X posted: Paul Krugman's excellent Revision of "The Return of Depression Economics"

[Mike 03]

EDIT: I hope it's okay to cross post this here. Originally it was posted in GD, but nobody was terribly interested (not that I blame them). I have so many questions about the issues he raised.

**


Yesterday I finished reading the revised and updated version of "The Return of Depression Economics" by Paul Krugman. It now includes his insight into the current financial disaster.

This is a great, extremely helpful, book, especially for people like me who are having a problem getting a sense of grasp over the magnitude of our current global crisis.

He begins by explaining how currency crises and recessions evolve, in general, and he focuses on the crises in Latin America and Asia as prime examples that foretell what is happening now on a larger scale.

He enumerates the various forces that combine to cause these disasters, such as central banking miscalculations, currency devaluation errors, market psychology, and hedge funds.

As far as I can tell, he doesn't pretend he knows exactly what to do (which I appreciate, because I've tried like hell to understand everything that is going on, and I'm not sure what I would do either), but he does in the final chapter suggest a firm, large and decisive stimulus package.

I'm not an economist, but I was deeply thankful for this book and grateful for the insight it has provided.

My one and only complaint is that it is too short. I wish Krugman had gone to greater lengths to explain (in particular) the Japanese crisis, because the government there tried many things, including some things Bernanke and Paulson are trying now, and I don't really think he provided a clear explanation of why they didn't work in Japan.

Maybe in the future Krugman can expand this book to provide more details. I know he wanted to keep it readable for people who have no economic background, but I think he could have gone further. I wish I could have dinner with him and ask him about a million questions.

In any event, I can't recommend this book enough.

[ayeshahaqqiqa]

1. By stimulus package,

does Krugman mean bailouts to business, or rebates to taxpayers, or the creation of government jobs?

[Mike 03]

3. He's not very specific: "Get credit flowing and

prop up spending."

He says it is harder to get credit flowing but it has to be done, somehow, apparently by injection of capital.

That is the honestly in the book that I appreciate.

I think we are getting into new territory here, where the rules are very blurry and unclear. On the one hand he says Japan injection 500 or 600 B in capital to its banks and in one chapter he seems to suggest it didn't help too much, but in the epilogue he hints that it helped a little bit.

His argument, which I'm not sure I agree with (although I appreciate his honesty) is that we need to increase spending.

And inflation is not such a bad thing because it spurs people to spend now rather than wait.

As perverse as that argument sounded to me at first, I think I get it. If you believe prices are rising, you are more likely to buy now than wait.

[Jim__]

5. Elsewhere, Krugman strongly recommends spending on rebuilding infrastructure.

Specifically in The New York Review of Books:

Now, the United States tried a fiscal stimulus in early 2008; both the Bush administration and congressional Democrats touted it as a plan to "jump-start" the economy. The actual results were, however, disappointing, for two reasons. First, the stimulus was too small, accounting for only about 1 percent of GDP. The next one should be much bigger, say, as much as 4 percent of GDP. Second, most of the money in the first package took the form of tax rebates, many of which were saved rather than spent. The next plan should focus on sustaining and expanding government spending—sustaining it by providing aid to state and local governments, expanding it with spending on roads, bridges, and other forms of infrastructure.

[stray cat]

2. I take it the revision is significant enough to buy a new copy?

Does it seem pretty up to date and relevant?

[Mike 03]

4. Maybe not.

Since his argument is that what happened in Latin America and Asia in the late 80s and 90s is basically the same blueprint for what is happening now, if you understand that principle, then it is probably not worth the money.

He sounds like he is honest enough to say he is confused about what to do too.

So, I would say not. Especially if you are fairly informed on economic issues.

[Morpheal]

6. WHEN IS AN ECONOMIC SYSTEM TERMINALLY ILL ?

A lot of commentators on economics fail to clearly indicate what is really wrong or what to do about it.

The symptoms are obvious.

The question is whether the economic system is terminally ill, and if so when will it die ?

What I can suggest is that we can know when an economic system is terminally ill.
That is not as difficult as it seems. In essence we know what an economic system is
terminally ill when it can no longer accomplish its primary task of providing for the
real needs and reasonable wants of its members.

We know that a major symptom of economic terminal illness is that there are more and
more things that need to be done, to meet needs, but there appears to be absolutely no
way to do them. No way to do them, that is, within the economic system. That being
the case, we know that the system will die. Prolonging its life only compounds and
increases the misery and suffering of those functioning within the system. So pulling
the plug becomes a very real option.

That means that the system itself must be changed. It is no longer possible to
accomplish what an economic system MUST be able to do WITHIN that system. Pulling
the plug on it then stops the additional long term suffering that comes from spending
trillions on what becomes a failing system of systemic life support, staving off the
inevitable end.

The refusal of America to allow transplant of healthy organs from other donor systems
has led to that terminal condition. Of course, using some parts of the corpse, when
life support is withdrawn, and building a viable economic organism remains a reasonable
approach. Healthy organs from communism and socialism were certainly available to
America for transplantation. America refused those transplants. No one said that the
whole system had to be murdered and replaced, but knowing that the system was
starting to die was a good time to do some transplantation.

Now, maybe it is not too late. Maybe transplantation is still an option. Maybe the
system can receive a new heart. New lungs to give it a new voice, long silenced as to
any critical and genuine appraisals of itself. A heart it most certainly needs. What
else ? Well, the analogy only goes so far, but you get my drift.

Other systems have ways to do what the system that is terminally ill cannot do.

Saving a terminally ill economic system requires introducing new ideas, the same
as transplanting organs from donors saves a dying body, giving it a new chance at life.
Maybe the system can be saved, but not as it is. It has decaying organs, dead organs,
within it. It is becoming increasingly corrupted, toxic, deadly to itself. It needs that
new kidney, or liver. It needs those new ideas as to how to do what it cannot figure
out how to do itself.

So.... lots to do.... we could list thousands of mega projects in education, infrastructure,
transportation, health care, housing, farming, energy production, and so forth. All very
worth doing, to meet real human needs and reasonable wants.

Now, why cannot any of those projects get done ?

Why cannot we do them now ?

Because the economic system is terminally ill and that illness is stopping us from
doing all those things that really should be done, and that are worth doing.

A sick system that stops progress dead, is not worth maintaining in life support.
You either do the transplantations of new ideas, from outside that system, or
you pull the plug and bury it completely. Not much choice.

Cheers.

Robert Morpheal