Krugman: The Third Depression

[ProSense]

Op-Ed Columnist

The Third Depression

By PAUL KRUGMAN
Published: June 27, 2010

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.

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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.

<...>

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.

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[Cha]

1. Not good. Thanks for

the article, PS.

[midnight]

2. If elected officials are taking their talking points from Hover,

it is a no wonder that this is the third depression.

[girl gone mad]

3. Deficit dove Krugman isn't really helping matters much..

Time and again he concedes to the right's bogus deficit hype.

Obama is even more confused about deficits.

http://www.creditwritedowns.com/2010/02/the-president-remains-trapped-in-the-talons-of-the-deficit-hawks.html

[ProSense]

6. Obama wants to reduce the deficit yes,

but he is pushing for more stimulus.

Unfortunately, he’s got it backwards. The deficits he decries actually help to sustain demand and create jobs, thereby supporting the economy — not destroying it. And he reflects a commonly held belief that growing government debt represents a burden on our children and grandchildren, implicitly suggesting that future generations will have to reduce consumption in order to pay the taxes required to pay off the outstanding debt. Related to this is the fallacy that too much bond issuance will create a “debtors’ revolt”, whereby “the markets” will force the country to pay higher interest rates in order to “fund” its spending.

Obama steps up push for added economic stimulus

It's Marshall Auerback who is confused, you can address wasteful spending (like cutting weapons systems no longer in use) and direct funding to programs that stimulate the economy.

[girl gone mad]

8. No, Auerback is not confused.

Reducing the deficit will cause real economic pain in an era where private business and individuals are net savers. That is basic math, accounting 101.

[ProSense]

9. "Reducing the deficit will cause real economic pain "

Reducing wasteful spending will not.

People will not suffer if a weapons system is cancelled or excessive payments to contractors are curb.

The problem people seem to be having is that they think all spending is useful. Everyone wants to cut defense spending despite the current economic climate so obviously it depends on which spending is cut.

[girl gone mad]

12. Except the cuts he's talking about making to defense are tiny..

and they won't even come close to covering the promised deficit reductions. So we can guess where the real cuts are going to come from.

[rhett o rick]

14. Our economy is one bubble inside other bubbles. Stimulus seem to just restart the big bubble.

We need a complete overhaul. We need jobs. We need to cut defense spending and spend on reducing our energy dependence on oil.

[MannyGoldstein]

4. Barack Hoover Obama

http://harpers.org/archive/2009/06/hbc-90005235

Same policies, same results.

Quelle surprise!

[ProSense]

15. I think you misread Krugman's commentary

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.

[Name removed]

24. Deleted message

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[Art_from_Ark]

5. There have been several other depressions in US history

In addition to the 1873 and 1929-31 events:

The Panic of 1837 turned into a full-blown depression that lasted for 5-7 years.
The Panic of 1893 turned into a depression that lasted until about 1897.
The Panic of 1907 turned into the Depression of 1907-08.

[Politics_Guy25]

7. Who the heck CARES about deficits right now!

My god, I can't believe anyone in the administration is taking the deficit situation AT THE MOMENT seriously. The economy is set to lose 150,000 jobs in June and deficit reduction is all the rage. It's outrageous. We need MASSIVE stimulus injected into the economy and need it now.

Congress can go to hell for refusing to grant it.

I swear, if the administration focuses on deficit reduction and not massive new stimulus to get unemployment down, it will be the end of them.

They are far smarter than I am. How can they not know this!

[Hydra]

10. They DO know this

Welcome to the culling.

[Art_from_Ark]

13. These guys are penny-wise and pound-foolish

They have no trouble spending hundreds of billions on bank bailouts and wars, but they pinch pennies when it comes to helping out the average citizen.

On edit: It really should be called "penny foolish and pound foolish"

[totodeinhere]

22. But if they don't reduce the deficit we will suffer more in the log run.

Under your plan, we might get unemployment down for now, but in the long run the huge deficit might put us into a ten year depression. Obama is no dummy. He must look at the long term health of the economy, not just a temporary short term gain.

