (or subtracted!)
On Dec 21 02:18 PM John Lounsbury wrote:
> I appreciate the good book review. More book reviews on Seeking
> Alpha would be welcome.
>
> Excellent comment stream. A new factoid I have picked up over the
> week-end is that the Peterson Foundation has estimated that the National
> Debt is passing the collective net worth of all U.S. citizens. This
> relates to the appropriate comments relating to consumerism.
>
> carey_jim, we need better nutrition in this country, but I agree
> with your contention (implied) that legislating vegetable consumption
> would be undesirable. I would maintain it would also be ineffective.
> How successful was prohibition? How successful is the "War on Drugs"?
>
>
> The nutrition problem can only be addressed if people like to eat
> well. We have a society that lives on fast food with a lot of cheap,
> empty calories. Many cases of obesity are abetted, not only by the
> low cost of the "wrong" foods, but by the acquired taste for them.
>
>
> Part of the problem is the government subsidy programs that support
> the growing of such things as sugar, corn and soybeans, but do nothing
> comparable for grains, fruits and vegetables. That has reinforced
> the cost advantage of the wrong foods. Most schools, running under
> a budget gun, overuse the cheap food option, conditioning our children
> to follow the path to poor diet.
>
> The problem should be addressed by figuring out a way to encourage
> (but not require) good diet. One way to start is to remove government
> subsidies for the "bad guys". Another way is to support good nutrition
> at the school lunch counter. There are probably many more suggestions,
> and I hope other commenters may have some ideas to offer.
>
> I will conclude with a bad pun: We will get a lot farther in addressing
> the national nutritional problem with a carrot than a stick.
>
>
I gave a talk at one of the elite schools in Paris this summer, and I was amazed at the fluency of the French audience where English is concerned. Maybe a switch is in order: The knowledge of English is e.g. France can be broadened, while Americans can adopt the 'lingo' of the Parisian cités.
Ferdinand E. Banks
I have enjoyed the many discussions we have had. It seems we argue and also agree. At the end, I think we agree more than argue.
I want to add one thing I wanted to come out of my first comment and didn't actually state. It has to do with the law of unintended consequences. The government supports of sugar, corn and soy production have not only enabled the production of cheap empty calorie junk foods, but have also made meat production much cheaper. I don't think the exposure to increased obesity ever entered the minds of the perpetrators of these support legislations. By the way, I enjoy meat and eat some every day, but I am fortunate to have the money to be able to afford healthier foods and an acquired taste (from a good upbringing, thank-you mother) for fruits, vegetables and whole grains.
Personally I don't understand how a problem caused by spending money we don't have will be cured by spending money we don't have.