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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.”