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The Return of Depression Economics and the Crisis of 2008 (original 2008; edition 2012)

by Paul Krugman

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6391715,139 (3.82)19
Member:pajarita
Title:The Return of Depression Economics and the Crisis of 2008
Authors:Paul Krugman
Info:W. W. Norton (2008), Edition: First Edition, Hardcover, 224 pages
Collections:Your library, Read but unowned
Rating:****
Tags:read but unowned

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The Return of Depression Economics and the Crisis of 2008 by Paul Krugman (2008)

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Krugman presents a pretty fast read on the international economic crises of the 1980s and 1990s and then relates those to the financial crisis of 2008. The original edition was published in 1997 and this edition is updated with a few new perspectives on those earlier crises.

By "Depression Economics," Krugman means Keynesian responses to sharp declines in aggregate demand-- increasing the money supply (lowering interest rates) and/or fiscal stimulus. He shows how successful or not those policies were in the crisis countries, and how most of the time IMF recommendations to hard-hit countries were the exact opposite-- arguably exacerbating the crises.

The subject matter was very similar to Joseph Stiglitz's Globalization and Its Discontents, which I think is essential reading, and I'm not sure Krugman does a decent enough job explaining the situations to the lay reader unless they have already read Stiglitz.

That said, I would have loved to have used this book in my International Economics/Finance course, which is really just international macroeconomics. Krugman outlines the trilemma well, but it's difficult to ascertain which of the options a country can take and not end up in disaster. It seems that all roads lead to disaster in this book--but dealing with the disaster after the fact is what matters to Krugman. The Mundell-Fleming optimal currency area criteria are outlined and skepticism about the euro very well explained.

Krugman's baby-sitting co-op reappears in this work, just as it was introduced in his Peddling Prosperity book:



A group of people (in this case about 150 young couples with congressional connections) agrees to baby-sit for one another, obviating the need for cash payments to adolescents. It's a mutually beneficial arrangement: A couple that already has children around may find that watching another couple's kids for an evening is not that much of an additional burden, certainly compared with the benefit of receiving the same service some other evening. But there must be a system for making sure each couple does its fair share.

The Capitol Hill co-op adopted one fairly natural solution. It issued scrip--pieces of paper equivalent to one hour of baby-sitting time. Baby sitters would receive the appropriate number of coupons directly from the baby sittees. This made the system self-enforcing: Over time, each couple would automatically do as much baby-sitting as it received in return. As long as the people were reliable--and these young professionals certainly were--what could go wrong?

Well, it turned out that there was a small technical problem. Think about the coupon holdings of a typical couple. During periods when it had few occasions to go out, a couple would probably try to build up a reserve--then run that reserve down when the occasions arose. There would be an averaging out of these demands. One couple would be going out when another was staying at home. But since many couples would be holding reserves of coupons at any given time, the co-op needed to have a fairly large amount of scrip in circulation.

Now what happened in the Sweeneys' co-op was that, for complicated reasons involving the collection and use of dues (paid in scrip), the number of coupons in circulation became quite low. As a result, most couples were anxious to add to their reserves by baby-sitting, reluctant to run them down by going out. But one couple's decision to go out was another's chance to baby-sit; so it became difficult to earn coupons. Knowing this, couples became even more reluctant to use their reserves except on special occasions, reducing baby-sitting opportunities still further.

In short, the co-op had fallen into a recession.

Since most of the co-op's members were lawyers, it was difficult to convince them the problem was monetary. They tried to legislate recovery--passing a rule requiring each couple to go out at least twice a month. But eventually the economists prevailed. More coupons were issued, couples became more willing to go out, opportunities to baby-sit multiplied, and everyone was happy. Eventually, of course, the co-op issued too much scrip, leading to different problems ...

The problem is that Krugman quickly shifts from thinking about solving this problem in terms of excess cash balances into thinking about a solution in terms of interest rates. When interest rates hit zero, and people still don't go out on the town, then you're in the Keynesian "liquidity trap" that Krugman loves to say the U.S. and Japan are in.

