Wed. Jun 29th, 2022

Written by Paul Krugman for The New York Times

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 weekends 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, todays 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 wasnt the end of the third depression, just as the business upturn that began in 1933 wasnt 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.

In the face of this grim picture, you might have expected policy makers to realize that they havent yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence. As a practical matter, however, America isnt doing much better. The Fed seems aware of the deflationary risks but what it proposes to do about these risks is, well, nothing. The Obama administration understands the dangers of premature fiscal austerity but because Republicans and conservative Democrats in Congress wont authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels.

Why the wrong turn in policy? The hard-liners often invoke the troubles facing Greece and other nations around the edges of Europe to justify their actions. And its true that bond investors have turned on governments with intractable deficits. But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners medicine.

Its almost as if the financial markets understand what policy makers seemingly dont: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.

So I dont think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.

And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.


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12 years ago

The paydirt paragraph:

“It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.”

Funny how the folks championing austerity never champion it for *themselves*, eh? If Bobo, Doughboy, and other right-wing champions of austerity think suffering builds character so well, how about they relinquish their six-figure salaries and try to live on the meager sums offered by most states’ unemployment compensation programs? Hmm…

– Badtux the “Austerity for others, not for me?” Penguin

RS Janes
12 years ago

Badtux has a great point and, unfortunately, Krugman fails to mention the reason many believe the ‘hard-liners’ are taking this austere path — to rid America (and other nations) of a viable middle-class. Why would the wealthy elite want to destroy the middle-class? It’s very short-sighted: they think it will permanently eliminate pesky unions, employer-paid job benefits, and guarantee a huge pool of people willing to work for next to nothing. Of course, they’ll be few left who can afford to buy cars, electronics, and even Walmart’s cheap junk, but, as I say, they are very short-sighted, as in really stupidly short-sighted. We are headed for a massive global economic collapse comparable to the comet that killed off the dinosaurs; whether this one kills off the multi-national corporate dinosaurs remains to be seen.

12 years ago

There are limits to what Krugman can publish in the New York Times. In a sense he is like the reporters for Pravda back during Soviet times, who often had to get across the truth via what they did *not* say just as much as via what they *did* say. Working for Pravda on the Hudson is no different. I was delighted to find the above paragraph in Krugman’s opinion piece, to tell you the truth — it says so many things that our would-be owners don’t want people to know, without outright stating it.

Ken Carman
11 years ago

I knew what Badtux says above to be true more than ever during Bush II: I found it interesting that as soon as some horrible fact came out about the inferior son and company the MSM, collectively, would proclaim, “But look!!! A seagull! Wouldn’t rather look at the seagull instead???”

I’m not claiming it had never been like that before, just had become so obvious… to the point of stupidity.

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