Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.I tend to share in Prof Krugman’s views and concerns for the future. I maintain that monetary contraction (as in austerity measures) risks deflation and depression. Conversely, monetary expansion (as in "printing money") risks inflation and recession. Given an opportunity to choose between these two risks, I would choose monetary expansion and the risk of inflation.
Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.
We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.
And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending....
In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy....
And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.
Under our current system of safety-and-soundness regulation, supervisors often focus on the financial conditions of individual institutions in isolation. An alternative approach, which has been called system wide or macroprudential oversight [italics added], would broaden the mandate of regulators and supervisors to encompass consideration of potential systemic risks and weaknesses as well.For the record, the terminology of “macroprudential oversight” is not found in the standard macroeconomics lexicon (and neither is the phrase, “too big to fail”). Moreover, I fear the public is being bamboozled into believing these concepts carry clear economic meanings, which is not the case. From where I sit, the quasi-economic notions of "too big to fail" and "macroprudential oversight" are experimental hypotheses at best. The public should be suspicious of claims that the Federal government has the regulatory know-how to institute "macroprudential oversight" of systemic risks and weaknesses within the US economy. I maintain that the more pragmatic approach for managing systemic risks within the financial services industry is to view firms that are "too big to fail," as also being "too big to keep around."
America has painted itself into a corner. Unaffordable demands for social services have led to trillion-dollar deficits, but most political leaders are unwilling to propose a real solution for fear of alienating voters who want it all. Special interests maintain a death grip on the status quo, making it hard to fix things that everyone agrees are broken.....Read More
Change is not a remote contingency, however....
Change occurs not incrementally but in big shifts. The relative stability over the past half century is misleading. What appears to be an immutable way of governing..., is just a temporary lull between episodes of big change....
Over the past 100 years, America has made three dramatic shifts in the role of government: The Progressive era at the turn of the last century, ending laissez faire; the New Deal in the 1930s, instituting social safety nets; and the rights revolution of the 1960s. Each of these represented a radical expansion of the reach of government into society....
The challenge of the 21st century is to pull government back from daily choices while still allowing it to provide regulatory oversight and safety nets. We must discipline government's appetite for social control, and push it away from the heaping table of unaffordable mandates and bloated regulation....
Like it or not, America will change its way of governing. The growing crisis of authority will force us to start over....
The villain that keeps America stuck in a swamp is an underlying presumption about government decision-making, no less insidious because it rules from our preconceptions rather than from a palace. To get out of this mess, we must depose it, and embrace a new way of making public choices.
So why doesn't the Fed ease...? The costs to workers and to the real economy are a quite serious matter. But as for the Fed's reputation, I'm much less sure. It seems sort of odd to think that the Fed is persistently missing its inflation target on the downside while also leaving millions to languish unemployed.... Ben Bernanke has brought us the lowest inflation of any Fed chairman of the postwar period. You may call it prolonged mass unemployment, but he may see it as a huge success.Read More
Colleges and universities are too important for educators to deny the challenges and demands of today and too important for policy makers to pass laws because of pressure from special interests or based on their recollection of what college used to be. Decisions cannot be based on past practices when the world is changing so rapidly. The mission of higher education is student learning, and all of our policies, procedures and practices must be aligned with that mission if our institutions are to remain relevant.Read More
