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Paul Krugman
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The Return of Depression Economics 19986th Edition

by Paul Krugman (Author)
4.1 4.1 out of 5 stars 47 ratings
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Surely the Great Depression could never happen again.

Today, the tragedy of the Great Depression looks gratuitous and unnecessary: Our economists and policy makers simply have gained too much experience since then. It could never happen again. Or could it? Over the course of the last two years, six Asian economies have experienced an economic slump that bears an eerie resemblance to the Great Depression. Russia defaulted on its debt in 1998―an event that, halfway around the world, drove Brazilian interest rates through the roof and terrified the U.S. bond market. Some of the brightest financiers in the world, working for the Long-Term Capital Corporation, thought they had the market licked only to find themselves in a jam that had all the makings of the overleveraged positions that caused the 1929 stock market crash. Paul Krugman, one of the world's top economists, recounts these events and more: He points out that they raise significant questions for which policy makers may not have answers. This paperback edition features a brand-new preface by Krugman on the financial realities of the past year.
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  1. ISBN-10
    0393320367
  2. ISBN-13
    978-0393320367
  3. Edition
    19986th
  4. Publisher
    W. W. Norton & Company
  5. Publication date
    May 17, 2000
  6. Language
    English
  7. Dimensions
    5.5 x 0.6 x 8.2 inches
  8. Print length
    192 pages
  9. See all details
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4.1 out of 5 stars
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Top reviews from the United States

  • Tanis Coralee Leonhardi
    5.0 out of 5 stars Applicable and approachable
    Reviewed in the United States on December 18, 2019
    Verified Purchase
    Having grown up during the 1990s and 2000s I found this book both applicable in content and approachable in writing style. It helped me gain a better external/global perspective to what was going on internationally during my childhood.
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  • H. Abboud
    5.0 out of 5 stars Excellent book
    Reviewed in the United States on October 8, 1999
    Verified Purchase
    No one matches Paul Krugman for his lucidity and ability to explain things well. If you are interested in why the Asian crises happened and if they could happen again, this is the book.
    3 people found this helpful
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  • Professor Joseph L. McCauley
    4.0 out of 5 stars Interesting and useful...
    Reviewed in the United States on January 18, 2000
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    This book is interesting, worth reading, in part because of it's attempt to avoid moralizing and to find instead `mechanical' reasons for economic slumps, and also for its presentation of facts about sequences of events. The book is also short: the presentation and arguments are concise and easy to follow. The mechanics emphasized by Krugman are large (often leveraged) money transfers and leveraged credit. The examples discussed are about Japan, Thailand, Mexico, Russia, and Brazil. Money transfers via hedge funds are nicely discussed.
    Japan, seen from a western economist's eyes, presents a problem economy: stable currency and employment (no growth), and high savings (people tend to keep their money in the bank). Krugman labels this no-growth/high liquidity state a `liquidity trap'. He describes a toy economy that provides a model of a liquidity trap, the Washington DC Baby-sitters' Co-op (see also Akerlof's `Market for Lemons', which came earlier). In the baby-sitter's co-op people start with small, equal amounts of script and a state is reached where parents want baby-sitters (demand) and other parents want to baby-sit (supply) but there is no matching of demand to supply because the script supply (money supply) is too small (savings are too high). Krugman's proposed solution to the liquidity trap is to inflate the script supply. That is also his proposed solution for destabilizing Japan's economy and society: to make saving less desirable by inflating the money supply, therefore inducing people to consume and speculate. The interesting thing is that on Thursday, 14 October 1999, that is exactly what the Bank of Japan agreed to do by announcing that they are buying back bonds. So, we now have running an uncontrolled experiment of Krugman's proposal.
    Krugman presents elsewhere a mathematical model of the liquidity trap (see his web page), but it's based on the mythology of a utility function and is only a static model with no dynamics and no time scales. Unfortunately, there is really no correct existing theory of liquidity traps, because `utility maximization' is not an equilibrium condition and does not predict anything measurable real data. As for Japan, one might ask: why label their society as a "problem" just because the economy and currency are stable, especially since people save a lot and there is as yet no large-scale unemployment? The reasons that they tend to save rather than speculate by buying stocks and bonds are several-fold: (1) the mafioso nature of Japan's finance system, where people got burned very badly in the last bubble (see Devil Take the Hindmost, by Edward Chancellor), (2) high financial friction, or large brokerage fees (soon to be destroyed by the introduction of discount brokerage houses into Japan as of 1 October 1999), and (3) the fact that Japan has no social security system. If we ask why western politicians and economists persistently label Japanese habits as `problematic', the answer could well be an unquestioning, bordering-on-dogmatic belief in the econo-religion of growth and progress by the accusers. French farmers rebelled with very good reason against European Union demands for `optimization'.
    Peter Drucker pointed out in 1983 in The Frontiers of Management that trade in goods and services no longer determines exchange rates, that money transfers/month across international borders are many times the value of exports/imports. This fact, that the size of money transfers dominates everything, plays a key role in Krugman's analysis. He replays for the reader the tape from (Thailand, 1997 and) Brazil (fall, 1998) where, with still non-increasing prices, but at the onset of an economic slump, Brazil's currency came under pressure due to fallout from the collapse of Russia. Brazil tried to devalue slightly and the currency was routed (via hedge funds). Krugman poses the general question why, when a currency (like the Baht or Real) is weak, and the government (either credit-leveraged Thailand or unleveraged-Brazil) tries to devalue slightly, the devaluation tends to turn into a run on the currency. The answer, he asserts, is that this happens because people believe that it will happen, and this belief then makes it happen (via hedge funds). In other words, a self-fulfilling expectation is created. This rings true because it reminds me of Feynman's observation (in Surely You're Joking, Mr. Feynman) that socio-economic phenomena are not like physics or mathematical laws of nature. In the latter belief doesn't count (you can't make it rain by wishing, and a billiard ball can't think and change its path), whereas in the social arena you can act on beliefs and then cause things to happen.
    Summarizing, in comparison with Krugman's book The Self-Organizing Economy, where he seems only to parrot ideas that he didn't invent and doesn't understand (I got this impression in the early pages and so did not read further), I found The Return of Depression Economics to be both enjoyable and informative.
    52 people found this helpful
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  • Stephen R. Shulman-Laniel
    5.0 out of 5 stars Terrific, wide-ranging introduction to macroeconomics
    Reviewed in the United States on May 26, 2008
    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.)
    3 people found this helpful
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