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[FrankT]

Op-Ed Columnist
The Third Depression
By PAUL KRUGMAN

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.

In the face of this grim picture, you might have expected policy makers to realize that they haven’t 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 isn’t 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 won’t 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 it’s 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.

It’s almost as if the financial markets understand what policy makers seemingly don’t: 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 don’t 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.

http://www.nytimes.com/2010/06/28/opinion/28krugman.html

 

[otake]

I read the piece earlier today. I hope he is wrong. I don't understand enough about global economics and credit.

 

[LegendofJoe]

China is our only hope!

 

[Jex]

China is our only hope!

Time to learn Mandarin. Might as well throw in Hindi as well.

 

[gcubed]

economist who espouses virtue of deficit spending unhappy when countries stop deficit spending...

 

[Vanillalite]

economist who espouses virtue of deficit spending unhappy when countries stop deficit spending...

I've always kind of like Krugman to an extent, but this article came off exactly like that.

Way to predictable.

 

[Byakuya769]

economist who espouses virtue of deficit spending unhappy when countries stop deficit spending...

Yet he's been consistent with this warning for practically two years.

 

[gcubed]

Yet he's been consistent with this warning for practically two years.

that doesn't make him any more right

 

[AlteredBeast]

deficit spending to me doesn't make much sense. Who is going to pay off these debts? Or do the lenders and debtors never expect to be paid/pay?

 

[Plinko]

Inadequate spending? Really? 46 states are facing budget shortfalls in the next 3 years and Krugman is saying we aren't spending enough?

 

[Nachkebia]

I agree with him, so far I see no light. I mean we wont die starving but depression will be world wide. and how exactly China will be saving us?

Also this thread could easily get anti-Semitic :lol

 

[Vanillalite]

Yet he's been consistent with this warning for practically two years.

I don't disagree with this, but I just wasn't sure we needed another article. He's already said all of this before.

 

[Evlar]

Nothing factual about the state of the world economy in that article is new or revelatory. Krugman and some other economists have been stating these views about the dangers of fiscal austerity in the midst of recession and that our efforts so far are insufficient to escape the zero-bound deflationary trap for months now. What's new is the label.

He is protecting himself with reference to historical use of the term 'depression', and he is apparently correct in stating that it was not exclusive to sustained unemployment over 20%; less severe downturns were called depressions based on how long the slump persisted. However much precedent there is for using the word, having a Nobel laureate call today's economy a depression is like lighting a firecracker: it will generate a lot of heat and noise.

 

[XiaNaphryz]

It’s almost as if the financial markets understand what policy makers seemingly don’t: 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.

I don't follow the GAF politics threads too frequently, is this a regular debate topic in there?

 

[gcubed]

deficit spending to me doesn't make much sense. Who is going to pay off these debts? Or do the lenders and debtors never expect to be paid/pay?

you are actually supposed to save money during good times, but unfortunately this country has had a terrible case of deficit spend by democrats in bad times, then super tax cuts by gop in good times.

 

[HylianTom]

As soon as we begin to recover (if/whenever that happens), our oil consumption will go up again, oil prices will jump above $100/bbl again, and the recovery will be smothered in its crib.

Rinse and repeat, and welcome to the new normal.

 

[UltimaKilo]

economist who espouses virtue of deficit spending unhappy when countries stop deficit spending...

He is seriously disillusioned. Like all these economists who are criticizing Europe for drastically cutting back spending and balancing their books. This mentality needs to end.

We need to go back to similar policies of the late 19th century.

 

[Evlar]

Inadequate spending? Really? 46 states are facing budget shortfalls in the next 3 years and Krugman is saying we aren't spending enough?

It sounds quaint to express shock over the suggestion to spend money during a recession 70 years after Keynes. I don't know why you wouldn't be aware of the idea, even if you don't agree with it.

 

[Flo_Evans]

Seems like no matter what happens the Friedmans of the world will say we didn't de-regulate/cut taxes enough, and the Keynes will say we didn't spend enough.

We seem to be spending an awful lot... not sure how deflation (in the US at least) is even possible.

 

[radioheadrule83]

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.

Not to sow seeds of panic and dispair, because there's likely no correlation, but:

The Long Depression (1873-1896): 18 years before World War I
The Great Depression (1929-1931): 8-10 years before World War II

 

[cartoon_soldier]

Seems like no matter what happens the Friedmans of the world will say we didn't de-regulate/cut taxes enough, and the Keynes will say we didn't spend enough.

We seem to be spending an awful lot... not sure how deflation (in the US at least) is even possible.

You obviously haven't kept up with exactly how many jobs US has lost in the past 2 years.

 

[JGS]

10% unemployment (Depressions are usually worse) and companies holding back hiring not because of demand issues but fear of the unknown (Eventually they'll have to cave in and hire people) are good signs. Plus banks have tons of money again and are lending it more freely. They are not lending it to ones who can't pay it back is all.

