Paul Krugman: Lessons From History Soon Forgotten

Paul Krugman’s The Return of Depression Economics takes a historical journey through past economic crises while relating them to the modern day. This strategy makes the book extremely applicable because it shows where mistakes have been made and repeated throughout history and which ones have contributed to the current global economic crisis. Journeys through the Great Depression, Argentina, Southeast Asia, Japan, Brazil, and the modern globe create a full picture for the reader to use in forming his or her own opinion on the causes of financial crises. Krugman is by his own admission a supporter of Keynes. For a further look of where his bias may lie, Krugman’s daily blog is named The Conscience of a Liberal. As is to be expected coming from a left-leaning economist, Krugman blames not the basic system for crises but the manner in which people have manipulated it. Instead of following Keynesian theory, nations under threat of a crisis have instead undertaken fiscal and monetary policies that were contractionary instead of expansionary and by doing so placed further strain upon the financial system and thereby driving it further into recession.

This was the mistake made by Hoover before the Great Depression and under orders from the IMF; the same mistake was repeated by several of the East Asian nations, Argentina, and Brazil. As for the current crisis, Krugman places some blame upon America’s economic “messiah” – Allan Greenspan. He points to the point that Greenspan replaced the Stock Bubble of the 1990s with the Housing Bubble of the current decade. The subprime mortgages that were allowed to be traded at will due to deregulation during the Bush Administration followed this and soon the highly leveraged “shadow banking” system was in collapse. As for an outlook on the future, Krugman remains skeptical as the stimulus package amounted to only about 1% of GDP while he believes a stimulus of at least 4% would be necessary to properly bring the economy out of its slump, as worked for Sweden in the 1990s. As for dangers to other economies, Krugman points to currency crises that come from not taking action early enough in the crisis. One lesson that he stresses is to make a decision, no matter what it is. Staying in a state of limbo only creates speculation and exacerbates the problems, making any action that will be taken less effective. Developing nations often faced the issue of choosing to either allow their currency to devalue or to raise interest rates, neither of which was desirable. However, the practice of choosing neither until it was too late always made things much worse for everyone involved. After looking at several of these crises, Krugman finally tackles the current crisis and generalizes that it is such a major disaster because it contains pieces from all of the previous crises in one. As he puts it, the current crisis has as parts of its whole a bursting real estate bubble, runs on banks in the shadow banking system, a liquidity trap, a disruption of international capital flows, and a currency crisis. With all of these placed together, Ben Bernanke has his work cut out for him and according to Krugman, he has not yet done enough to placate all of these economic beasts.

Krugman’s book, The Return of Depression Economics, is undoubtedly well written. His style is equally appropriate for the average American as it is for an aspiring PhD student. His uses of simple analogies, such as the recurring babysitting coop, make difficult concepts easier to grasp. Many will find issues with points he makes throughout the book, most namely of which his strong support of government intervention to prevent economic shocks for turning into full fledged recessions. Others will find issue with his mild opinion of Greenspan, as many once regarded him as one of America’s greatest economic leaders. Overall, I will argue that the book offers lessons for anyone who cares to read from a well educated and well spoken economist. It never tries to be an unbiased view of the world, but offers what Paul Krugman believes to be the soundest advice regarding economic crises that history has taught us time and time again. More than anything, this book is a plea for leaders of the world to be prepared to act in order to save the world from experiencing such a crisis ever again. He only wants us to finally stop repeating history.