But I think Krugman outlines the Japan crisis better than he does on his blog, clearly showing that monetary policy isn't ineffective at the zero bound so long as the central bank creates inflationary expectations-- something that Japan's central bank hasn't done in 20 years (they raise rates when there is even a hint of inflation, making deflation often more of a reality).

Krugman's explanation of the U.S. financial crisis is from a 2008 point of view, but covers most of what we now know to be a problem. His point is that the U.S. learned nothing about the real estate bubbles it saw in other countries' run-up to financial doom.

I give this book 3.5 stars out of 5. It was written for a lay person, but I think his oversimplifications might be a little much to ask a layperson to comprehend. I could use it for a class and make sure I elucidated and graphed more clearly Krugman's arguments.

Worth noting that someone who previously held my current position wrote a critique of the 1997 edition of Krugman's book for the Von Mises Institute. When asked about my opinion of the Austrian perspective, I always refer people to Bryan Caplan's well-informed article "Why I Am Not an Austrian Economist," which clearly elucidates the weaknesses and inconsistencies (and incoherence) of Austrian business cycle theory. ( )
  justindtapp | Jun 3, 2015 |
I have a degree in political science, but the economics classes I had to take were always the hardest part for me. I wish books like this had been used more in those classes! Krugman does a brilliant job of setting his ideas out in a very understandable manner. This book is, shockingly, a quick and interesting read - not nearly as dry as many of my economics texts.

My only complaint is that there isn't more on the 2008 crisis, as I assumed there would be from the title. Other than that, a very interesting and informative book. ( )
  sammii507 | Aug 19, 2014 |
I have a degree in political science, but the economics classes I had to take were always the hardest part for me. I wish books like this had been used more in those classes! Krugman does a brilliant job of setting his ideas out in a very understandable manner. This book is, shockingly, a quick and interesting read - not nearly as dry as many of my economics texts.

My only complaint is that there isn't more on the 2008 crisis, as I assumed there would be from the title. Other than that, a very interesting and informative book. ( )
  Anniik | Sep 18, 2013 |
Succinct and readable explanation from a respected economist of what caused recessions/depressions/crashes in various nations since the 1980's with a view to explaining what happened in the US economy in 2007-08. ( )
  LibraryGoddesses | May 9, 2011 |
A short, but detailed explanation of monetary policy, the role of banks and bank like structures in our economy, how hedge funds can affect the economy and the state of affairs we are in right now.

The title is appropriate as his thesis is that the economy has changed to reflect the current situation we are in and the book ends with a description of what our government is doing and why it is doing it from a policy standpoint. As Krugman is a Keynsian economist he is supportive of the strategy and in fact believes the government should play an even bigger role in the economic recovery. ( )
  aaf7 | Aug 14, 2010 |
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Amazon.com Product Description (ISBN 0393071014, Hardcover)

In 1999, in The Return of Depression Economics, Paul Krugman surveyed the economic crises that had swept across Asia and Latin America, and pointed out that those crises were a warning for all of us: like diseases that have become resistant to antibiotics, the economic maladies that caused the Great Depression were making a comeback. In the years that followed, as Wall Street boomed and financial wheeler-dealers made vast profits, the international crises of the 1990s faded from memory. But now depression economics has come to America: when the great housing bubble of the mid-2000s burst, the U.S. financial system proved as vulnerable as those of developing countries caught up in earlier crises and a replay of the 1930s seems all too possible.

In this new, greatly updated edition of The Return of Depression Economics, Krugman shows how the failure of regulation to keep pace with an increasingly out-of-control financial system set the United States, and the world as a whole, up for the greatest financial crisis since the 1930s. He also lays out the steps that must be taken to contain the crisis, and turn around a world economy sliding into a deep recession. Brilliantly crafted in Krugman's trademark style--lucid, lively, and supremely informed--this new edition of The Return of Depression Economics will become an instant cornerstone of the debate over how to respond to the crisis.

(retrieved from Amazon Thu, 12 Mar 2015 18:04:45 -0400)

(see all 3 descriptions)

Our newest Nobel Prize-winning economist shows how today's crisis parallels the events that caused the Great Depression and explains what it will take to avoid catastrophe.

(summary from another edition)

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