I see it more along the lines of a prolonged recession. Since it's global it's hitting in waves. It would have been shorter without the prop ups. Now people expect the bailouts or when the help ends it goes back to the usual. Geez, does anything good come out of a political/economic mix?

 

[Blergmeister]

He is seriously disillusioned. Like all these economists who are criticizing Europe for drastically cutting back spending and balancing their books. This mentality needs to end.

We need to go back to similar policies of the late 19th century.

Sounds like a great idea that would help our ail....

...the Long Depression of the 19th century...

OH MY GOD WE ARE DOOMED!!!!

 

[LegendofJoe]

There are way too many structural problems inherent in the global economy to even begin to elaborate what needs to be done on a global supply/demand basis to straighten things out, but I'll share a few thoughts anyway.

In reality it is China that should be fearful of an austere Western future. I say this for two reason. First, the U.S. (and some countries in W. Europe) has long needed to curtail and moderate its consumption levels. We are just now beginning to see that realization hit critical mass in the general populace. Second, China for the most part refuses to nurture its service sector. The consequence of this is that it has to rely almost exclusively on manufacturing exports for economic growth. And who buys these exported goods? That's right the U.S. and Europe. There is no other market big enough to fill China's annual production quota.

Obviously, these two forces are not compatible, something has to give. And that something will hopefully entail a resurgence in manufacturing in Western economies (or in India or Brazil), accompanied by a surge in the growth of the service sector (as well as its currency) in China. Whatever happens China, Brazil, and India are going to have to fill the demand gap somehow because austerity in the western world is coming whether we like it or not.

 

[Byakuya769]

I see it more along the lines of a prolonged recession. Since it's global it's hitting in waves. It would have been shorter without the prop ups. Now people expect the bailouts or when the help ends it goes back to the usual. Geez, does anything good come out of a political/economic mix?

What makes you so sure of that?

 

[Escape Goat]

Recession = Depression lite


so no shit sherlock.

 

[cwmartin]

Not to sow seeds of panic and dispair, because there's likely no correlation, but:

The Long Depression (1873-1896): 18 years before World War I
The Great Depression (1929-1931): 8-10 years before World War II

War ends economic instability. Nothing history hasn't taught us before.

 

[Nachkebia]

War ends economic instability. Nothing history hasn't taught us before.

 

[Quadrangulum]

Hopefully it's more a Long Depression than a Great Depression if true.

 

[Flo_Evans]

You obviously haven't kept up with exactly how many jobs US has lost in the past 2 years.

You obviously haven't kept up with how many jobs the govt. has created in the past 2 years.

I'm firmly in the Keynes camp, when the economy stalls the govt. should step in and get the wheels rolling again. It's hard for me as just a dude on an internet form to accurately gauge how much is too much/not enough. I don't really think there is a "correct" amount, and only in hindsight will we be able to judge what effect we really had. Even then the 2 sides will claim victory/failure based on their own personal bias.

 

[cwmartin]

:lol

I think I just made the face of my avatar after seeing your reply. :lol

 

[Jason's Ultimatum]

Republicans cried to FDR to balance the budget in 1937 and that led to another huge recession.

 

[UltimaKilo]

There are way too many structural problems inherent in the global economy to even begin to elaborate what needs to be done on a global supply/demand basis to straighten things out, but I'll share a few thoughts anyway.

In reality it is China that should be fearful of an austere Western future. I say this for two reason. First, the U.S. (and some countries in W. Europe) has long needed to curtail and moderate its consumption levels. We are just now beginning to see that realization hit critical mass in the general populace. Second, China for the most part refuses to nurture its service sector. The consequence of this is that it has to rely almost exclusively on manufacturing exports for economic growth. And who buys these exported goods? That's right the U.S. and Europe. There is no other market big enough to fill China's annual production quota.

Obviously, these two forces are not compatible, something has to give. And that something will hopefully entail a resurgence in manufacturing in Western economies (or in India or Brazil), accompanied by a surge in the growth of the service sector (as well as its currency) in China. Whatever happens China, Brazil, and India are going to have to fill the demand gap somehow because austerity in the western world is coming whether we like it or not.

A great point. This is usually what I point out when the comparison between the U.S. and European debt post-WWII and the U.S. and China today.

I was pretty cautious to hear that China would be easing it's currency policy to allow appreciation against the dollar and Euro.

 

[tokkun]

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 it’s 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.

It’s almost as if the financial markets understand what policy makers seemingly don’t: 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 don’t 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.

Two problems with this argument:

First, Krugman ignores the fact that Greece was forced to adopt those austerity measures after receiving a huge bailout from other EU members, who didn't want to be bailing out the Greeks again next year. His argument that no countries should try to balance their budgets assumes that if Ireland, Portugal, Spain, etc reach the point of near collapse like Greece, that they can just get another global bailout.

Second, much of the reason that investors have been harder on Greece is because they were forced to fully reveal their debt situation in order to get the bailout. Krugman would have you believe that it is solely due to the austerity measures.

 

[Skiptastic]

Obviously the answer is to get a Republican president who raises taxes and a Democratic president who does budget cuts.

