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The Economic Meltdown: What Have We Learned, if Anything?

Paul Krugman PhD '77: February 5, 2010; Running Time: 1:05:14

About the Lecture

About the Lecture

The U.S. has had more than 70 years to come to terms with the Great Depression, and we really thought we knew how to avoid another one, says Paul Krugman. “It wasn’t supposed to be possible. Then came the current crisis.”

So how to explain the Great Recession of 2008? Krugman suggests a combination of factors: First, he thinks we “mislearned” some of the lessons of the Crash. We developed an “unwarranted belief that it was easy for the …Federal Reserve to prevent the crisis.” We forgot how difficult it is to get “policy traction” when financial markets are really unstable, and conveniently overlooked how things had “gone awry in the past” when we deregulated the banks in more recent years. We grew too literal-minded in our notion of banks, imagining “a big marble building with a row of counters, with Jimmy Stewart,” when in fact, we’d created new institutions that used deposits to make innovative but sometimes disastrous investments. We didn’t immediately recognize the 21st-century version of bank runs, which didn’t involve mobs in the street but “investors refusing to roll over their repos.”

Not only did we get a replay of the collapse, but we’re witnessing a replay of the response as well, including “obvious failures to understand the depth of the problem.” Big government is again under attack, even though it has “protected the system from total meltdown.” Just like the ‘30s, some say we’ve passed the worst -- when, says Krugman, “this thing ain’t over.” Many economists project years of higher unemployment, “years of huge suffering.” And instead of acknowledging these continuing impacts with appropriate moves to support the economy, “we’re withdrawing policies from the economy quite soon,” he says, repeating another mistake from the past.

Politics plays a large part in this sorry rerun. Officials feel they can only pass partial remedies through Congress. But in this case, “half a loaf may be not much better than none,” because “if the economy still looks lousy when you do half-hearted policy, the conclusion of the political process is not that you need to do more of it, but…that the policy failed, so we can’t do more.” That’s what happened with the stimulus.

Krugman is deeply worried about what comes next, seeing us stuck with massive unemployment; people behaving as though we’ve avoided disaster, and returning to “the same rhetoric about private sector dynamism and the evils of big government;” and no political will to “change either the economy or the intellectual climate.”

Lecture Details

Location: 32-123

“What actually seems to be happening is that by avoiding real disaster, we also managed to avoid confronting our own intellectual failings. ... It’s as if it were still 2007: we’ve gone back to it. People are espousing the same positions, the same rhetoric about private sector dynamism and the evils of big government. The same denunciations of Keynesian economics are right back in vogue. ”

Paul Krugman

About the Speaker

Paul Krugman PhD '77

Professor of Economics and International Affairs, Princeton University
Columnist, The New York Times
2008 Nobel Prize in Economics

Paul Krugman received the Nobel Prize in Economics in 2008 for "his analysis of trade patterns and location of economic activity." He became a regular columnist for The New York Times Op-Ed Page in 1999. Krugman is the author or editor of 20 books and more than 200 journal articles and edited volumes, specializing in "new trade theory," which concerns international trade. Krugman's more recent scholarship involves economic and currency crises. He received the John Bates Clark medal in 1991 from the American Economic Association, which is awarded to "that economist under forty who is adjudged to have made a significant contribution to economic knowledge."

Krugman received his B.A. from Yale University in 1974, and his Ph.D. from MIT in 1977. He taught at Yale, Stanford, and MIT, where he was Ford International Professor of Economics.