The Return of Depression Economics and the Crisis of 2008

Krugman uses the example of a Washington, D.C., babysitting coop to explain the dynamics of recession and inflation. He examines the remarkable emergence of Asia and the precursors to the Asian mess--the Tequila Effect of the mid-'90s that began in Mexico and Japan's fall in the early '90s into an economic malaise. He then analyses the underlying reasons for the collapse of the Thai baht and other Asian currencies as well as the subsequent actions of the IMF and the murky role of hedge funds. In the end, Krugman sees the return of depression economics, which "means that for the first time in two generations, failures on the demand side of the economy--insufficient private spending to make use of the available productive capacity--have become the clear and present limitation on prosperity for a large part of the world." It's the same problem that was at the root of the 1930s depression. And while it took a world war to solve that problem, Krugman sees solutions that are far less dramatic but that do require a willingness to chuck obsolete doctrines and think about old problems in new ways.

Over the years, Krugman has earned a well-deserved reputation for translating the jargon that economists speak into something that anyone with an interest--not necessarily a Ph.D.--can understand. The Return of Depression Economics is another timely testament to Krugman's ability to read and interpret the tea leaves of today's global economy. Highly recommended. --Harry C. Edwards, Amazon.com

This book was written in the aftermath of the Asian economic crisis and draws extensively on the events of the period, as he acknowledges in his introduction to this paperback edition, the original topicality has been diluted. Its continued relevance should not be doubted as the US economy approaches a feared recession following a decade of growth and Japan's economy remains stagnant and in need of imaginative solutions of the sort described by Krugman here.

The Return of Depression Economics reminds us that the problems which caused depression in the 1930s need to be addressed and resolved anew by each generation. The solutions to the problems of the recent past (such as inflation) do not necessarily provide and answer to the problems of today and we sometimes need to look beyond the "conventional wisdom" to find answers which work.

The first chapter reviews the hubris surrounding the speech on the new world order given by George Bush (senior) and the belief that capitalism and globalisation had secured a golden future in the aftermath of the collapse of the soviet union between 1989 and 1991. Krugman then survey's the so-called Asian economic miracle and highlights not only the weaknesses of structure (such as cronyism and poorly monitored banking industries) but also importantly recognises that these weaknesses existed long before the crash and so cannot credibly be used to explain the immediate cause of the crisis. Nor, he argues, did these concerns need to dominate the attempts of the IMF and World Bank to provide aid and help restore economic health. The author was an early contributor to the debate, writing 3 years before the crash (in The Myth of Asia's Miracle, 1994) of his doubts about the sustainability of growth based on expansion of inputs rather than improvements in productivity (to summarise his argument in arrogant simplicity).

Chapter 3 reviews the experience in Latin America, where the "Tequila" crisis of 1995 demonstrated that a collapse in a visibly troubled economy (in this case Mexico) can be transmitted to an innocent and generally well-regarded economy (Argentina), an experience repeated in Asia. Paul Krugman then discusses the stagnation of Japan since the collapse of the property bubble in the late 1980s and outlines both his analysis of the problem (a liquidity crisis which means that even nominal interest rates of 0% have failed to boost demand) and his solution (targeted inflation which will generate negative real interest rates and encourage, it is argued, consumption).

Krugman's discussion of the unfolding events of the 1997 crisis describes the self-fulfilling panic which gripped Western investors in the region, the importance and ephemeral quality of confidence, and the attempts by the IMF to provide support. The next chapter focuses on international villains: the hedge funds and international speculators whose actions sometimes intensify, or even create, crises. Here there is discussion of the role of capital controls, strictly against the teaching of orthodox theory but which, since they were tried in Malaysia have gathered a degree of support from some academic observers (Kaplan and Rodrick, 2001, Did Malaysia's Capital Controls Work?). Finally Krugman reviews the prospects, as seen in 1999, for a return to growth in the Asian economies (optimism which has continued to be supported by events).

This book is written in a accessible style, the tone relaxed and makes extensive use of examples in domestic settings (that is the domestic setting of a middle class family on the East Coast of the USA, they are less accessible to UK readers, but still help illustrate his arguments). There is little to exclude readers with no background in economics and if you are inspired to search for more technical discussions you can refer to the author's own website which contains many of his papers on the subjects discussed.

Paul Krugman's writing on the Asian economic crisis has the authority of a long term observer of the region's economy: scepticism in 1994 (as mentioned above) has been followed by detailed analysis after the crisis. The ideas discussed in this book reflect Krugman's recent writings on the subject (What happened to Asia, 1998; Analytical Afterthoughts, 1999; Japan's Still Trapped, 2000).

However, although he is willing to challenge the orthodox (by suggesting capital controls or targeted inflation), Paul Krugman does write from within the dominant tradition of neoclassical economics, he is committed to globalisation and believes in the benefits of free trade for developing countries. This book should not be dismissed either because of its deviation from the orthodox or because it fails to challenge the basis of neoclassical economics, instead it highlights inconsistencies within the dominant tradition and suggests that you don't need to be a wild-eyed radical to perceive inadequacies with the international response to recent crises.


Clear, concise analysis of the Asian currency crises   September 6, 1999
Not as comprehensive as Peddling Prosperity, and significantly shorter, this book has a much more focused kernal and tackles some complex exchange rate issues in an admirably lucid style. Krugman also explodes the myth of crony capitalism as the immediate cause of the crises in a clear and intuitive fashion, while also explaining the probably mechanism of contagion and the risks hedge funds create. Definitely worth a read for anyone interested in Asian contagion and financial crises in general (one of Krugman's specialist subjects). In my opinion, because of the complexity of the subjects intuitively tackled, this is his best book since Peddling Prosperity.


Good, but flawed and rushed   July 7, 1999
Even though much of this will be familiar to readers of thequality press and Krugman's own columns in Slate.. it is probably the best summary of the strange global financial events of the last two years, and even someone with no knowledge of economics will dig 90% of it. Krugman writes well and intelligently, clearly and interestingly, and usually his jokes are good.

But it doesn't add up to a coherent achievement, and compared to some of his earlier books like 'Peddling Prosperity' this comes as a disappointment. Too sketchy, too superficial, too desperately populist it doesn't stretch your mind like other Krugman books. But nor does it satisfactorily please a jaded palate tired of tedious business and economics articles. There is no detail, no telling illustrations, no examples, no tables or graphs, hardly any figures, and, most irritatingly, no footnotes or references. It is, in other words, 'The Word According to Paul Krugman' - and by the time I finished I had begun to feel more than a little patronised. By not bothering to provide the slightest frame of reference for his argument, Krugman lulls the reader into assuming that what he says is God-given from the banks of the Charles River.

Which might lead one to miss the most important fact about this book - it is a piece of instant history, not a work of reflection. Almost all Krugman's points could, and in time may be refuted. His predictions, as reviewers have commented, have already run awry. Written in January, the financial meltdown he predicts in Brazil is not really visible yet.... Email me if you're interested in these things!