 

[Plinko]

It sounds quaint to express shock over the suggestion to spend money during a recession 70 years after Keynes. I don't know why you wouldn't be aware of the idea, even if you don't agree with it.

Spending money during a recession is fine. I have no problem with that.

But when all but 4 states already have (or are going to have in the next year) budget problems?

 

[Mr. B Natural]

War ends economic instability. Nothing history hasn't taught us before.

Well, IF you can figure out how to profit out of it, end it and invent new profitable technology because of it.

There have been plenty of wars that did not result in economic stability but instead just made things worse. We're living in one of those times right now.

I think one big difference between the world wars and the war on iraq is that sadly, world wars resulted in european countries getting devastated. Rebuilding Paris sounds a lot more economically viable and profitable then say rebuilding a country that has always been and probably always will be unstable. There's no good investing going on here in the new wars...unless you wanna talk oil and halliburton. The new wars in itself are a "charity" and the end result and clean up is just as charitable. Maybe I'm way off. I'm just thinking logically about something as illogical as war and destruction.

 

[antiloop]

Is it more like a domino or a house of cards?

 

[LegendofJoe]

Well, IF you can figure out how to profit out of it, end it and invent new profitable technology because of it.

There have been plenty of wars that did not result in economic stability but instead just made things worse. We're living in one of those times right now.

Oh god don't remind me. Just casually imagining the opportunity cost our two jaunts in the Middle East have amounted to makes me nauseous.

 

[Evlar]

Two problems with this argument:

First, Krugman ignores the fact that Greece was forced to adopt those austerity measures after receiving a huge bailout from other EU members, who didn't want to be bailing out the Greeks again next year. His argument that no countries should try to balance their budgets assumes that if Ireland, Portugal, Spain, etc reach the point of near collapse like Greece, that they can just get another global bailout.

Second, much of the reason that investors have been harder on Greece is because they were forced to fully reveal their debt situation in order to get the bailout. Krugman would have you believe that it is solely due to the austerity measures.

You are incorrect on both points. Krugman is against austerity as a general policy during a recession unless there is a compelling argument for some imminent financing crisis. He favored the Greek bailout and its associated austerity because the alternative was near-certain Greek default and possible panic leading to attacks on more Euro members (namely Spain and Portugal). That is, austerity is damaging but Greek default would have been worse.

His argument against austerity by the Germans, British, Americans, and so forth is that we are in no imminent danger of any similar financing crisis. Greece's payments on their debt had been skyrocketing and they were reduced to junk status. US and German debt continues to get cheaper and cheaper. We are not Greece.

I don't know where you get the idea he is applying one-size-fits-all policy to all economies.

 

[Dresden]

It's a house of cards built out of domino-print cards.

 

[Byakuya769]

Spending money during a recession is fine. I have no problem with that.

But when all but 4 states already have (or are going to have in the next year) budget problems?

Those budget problems are primarily because tax receipts are down, because unemployment is up.

 

[Nachkebia]

I think I just made the face of my avatar after seeing your reply. :lol

 

[Deku]

long depression of the 19th century is often forgotten.

Americans, and policy markers are way too fixated on the great depression, WWI and WW2, whereby their views on 'pain' and suffering are always fixed on short periods of pain.

I wouldn't rule out a long drawn out depression or stagnation. This is scary stuff.

 

[Mael]

Those budget problems are primarily because tax receipts are down, because unemployment is up.

Or because they put tax cuts scheme that didn't work as plannned....

 

[Neuromancer]

I know what would save us:

Prohibition!

Bring back the 18th amendment!

 

[LegendofJoe]

Thankfully, at the G20 meeting the target date they agreed upon for implementing austerity programs was 2013. Hopefully, by that time the global economy will be stable and the U.S. will have abandoned its foreign money pits for greener pastures.

 

[Flo_Evans]

Spending money during a recession is fine. I have no problem with that.

But when all but 4 states already have (or are going to have in the next year) budget problems?

The problem with states budgets is many of them are still operating under old "trickle down" paradigms. They give out huge tax breaks to corporations to build their business there, and expect to make up the shortfall with sales and property taxes of the employees.

They pretty much HAVE to do this, because hey if Missouri won't give us a 5 million dollar tax credit for building our corporate HQ there, Illinois sure will.

When said business gets the tax credits then lays off half of it's workers this no longer works. But instead of taxing corporations fairly, they will raise sales and property tax on individuals or ask for federal handouts.

 

[nemesun]

Time to learn Mandarin. Might as well throw in Hindi as well.

Jim Rogers is already at it. him and his family relocated to that part of the world longtime ago as well.

 

[FrankT]

Thankfully, at the G20 meeting the target date they agreed upon for implementing austerity programs was 2013. Hopefully, by that time the global economy will be stable and the U.S. will have abandoned its foreign money pits for greener pastures.

Naw, Bernanke will have totally and fully opened all spickets well before that point;

http://www.telegraph.co.uk/finance/...er-money-printing-by-the-Federal-Reserve.html