On Wednesday, I wrapped up the class I’ve been teaching all semester: “The Great Recession: Causes and Consequences.” (Slides for the lectures are available via my blog.) And while teaching the course was fun, I found myself turning at the end to an agonizing question: Why, at the moment it was most needed and could have done the most good, did economics fail?I saw the crisis coming. From the fall of 2002 to the spring of 2008, I pointed out that the housing market was going to crash and potentially take down the global financial system with it. Because no individual, family, business, or nation can sustain infinite debt. And the claim that "basic textbook macroeconomics" has performed very well is a bad joke, especially in light of the stagnant GDP report that was just released. There is no recovery.
I don’t mean that economics was useless to policy makers. On the contrary, the discipline has had a lot to offer. While it’s true that few economists saw the crisis coming — mainly, I’d argue, because few realized how fragile our deregulated financial system had become, and how vulnerable debt-burdened families were to a plunge in housing prices — the clean little secret of recent years is that, since the fall of Lehman Brothers, basic textbook macroeconomics has performed very well.
And the diagnosis of our troubles as stemming from inadequate demand had clear policy implications: as long as lack of demand was the problem, we would be living in a world in which the usual rules didn’t apply. In particular, this was no time to worry about budget deficits and cut spending, which would only deepen the depression. When John Boehner, then the House minority leader, declared in early 2009 that since American families were having to tighten their belts, the government should tighten its belt, too, people like me cringed; his remarks betrayed his economic ignorance. We needed more government spending, not less, to fill the hole left by inadequate private demand.Lack of demand isn't the problem. The problem is the credit-imposed limits of demand. To Krugman, demand is a magical entity. Invent money ex nihilo and the spirit will be summoned to magically expand the economy. He's appealing to a logically incoherent system that can NEVER address the problem; it's like trying to fix a car that won't start by pouring water on the driveway. Krugman keeps calling for more water and insisting that just one more big dowsing of water will make the car start.
But a few months later President Obama started saying exactly the same thing. In fact, it became a standard line in his speeches. Nor was it just rhetoric. Since 2010, we’ve seen a sharp decline in discretionary spending and an unprecedented decline in budget deficits, and the result has been anemic growth and long-term unemployment on a scale not seen since the 1930s.
He's also being wildly deceptive here. Have a look at that "unprecedented decline in budget deficits" from 2012 to 2013.
Mainstream economics didn't see the crisis coming. Mainstream economics has not fixed the problem. And mainstream economics is obviously unaware that the first crisis was only the first wave downward. The magnitude of the next one is indicated by the length of the anemic five year "recovery".