Averting the Worst

New essay from Nobel Prize winning economist Paul Krugman:

For all that, however, the latest flurry of economic reports suggests that the economy has backed up several paces from the edge of the abyss.

A few months ago the possibility of falling into the abyss seemed all too real. The financial panic of late 2008 was as severe, in some ways, as the banking panic of the early 1930s, and for a while key economic indicators — world trade, world industrial production, even stock prices — were falling as fast as or faster than they did in 1929-30.

But in the 1930s the trend lines just kept heading down. This time, the plunge appears to be ending after just one terrible year.

So what saved us from a full replay of the Great Depression? The answer, almost surely, lies in the very different role played by government.

Probably the most important aspect of the government’s role in this crisis isn’t what it has done, but what it hasn’t done: unlike the private sector, the federal government hasn’t slashed spending as its income has fallen.

More here.

Krugman goes on to assert that the federal stimulus and the bank bailouts, as ham-handed as they are, have played an even greater role in preventing Great Depression II. Sadly, conservatives, who are ideologically opposed to government spending on anything that doesn't further conservative causes, will never admit it, either to themselves or others. They'll say it wasn't so bad in the first place, or that government spending made the crisis worse, or some other nonsense. And the corporate news media may very well project such views through their enormous megaphone. It's almost as though conservatives and establishment journalists simply don't have the intellectual structure from which to understand what has happened.

And really, when you get right down to it, the economic crisis, and the Obama solution to it, aren't so hard to fathom. While the US economy was entering a not so unusual business cycle recession, the banking system failed, causing the money flow to sieze up dramatically. That is, businesses and individuals, having lost confidence in the entire economic system, stopped spending, which created a frightening downward spiral of economic inactivity. The federal response was to replace the now gone private spending with public spending, keeping the overall GDP in survivable shape long enough for people to relax and get back to work, which is what is apparently happening right now.

Conservatives simply can't understand this, and corporate journalists are simply stupid. In their minds, government is the problem, never the solution, so a federal rescue of the economy is, to them, a non sequitur. But there really is an intellectual framework from which to understand all this. It's called Keynesianism, and it used to be the prevailing economic paradigm, back before the conservatives rammed neoliberalism down our throats.

All of us learned about Keynesianism in eleventh grade. Why do so few people remember it now? Especially after it's once again saved our collective ass?

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