Stephen Laniel’s Unspecified Bunker

Pre-George Bush Paul Krugman is a different beast from post-George Bush Paul Krugman, though you can see a different side of The Conscience of a Liberal in The Return of Depression Economics. Conscience of a Liberal is, among many other things, admirable for the concision and sweep of its narrative: in not very many pages, it runs through a century of U.S. history, and to my eye didn’t leave out very much. Krugman delivers the story almost breezily; we could be forgiven if we didn’t notice that we’re learning a lot.

So it is with The Return of Depression Economics, which could be the leitmotif for a course in macroeconomics. Why did Japan, whose economy made the U.S. tremble throughout the early Nineties, falter into a recession for the better part of a decade? How did Mexico, Indonesia, Thailand and Brazil all require IMF bailouts? Why did central banking, which seemed to have mastered the control of business cycles, suddenly lose its bearings?

The remarkable thing about this book is that I feel like I’d be doing it an injustice if I summarized it with fewer words than the book itself contains. There are a lot of stories wrapped up in here. There’s a story about properly devaluing your nation’s currency, for instance: if you’re going to do it, do it only once; this tells the market that you’re going to maintain as stable a currency as you can. At the same time, don’t devalue just a little bit: the market will think that you have future devaluations on hand and that you’re not serious about fixing your country’s fiscal problems.

There’s a story about hedge funds — a story that’s especially valuable now, a decade after Krugman wrote this book. The hedge funds were all so interconnected that a collapse in the one entailed a collapse in the others. And they’re so heavily leveraged that a tiny drop in the market causes an enormous drop in the fund. Combine this with how interconnected they are, and you have a recipe for disaster.

There’s another story about the difficulty of measuring a nation’s productivity. Krugman spent a good bit of Pop Internationalism addressing this in the context of “Asian tigers” and the Soviet Union. To most outsiders, the USSR looked like an economic miracle, achieving remarkable growth in GDP. To those who looked carefully at the numbers, though, the story was much different: the Soviets achieved those rates of growth by wasteful use of capital. Carefully measuring the productivity of labor and capital — a metric economists call Total Factor Productivity — showed that the Soviets were making inefficient use of their resources, and that they’d have to run out of steam eventually. And so they did.

The overarching story, if I’m reading Krugman right, is that we need more Keynes now, not less. If people expect a recession in the future, they consume less now. This leads to a contraction in the economy, which leads to layoffs, which leaves people even less economically secure, which makes them hoard more. The Keynesian response is demand-side stimulus: dump money into public works to get people spending again, print more money to pay for it, and put up with the temporary inflation that results.

I know almost no macroeconomics, but I’m dying to learn. If Krugman’s book has any major faults, it’s the absence of any footnotes that could help someone like me. I ended this book wishing to dive more deeply into any of the various stories; Krugman gave me nowhere to go. (For the record, it looks like Lectures on Macroeconomics, by Krugman’s erstwhile MIT colleagues Blanchard and Fischer, is one classic direction to go from here.)