Originally published at: https://blog.12min.com/the-return-of-depression-economics-and-the-crisis-of-2008-pdf/
The Return of Depression Economics and the Crisis of 2008” is essentially an update of Paul Krugman’s decade younger book, “The Return of Depression Economics.”
Now taking into account the 2008 financial crisis, Paul Krugman is once again at his best investigating what drives economic growth and what causes recession.
And how the government – and we, the regular people – can contribute to the former and stop the latter.
Who Should Read "The Return of Depression Economics and the Crisis of 2008"? And Why?Since it’s Paul Krugman we’re talking about, it’s safe to say "The Return of Depression Economics and the Crisis of 2008" – just like any other of his books – is a must-read for anyone interested in how the mechanisms of world economics and financial markets work in theory and in practice.
Featuring a host of analogies which simplify complex economic concepts, “The Return of Depression Economics and the Crisis of 2008” may also prove to be a thought-provoking book for beginners as well.
Finally, an economist you can understand!
About Paul KrugmanPaul Krugman is an American economist, currently working as a columnist for "The New York Times" and as a Distinguished Professor of Economics at the Graduate Center of the City University of New York.
Krugman has authored and edited almost 30 books and has published over 200 scholarly articles, in addition to writing numerous columns for popular publications such as “Slate,” “Fortune,” and “The New York Times.”
One of the most influential thinkers in the world, in 2011, a survey ranked Krugman as the economists’ favorite economist under 60 by a wide margin.
In 2008, Krugman won the Nobel Memorial Prize in Economic Sciences for his contributions to New Economic Geography and New Trade Theory.
"The Return of Depression Economics and the Crisis of 2008 PDF Summary"When Paul Krugman writes for the general public, he is very aware that he is writing for the general public.
So, he uses great analogies to describe complex processes and, subsequently, make his point.
Let’s start our summary with possibly the most significant – and memorable – presented in “The Return of Depression Economics and the Crisis of 2008,” since it describes the logic behind an economic slump.
Say that a babysitting co-op has been set up for 150 couples with young children.
Its currency: babysitting coupons which are given to one babysitting couple when it babysits for another to be used on a night out.
And in the beginning, everything is going great: some couples are happy with how other couples are babysitting, and the latter are happy with the value of the coupon they earn in return.
However, after some time, the couples begin to sense that there is some shortage of coupons.
As a result, they are now much more interested in babysitting to earn coupons, than using the coupons they have already earned.
This, however, means that nobody is going out now, and that, consequently, nobody needs a babysitting couple.
So, in other words, the babysitting business comes to a halt; and, what’s worse, nobody is enjoying life.
There’s no corruption, not one single change in the babysitting practices, and the quality of the service hasn’t diminished one bit.
Well, Paul Krugman notes,
The problem was not with the co-op’s ability to produce, but simply a lack of ‘effective demand’: too little spending on real goods (babysitting time) because people were trying to accumulate cash (babysitting coupons) instead. The lesson for the real world is that your vulnerability to the business cycle may have little or nothing to do with your more fundamental economic strengths and weaknesses: bad things can happen to good economies.There’s one more lesson here, and it’s both the more important one and the one Krugman advances.
Namely: the solution.
According to Krugman, there are two different ways to solve the problem of this anecdotal babysitting co-op.
The first is a law forcing each of the couples to go out at least twice a month. The second – much more reasonable – is to simply up the supply of babysitting coupons.
Recessions, in other words, can be fought simply by printing money – and can sometimes (usually) be cured with surprising ease.Unfortunately, however – as the analogy demonstrates – recessions can be also pretty difficult to predict, since panic (regardless of how irrational) can easily supersede sound macroeconomic policies.
But nobody knows when a panic will evolve to do just that, since not every shock causes panics of this degree.
Once again, an analogy illustrates the situation well.
Think of a microphone in an auditorium: it always produces a feedback loop, since the speakers emit the sound of the microphone which is then caught by the microphone and send back to the speakers to be amplified.
However, this is usually controlled and causes no problems.
But, what will happen if, say, the sound is too loud or the room has a significant echo?
That’s right: a malfunction of such extent which will cause the system to stop working properly.
Well, the very same happens in an economy: a lack of regulation of a system leads to its breakdown.
That’s exactly what caused the crisis of the 2008 – according to Krugman: the risk-taking practices of shadow banks, i.e., institutions which basically function as such, but are not regulated or capable of coping with crises.
As the shadow banking system expanded to rival or even surpass conventional banking in importance, politicians and government officials should have realized that we were re-creating the kind of financial vulnerability that made the Great Depression possible – and they should have responded by extending regulation and the financial safety net to cover these new institutions. Influential figures should have proclaimed a simple rule: anything that does what a bank does, anything that has to be rescued in crises the way banks are, should be regulated like a bank.
Key Lessons from "The Return of Depression Economics and the Crisis of 2008"1. Capitalism Is Doing Just Fine 2. The Romantic Aspects of Capitalism 3. We Need to Spend More… and Governments Need to Print More Money
Capitalism Is Doing Just FineEven though many people saw the economic collapse of 2008 as a signal for the end of capitalism, Paul Krugman said – even back then, a decade ago – that this was just a needless exaggeration.
Put differently, there’s no more Soviet Union in the world and nowadays even China is much more of a capitalistic country than a communist one. The fact that it has annexed Hong Kong and it has still preserved its free market is a proof that capitalism is just too valuable to be destroyed.
So, don’t worry: capitalism is doing just fine.
The Romantic Aspects of CapitalismIn fact, capitalism is doing more than fine.
Because, nowadays, it has even entered a phase of romanticism.
That is: for the first time in history, there is such thing as a popular capitalistic hero.
We’re not talking about Fords or Rockefellers anymore.
And it’s a good time to be alive in!
We Need to Spend More… and Governments Need to Print More Money"Depression economics" is basically a failure on the demand side of the economy. And, even though it is a problem, this is the better one of the two.
In other words, we are producing more than we need.
What we now need to do is to start spending.
And, in cases of recession, to hope the government starts printing money – instead of being indecisive.
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"The Return of Depression Economics and the Crisis of 2008 Quotes"[bctt tweet="Economics inevitably takes place in a political context." username="get12min"]
[bctt tweet=“Who can now use the words of socialism with a straight face? I can remember when the idea of revolution, of brave men pushing history forward, had a certain glamour. Now it is a sick joke.” username=“get12min”]
[bctt tweet=“Much of the world, very much including the United States, is grappling with a financial and economic crisis that bears even more resemblance to the Great Depression than the Asian troubles of the 1990s.” username=“get12min”]
[bctt tweet=“The Great Depression was brought to an end by a massive deficit-financed public works program, known as World War II.” username=“get12min”]
[bctt tweet=“There are probably around 12 million American homeowners with negative equity as this book goes to print.” username=“get12min”]
Our Critical ReviewWritten in the midst of the financial crisis as an analytical tract ("not so much what happened as why it happened"), "The Return of Depression Economics and the Crisis of 2008" became a classic as soon as it was published.
A decade later, it still is.