[Turbineguy]

11. So let's see....

If you export jobs from a high paying economy to a low paying economy, the people in the high paying economy cannot buy products made in a low paying economy. So then people in the low paying economy lose jobs as well.

However, by making credit cheap and plentiful you create the illusion that people in the high paying economy still have money and keep the things running. For a while.

People went to business school not to learn that.

[depakid]

16. Should have listened back in February 2009...

it's not like folks weren't warned. Repeatedly.

Both in inner circles- and on countless economic forums and blogs.

Not to mention- right here on this forum.

[paulk]

17. Krugman got it exactly right

The first stimulus wasn't large enough, especially with so much of it going to tax cuts, and the Congress wouldn't have the will to do a 2nd stimulus.

[depakid]

23. Yep- and Dean Baker had it right about the mortgage program and the financial transactions tax

Right to rent would have been a success- yet the administration's insular "team" decided that they preferred the bankster's approach.

Should have listened to the guys with the track record and objective expertise.

[MadHound]

18. This Depression is going to continue

Until we stop spending our resources on never-ending war and start spending our resources on our own citizens. Hopefully Obama will wake up and recognize this, but given his track record so far, it is highly unlikely.

[Jennicut]

19. Of course we need more stimulus. But the public and Congress don't want it, by a majority.

Tell me something besides that. The public didn't even like the stimulus. Please don't tell me it was a failure by Obama to adequately explain it. The American people are so used to railing against spending they have not got a clue. If we collapse again, then they can look at who they elect to Congress to blame.

[depakid]

25. Blew the political capital AND didn't get it done to boot

That was a failure of leadership if ever there was one.

-and the OP doesn't even touch on the massive problems in state budgets in the US.

[Jennicut]

26. Right. Just like you told me that most people are really liberal, for real.

Gallup is so wrong. And of course, no matter how people say they feel about certain issues, they still vote Rethugs in again and again. Face it, it is much easier to say spending is evil since Reagan ingrained in into people's heads. Luckily, people my age and younger remember Reagan only as kids or in the history books. The sooner Baby Boomers age, the better off we will all be.

[depakid]

28. If you read the actual data, you'll see that that's correct.

You can find it here (it will help to keep you from laboring under this dysfunctional misconception):

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=8311732&mesg_id=8312675

Many Americans hold outright false beliefs and look for evidence to confirm it- while ignoring clear and convincing data and analysis (which is what you'll find in depth at the link).

Regarding the above post- the stimulus and mortgage program(s) didn't get the job done- and informed people listening to the credible experts (people with a track record of getting it right) knew from the outset that would very likely be the case.

[ieoeja]

20. WTF?!?

The United States has experienced 7 or 8 economic depressions. One of those is debatable among economists. Krugman is the FIRST economist I have ever heard of denying the other 5.

Economic depressions were actually quite common. Every 12-15 years on average. It wasn't until the last depression that most people decided the government should be responsible for the economy. Not all people, of course. Many rightists still believe the gov't should let the economy do its own thing, even if that means going back to the 12-15 year cycle of economic depressions.

[Odin2005]

30. The definition of "depression" has changed over the years.

under the old usage the late 70s and early 80s would have been called a "depression". The current definition of a depression is a drop in GDP of at least 10% that does not recover to pre-crisis GDP levels for several years.

[Ryano42]

21. Well if it is...and nothing is done.

Then it's TSHTF. Time to get ready. Game over.

I don't see it happening like the 30's...people don't pull together; it's more selfish now. Hell we can't even band together and protest! People seem greedier, more violent and certainly more armed.

This will be no Grapes of Wrath...this will be civil war I am afraid.

:(

[Douglas Carpenter]

27. kick and recommend!! VERY IMPORTANT!!!

[Odin2005]

29. The lunatics are running the asylum!