Crash Landings: Paul Krugman's Depression Economics
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"We sometimes, for example, hear it said," writes John Stuart Mill in his Principles of Political Economy, "that governments ought to confine themselves to affording protection against force and fraud"; that people should otherwise be "free agents, able to take care of themselves." But why, he asks, considering all the "other evils" of a market society, should people not be more widely protected by government--that is, "by their own collective strength"? Much like Mill, Paul Krugman likes capitalism's innovations but not its crises and thinks that government has a duty to facilitate the former and protect us from the latter. He doubts that citizens will get much protection from moguls--or from most economists, for that matter--unless we trouble to grasp how the whole intricate game works, so that our legislators will form a consensus about how to regulate it. Mill supposed that we needed to see "the Dynamics of political economy," not just "the Statics." Krugman knows we need Liquidity Traps for Dummies.
So for the past twenty years Krugman has dutifully mapped the patterns, worried the numbers and issued his warnings--as in (now we can say it) his seriously underestimated book The Return of Depression Economics (1999), a primer on the financial busts of Japan, the Asian "tigers" and Latin America, transparently meant to caution Americans about their own vulnerabilities. He could not have chosen a worse time for prophesy than the end of the millennium. Technology markets were booming, Google was just a year old and Enron was voted a Fortune "Most Admired Company" (for the fourth consecutive year). Meanwhile, a budget surplus was accruing, and the Clinton White House, the Federal Reserve and Congress were all in agreement that, say, regulating "credit default swaps" would be an insult to the professionalism of investment bankers.
What about the problems that had recently hobbled other economies? Would not Wall Street rehearse Japan's recession? Then again, most thought, what did the Japanese, with their computerless offices and hierarchical keiretsu, have to do with entrepreneurial, Lotus Notes-enveloped us? Mexico's politically inbred financial institutions? What board member of an American insurance company--wired with information, faithful to shareholder value--would allow its executives to underwrite high-risk bets, or indeed any transactions, without appropriate reserves? I was, at the time, director of intellectual capital at KPMG International, designing a worldwide intranet for auditors and consultants; our news filters were programmed to cause any story with the word "Greenspan" in it to leap onto 100,000 desktops. The digerati, successive presidents of the United States--Andrea Mitchell, too!--seemed under the spell of the old Atlas's shrugs. But young Krugman, I was told (and might here and there say), didn't "get it."
The Return was, as things turned out, the last book Krugman published before breaking onto the New York Times op-ed page, from which he has persisted in calls for predictability, simplicity and safety for salaried citizens who have better things to do than maximize their utilities all day long. Krugman championed single-payer healthcare; he hammered away at Dick Armey's tax cuts and Karl Rove's winning creepiness; after the 2004 elections, he almost single-handedly shamed wavering Republican moderates into abandoning their president's proposal to let Aunt Sheila risk chunks of her Social Security on the stock market. Since 2006 he has become a kind of John the Baptist of our Keynesian resurrection, warning as early as a year ago that an Argentine-style crisis was looming because global investors would eventually learn that Americans, too, were unfit to soak up much of their surplus savings, that US financial markets were "characterized less by sophistication than by sophistry."
Now he has reissued The Return, which he has shrewdly subtitled and hastily updated--in part, I suppose, to say, "I told you so" (and to make a buck from a different kind of derivative), but mainly to reiterate what he has argued all along: that any financial institution we dare not let fail we also dare not leave unregulated; that a commonwealth must use its powers to spend and invest and especially to promote growth when more or less free markets more or less inevitably let us down.
For a slender book, The Return is ambitious--actually, it's three polemics in one. The first sketches out the ways financial capital in Asia and Latin America flowed, or didn't, to cause sudden recessions, or inflationary spirals, or currency devaluations, or all of these at once. Various governments, even those trying to play by the rules of fiscal conservatives, were confronted with terrible choices: either decline to print money, endure recession and let ordinary people suffer now; or print money, discourage investment and cause them to suffer later. The second polemic draws parallels between what happened in these places and what might happen--actually, what is happening--in America, Europe and more developed parts of the world, suggesting what dislocations to expect and remedies to pursue. Krugman sighs when thinking about economists--including, notably, his Princeton colleague Ben Bernanke--who assumed that officials at Treasury and the Fed had evolved the means to reduce economic imbalances to the point where regulations could be relaxed and the term "business cycle" would seem an anachronism.
The third polemic, the thinnest and most implicit of the three, consists of arguments scattered throughout the book regarding how changes in the "real economy"--the businesses that actually make, transport and design things--shape financial markets or are shaped by them. How, in particular, might revolutionary changes in information technology--producing changes in the structure of corporations and their terms of competition--yield a changing financial pattern? Or how might those changes entail a revised superintending of the business cycle? Krugman allows, for example, that the globalization of industrial markets and their much higher rates of productivity--both the result of a new, pervasive information platform--might have justified Greenspan's unwillingness to hike interest rates after the "irrational exuberance" of the dot-com bubble, although low rates, both men knew, were bound to sustain the value of houses--in effect, risking an even bigger bubble. Krugman writes that it was clear by the 1990s "that the information industries would dramatically change the look and feel of our economy."
Still, Krugman doesn't much go into how the new technology worked or spread, speeding up big businesses or lowering barriers for small ones. What mattered, so he writes, was the sheer visibility of cool technology, the "romance" of a new American industry--the fact that high-tech start-ups made entrepreneurship seem admirable "in a way that it hadn't for more than a century." The Berlin Wall had been torn down, and business magazines "actually became interesting to read"; even radical economic theorists were lulled into a "new sense of optimism about capitalism," he writes. Krugman's argument here is all about perceptions, psychology. What interests him, mainly, are the financial traces left by investors acting on assumed changes in the commercial environment; and what compels him is how governments might respond to any consequent exuberance.
I suppose it is clear by now that the first of The Return's polemics strikes me as the most fully satisfying of the three. And if the third were better--as good as Krugman could have made it--the second would be even more convincing. Make no mistake, the trenchancy with which Krugman explains capitalism's dysfunctions--the fall of Thailand's baht, the smooth corruptions of Mexico's PRI--is reason enough to read the book; these sections will embarrass blinkered proponents of laissez-faire, IMF austerity and Laffer curves, if the headlines have not already. Yet at the risk of rekindling the vanities I indulged at KPMG, I am not sure Krugman, or macroeconomists more generally, fully appreciate the technology revolution that's hit the real economy in recent years--you know, the business innovations whose details that other Times columnist sweats.