Risk Latte - Paul Krugman and “The Return of Depression Economics”

Paul Krugman and “The Return of Depression Economics”

Rahul Bhattacharya
October 12, 2008

In 1999, Paul Krugman, the famous MIT economist (now at Princeton) wrote an excellent book called "The Return of Depression Economics." The book was an attempt at understanding the unraveling of the global economy following the Asian financial crisis.

In the final chapter of that book, he concluded:

"The world economy is not in depression; it probably will not be in depression anytime soon. But while depression itself has not returned, depression economics - the kinds of problems that characterized much of the world economy in the 1930s, but have not been seen since - has staged a stunning comeback. Five years ago hardly anybody thought that modern nations would be forced to endure bon-crushing recessions for fear of currency speculators; that a major advanced country could find itself persistently unable to generate enough spending to keep its workers and factories employed; that even the Federal Reserve would worry about its ability to counter a financial-market panic. The world economy has turned out to be a much more dangerous place than we imagined."

These words could as well have been spoken by any one of the pundits from the academia or the industry in the last couple of weeks.

Sadly, the book and the crux of Krugman's arguments were forgotten during the boom years that followed since the early years of this century.

Perhaps, Prof Krugman was ten years too early. It is time to revive the Krugman thesis. Perhaps, it is time to finally bury, once and for all, the set of "silly ideas" that go by the name of "supply side economics".

Watching Ben Bernanke and Hank Paulson on the TV and listening to what they are proposing, it certainly feels like the Depression Economics is back.

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