Krugman: Big Government May Have Averted Great Depression II

Nobel prize winning economist, Princeton University professor and NY Times columnist Paul Krugman has a column in the New York Times that says while things are still pretty tough out there for the economy, the Obama aministration’s big government policies may have averted the nation (and the world) from falling into a financial abyss akin to the Great Depression.  While we still have a way to go towards a full economic recovery, we’re not hanging on by our toenails any longer.

From the article:

“Just to be clear: the economic situation remains terrible, indeed worse than almost anyone thought possible not long ago. The nation has lost 6.7 million jobs since the recession began. Once you take into account the need to find employment for a growing working-age population, we’re probably around nine million jobs short of where we should be.

And the job market still hasn’t turned around — that slight dip in the measured unemployment rate last month was probably a statistical fluke. We haven’t yet reached the point at which things are actually improving; for now, all we have to celebrate are indications that things are getting worse more slowly.

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. (State and local governments are a different story.) Tax receipts are way down, but Social Security checks are still going out; Medicare is still covering hospital bills; federal employees, from judges to park rangers to soldiers, are still being paid.

All of this has helped support the economy in its time of need, in a way that didn’t happen back in 1930, when federal spending was a much smaller percentage of G.D.P. And yes, this means that budget deficits — which are a bad thing in normal times — are actually a good thing right now.

In addition to having this “automatic” stabilizing effect, the government has stepped in to rescue the financial sector. You can argue (and I would) that the bailouts of financial firms could and should have been handled better, that taxpayers have paid too much and received too little. Yet it’s possible to be dissatisfied, even angry, about the way the financial bailouts have worked while acknowledging that without these bailouts things would have been much worse.

All in all, then, the government has played a crucial stabilizing role in this economic crisis. Ronald Reagan was wrong: sometimes the private sector is the problem, and government is the solution.

And aren’t you glad that right now the government is being run by people who don’t hate government?

We don’t know what the economic policies of a McCain-Palin administration would have been. We do know, however, what Republicans in opposition have been saying — and it boils down to demanding that the government stop standing in the way of a possible depression.”

Now I’m sure Krugman’s asnalysis won’t sit well witht the limited government/free market gurus at thew Register, but how many of them have a Nobel Prize in Economics?

  3 comments for “Krugman: Big Government May Have Averted Great Depression II

  1. August 11, 2009 at 5:22 pm

    I can only imagine where we would be if McCain had won last year.

  2. Adam
    August 11, 2009 at 9:12 pm

    Wow, government saves the day with no negative consequences! How fantastic! How wonderful! Is it too good to be true?

    Duh. When the government interferes with the functioning of the private economy, we (buyers and sellers) lose the feedback that we would have gotten. If you want to believe that government has kept the economy from crashing too far down, you have to accept that it will also constrain it in the future.

    Or just keep on pretending government is so great and see how that works out for you.

  3. Dan Chmielewski
    August 12, 2009 at 8:11 am

    Adam — perhaps if government had regulation on the financial markets, we might have avoided this whole financial meltdown and the recession that’s the worst in our memory.

    So what’s your free market solution? Let the big companies fail and drag down a host of small businesses with them. If you’re a Republican, then you should know even President Lincoln believed that when the free market failed, it was the obligation of the federal government to step in until the economy can recover on it’s own.

    So where’s your Nobel prize in economics?

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