THE RETURN TO DEPRESSION ECONOMICS - Paul Krugman

When Franny was born in 1980 she was joined by a whole raft of other faculty brats. C. Fite gave birth to Justin. Colin McNamee entered the fray, as did Beau Simmons. Faebian Baker had a little girl and so did Sarah Nesmith. Our friends outside of school also started breeding like rabbits and so did the people in our neighborhood.

Let us say for the purposes of illustration that all of these new parents decided to get together to form a baby sitting co-op, volunteering to take care of one another's children as a way to guarantee a certain amount of freedom and to save money to boot.

If we had been clever enough to do that we would have created a little economy that would function much like the macro-economic reality that we all inhabit. Let us say that our co-op had a membership of about 100 families. A co-op of that size would need some rules and regulations to insure that everyone did their fair share of the babysitting duties. We would have to set up a governing board of some sort. To make sure everything was fair and manageable the board would probably issue coupons of a sort (lets call them "diapers") that the co-op members could use to trade services. One diaper would be worth one hour of babysitting. If everyone was allotted the same number of diapers our co-op could be reasonably sure that everyone would share and profit equally in the baby sitting swap.

As long as co-op members need baby sitting and as long as there are other members willing to do the baby sitting, things run smoothly. However, we might discover that the demand for baby sitting fluctuates, creating some periods when the demand for baby sitting doesn't fulfill the needs of all the members who are willing to sit. We might discover, for instance, that the need for baby sitting is seasonal. People would rather go out and party during the summer, so they might tend to save their diapers over the winter in order to have more to spend during the summer. The only way to accumulate additional diapers is by baby sitting, but since people are saving their diapers in the winter, baby sitting jobs are hard to come by. To make matters worse, this dearth of baby sitting jobs is self perpetuating. If you see that your neighbor is hording diapers, you might be tempted to horde diapers yourself so that before long the amount of diapers in the system dries up and the whole diaper based economy slows down. Economists call that situation a recession.

It is important to note here that the baby sitting recession is not caused by anything in particular. The quality of baby sitting is fine. On paper there are no systemic problems. No one is trying to corner the diaper market. There is just a scarcity of diapers basically because there is a scarcity of diapers.

There are ways to fix this problem. Impose some inflationary rules that make diapers acquired in the winter worth less in the summer thereby making people think twice about hording them. But the simplest and most effective way to fix this diaper recession is for the governing board to print some more diapers and put them in the system. That way people will not be so hot to horde them to guard against scarcity.

Paul Krugman uses this baby sitting analogy as a starting point to explain not only our current economic crisis, but also a whole history of similar crises from the Great Depression to the current day. The analogy keeps getting more elaborate as the crises accumulate, but for economically challenged readers like me it provides a remarkably lucid explanation of situations characterized by a complete lack of lucidity.

If you have been keeping up with your reading about our current economic situation, Krugman's book doesn't offer any explanations you haven't heard before, but it does provide a detailed trip through past recessions in Mexico, Thailand, Indonesia, the USA, England, Ireland, etc. According to Krugman's analysis each of these recessions were addressed and ultimately solved through the same method as the baby sitting crisis: The immediate injection of capital into the system in order to increase demand.

That is why his book is titled The Return to Depression Economics. If we look at economics as a debate between supply siders (The Milton Friedman/Ronald Reagan folks)and demand siders (John Maynard Keynes, et. al.), we can see that during times of recession the most effective fix is to inject money into the system. In fact, if we just took a trillion dollars and buried it like so much gold to be discovered around the country the resultant "gold" rush and all the other economic activity that such a rush would engender would be sufficient to jolt an economy out of recession.

Of course, Krugman goes even farther to say that supply side thinking is a "crank" solution that only appeals to the wealthy, but has no real effect on the economy as a whole. In fact, the biggest threat to our current economic malaise, according to Krugman, would be if we lost our political will to pour money into the system because of its unpopularity with ranting supply side radio personalities and the uninformed electorate who listen to them and instead tried to curtail government spending. That would duplicate what happened to Japan a decade ago and leave our country wallowing in a double dip recession that might last indefinitely.

Krugman has been very loud and clear in criticizing Obama and Secretary Geithner for not going far enough with the bail out. He is convinced that our system needs a bigger injection of cash and it seems that government is the only entity capable of an injection of the size needed. Obama is betting that he is wrong. We all hope Obama wins the bet.