The World Economy: A Sickness Unto Death?

The fundamentals of the world economy aren’t, in themselves, all that scary; it’s the almost universal abdication of responsibility that fills me, and many other economists, with a growing sense of dread.”

—Paul Krugman

here has long been a great divide among those who seek to explain both the cause and the duration of the Great Depression. What side you are on almost always says something about your politics: liberals have one view, conservatives tend to have another.

Brad DeLong and Barry Eichengreen have written an interesting new preface to the 40-year anniversary edition of Charles Kindleberger’s The World in Depression 1929-1939. The  book, as Wikipedia deftly summarizes it,

advances an idiosyncratic, internationalist view of the causes and nature of the Great Depression. Blaming the peculiar length and depth of the Depression on the hesitancy of the US in taking over leadership of the world economy when Britain was no longer up to the role after WWI, he concludes that ‘for the world economy to be stabilized, there has to be a stabilizer—one stabilizer’, by which, in the context of the interwar years at least, he means the United States.

In a column yesterday, Paul Krugman—whose latest book is titled, End This Depression Now!—worries that policy makers both in Europe and here in the U.S. are repeating past mistakes and failing to act decisively to rescue the world’s economy from the mess that financial recklessness created.

He took a swipe at the European leaders, who have failed to take meaningful action to bail out Spanish banks (“Forget about Greece, which is pretty much a lost cause; Spain is where the fate of Europe will be decided“), and he jabbed domestic Republicans, “who often seem as if they are deliberately trying to sabotage the economy.”

But since Krugman, like all of us should be, is most concerned about the crippling effects of long-term unemployment, he directed his latest attack squarely at the Federal Reserve:

The Fed has a so-called dual mandate: it’s supposed to seek both price stability and full employment. And last week the Fed released its latest set of economic projections, showing that it expects to fail on both parts of its mandate, with inflation below target and unemployment far above target for years to come.

This is a terrible prospect, and the Fed knows it. Ben Bernanke, the Fed’s chairman, has warned in particular about the damage being done to America by the unprecedented level of long-term unemployment.

So what does the Fed propose doing about the situation? Almost nothing. True, last week the Fed announced some actions that would supposedly boost the economy. But I think it’s fair to say that everyone at all familiar with the situation regards these actions as pathetically inadequate — the bare minimum the Fed could do to deflect accusations that it is doing nothing at all.

Why won’t the Fed act? My guess is that it’s intimidated by those Congressional Republicans, that it’s afraid to do anything that might be seen as providing political aid to President Obama, that is, anything that might help the economy.

That’s a fairly serious charge, but recall that GOP candidate for president Rick Perry said this about Ben Bernanke and the Federal Reserve:

If this guy prints more money between now and the election, I dunno what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treasonous in my opinion.

That stupidity and attempt at intimidation was endorsed by the likes of Tea Party spokesman Sarah Palin and represents the sentiments of many right-wingers. But no one on that side seems to be concerned at all about the Fed’s lack of aggressiveness in addressing unemployment (not to mention the failure of conservatives in Congress to do anything at all), particularly long-term unemployment.

Look at this graph Krugman has previously presented:

We ignore this at our peril, both here and in Europe. The world economy is sick and trying to heal it with budget austerity is making it sicker. That is the equivalent of prescribing lots of calisthenics for a bedridden patient, and it may, as Krugman and others continue to argue, prove economically lethal.



  1. ansonburlingame

     /  June 25, 2012

    For those that did not click the Wikipedia link above, here are the solutions proposed by Kindleberger in his book:

    1.maintaining a relatively open market for distress goods;
    2.providing countercyclical, or at least stable, long-term lending;
    3.policing a relatively stable system of exchange rates;
    4.ensuring the coordination of macroeconomic policies;
    5.acting as a lender of last resort by discounting or otherwise providing liquidity in a financial crisis.

    Obviously, all of the above requires some form of government force to ensure “stability”. Just look at #4 above, some single “coordinator” of all macroeconomic policy across NATIONAL boundaries, not just within individual countries. Try getting China to follow such “coordination” as just an example.

    I suppose we could give the UN such controls, right?

