National Commentary

Krugman ‘Calls’ the 3rd Great Depression

bentonmugIt’s one thing for me or for other less-well-known observers to say, but when a Nobel Prize winning economist says it, then that represents a level of authority and gravitas that no one can ignore.

bentonmugIt’s one thing for me or for other less-well-known observers to say, but when a Nobel Prize winning economist says it, then that represents a level of authority and gravitas that no one can ignore.

And now we have it: Princeton economist Paul Krugman, winner of the 2008 Nobel Prize in economics, has “called” America’s Third Great Depression. We are in the earliest stages of it now.

He did it in his New York Times column last weekend,  entitled “The Third Depression,” and it has not gone unnoticed worldwide. He made the “call” coming out of the Group of 20 meeting in Toronto, where, he says, “Governments are (now) obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.”

After an initial reaction to the 2008 global financial meltdown prompted policies to ease credit and stimulate a recovery, Krugman wrote, “Over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.”

He argues that “while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.”

The current policy shift, he concludes, is “the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.”

The result, he forecasts, is a long, slow depression characterized by chronic unemployment and a spiraling decline in the standard of living and quality of life of growing legions of Americans.

The the same “call” was made in this column three months ago, when on March 17, I referred to the “dreaded d-word” that no one talks about: deflation. “Every reality on the street indicates that the value of things, in general, is nosediving, and the imminent rise of fuel costs will only escalate that trend. The rising cost of that indispensable basic economic component will not cause inflation, but intensified austerity, resulting in steeply declining demand, over-supply and deflation, given a double-digit unemployment environment.”

But it was not clear then how ferocious the pull-back from the economic stimulus approach to jump-starting a recovery would become. No one knew how forcefully Republicans and conservative Democrats in Congress would dash any hopes for a second stimulus package to aid state and local regimes.

It has been reported that Obama officials believe as many as 300,000 school teachers and other employees will be laid off by fall, five times the number in 2009 and 10 times the number in 2008. As Annie Lowrey reports, the Center on Budget and Policy Priorities estimates that if states cut their spending from 2009 to 2010 the same level they did from 2008 to 2009, it might cost as many as 900,000 jobs in both the public and private sector.

The austerity approaches to handling the debt crises in Europe, including in Greece and Ireland, as Krugman pointed out, only reveal how inadequate the measures taken to date are, and there are a number of states in the U.S. whose economies are far larger than either of those small European countries who face equally distressed conditions.

As cities and larger jurisdictions in the U.S. begin to default, there is no adequate solution at the local level. Faced with the legal burden to balance budgets, local governments have no options but to make truly draconian cuts in basic services and schools, raise property taxes through the roof for their increasingly unemployed or underemployed citizens, and to begin to sell off assets, such as parks and government buildings.

Short of a robust recovery at the national and global level, unlikely to happen without a massive 1930s-style government intervention, state, regional and local governments will simply be incapable of protecting their populations.

But to Krugman, it’s already too late. The sinking feeling in the stomach that comes with seeing on TV a disabled airplane begin to tilt its nose down toward an inevitable, searing crash to the earth constitutes the tone of his column this week, and it’s hard to miss.


Nicholas Benton may be emailed at