The Return of Depression Economics and the Crisis of 2008

Krugmanbig1012 Over at the TPMCafe Book Club, Paul Krugman, Brad DeLong, Dean Baker, Robert Reich, Mark Thoma and Dana Chasin discuss Krugman's The Return of Depression Economics and the Crisis of 2008. Krugman:

This is a heavily revised new edition of The Return of Depression Economics, originally published 9 years ago. When I wrote the original version, I had Asia on my mind. Some people looked at the crisis that swept Southeast Asia and at Japan's monetary trap, and saw them as proof of the superiority of the American system. I looked at the same things and saw them as omens. I worried that similar things could happen to us. And now they have.

Right now the world economy is in a nosedive, and understanding what I call “depression economics” — the weird world you get into when even a zero interest rate isn't low enough, and a messed-up financial system is dragging down the real economy — is essential if we're going to avoid the worst.

The key thing, when you're in a situation like this, is realizing that normal rules don't apply. Ordinarily we'd welcome an increase in private saving; right now we're living in a world subject to the “paradox of thrift,” in which private virtue is public vice. Normally we want to be careful that public funds are spent wisely; right now the crucial thing is that they be spent fast. (John Maynard Keynes once suggested burying bottles of cash in coal mines and letting the private sector dig them up — not as a real proposal, but as a way of emphasizing the priority of supporting demand.)

Response at the book club.