    Now when Krugman and John Kenneth Galbraith line up in support of a particular economic policy, you can be assured that more government spending is going to be the solution.

    Yet excessive government spending, leading to unsustainable national and even international debt, is what has gotten us, the democratic world into our current financial mess. People with money are now becoming more and more reluctant to lend that money. And the progressive solution is to use government force, taxation to change their minds. Take that money away from lenders and let government becoming the lender. And if Kindleberger’s approach is used, would it not HAVE to be some autocratic international body to become the “universal lender” of all the world’s money?

    Back to Krugman for a moment. Greece is “lost” now or so he seems to be saying but Spain is the “lynchpin” to save the Euro, right? Well hell, Spain “only” asks for about $125 Billion right now. That is a drop in “our” economic bucket. So if the fate of Europe is at hand because of Spain, we, Ameridca, should just “lend” Spain the whole amount, right? Call it the new “Marshal Plan” to save Europe!!!



    • I’m going to address something you wrote because I think it important for others (those weary souls who have read thus far and who care) to understand the following. Because of length, I edited out of my original piece above a discussion about what DeLong and Eichengreen and Krugman wrote about an important event in 1931:

      At the centre of The World in Depression is the 1931 financial crisis, arguably the event that turned an already serious recession into the most severe downturn and economic catastrophe of the 20th century. The 1931 crisis began, as Kindleberger observes, in a relatively minor European financial centre, Vienna, but when left untreated leapfrogged first to Berlin and then, with even graver consequences, to London and New York. This is the 20th century’s most dramatic reminder of quickly how financial crises can metastasise almost instantaneously. In 1931 they spread through a number of different channels. German banks held deposits in Vienna. Merchant banks in London had extended credits to German banks and firms to help finance the country’s foreign trade. In addition to financial links, there were psychological links: as soon as a big bank went down in Vienna, investors, having no way to know for sure, began to fear that similar problems might be lurking in the banking systems of other European countries and the US. In the same way that problems in a small country, Greece, could threaten the entire European System in 2012, problems in a small country, Austria, could constitute a lethal threat to the entire global financial system in 1931 in the absence of effective action to prevent them from spreading.

      If you actually read thus far, you can understand how your suggestion that the U.S. bail out Spain, which you stumbled onto trying to be sarcastic, is pretty much exactly what Kindleberger had in mind (as far as I can tell). If $125 billion would help save the collective European economy, the failure of which would have serious consequences for our own country, wouldn’t that relatively small sum be worth the investment, particularly since we wouldn’t be expected to put up the entire amount?

      Of course, all of us know that U.S. taxpayers will not bail out Spanish bankers, nor should they without the implentation (also impossible these days) of Kindleberger’s (4) above:

      “ensuring the coordination of macroeconomic policies”

      As long as we have no control over those banks (heck, we don’t have much control over our own) or the government (ditto), then we rightly stay away from giving them a lot of money, even if it may ultimately help ourselves. The point is that there is no assurance, since we can’t attach strings to the money, that it won’t go to waste. But the Kindleberger “lesson”–that contagion can lead to catastrophe and that it is more prudent to act earlier than later–is a sound one, even if the corresponding Kindleberger lesson–of the importance of a “dominant economic power able and willing to take the interests of smaller powers and the operation of the larger international system into account” — will be lost on this generation, just like it was in 1931.

      You, and others interested, should read the short preface to Kindleberger’s book, which can be found here.



  2. Jane Reaction

     /  June 25, 2012

    Duane: Your graph is one of increasing desperation, for not only jobs, but the future of America. Excessive government did NOT get us into this situation, in fact lack of government regulation did, then corporate greed stepped in to finish us off.

    I wish I could add a recent chart from the Federal Reserve Bulletin Volume 98 this month. It details a 20 year, zero increase in wealth for most of us.

    Not counting primary residences, family median net worth was reduced from $126,000 to $42,300 by 2007, and further reduced from there to $29,800 by 2010.

    Essentially, the declines are associated with vastly decreased levels of capital gains on assets. Maybe somewhere homes, cars, boats and other flotsam are commanding higher prices, but not in this country.

    Keep up the good work.


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