Wednesday, June 30, 2010

How long will the recovery last?

So far, the world economy seems to be on an upswing from the depths of the last couple of years. The participants in the G20 meeting have, in fact, agreed to slash their deficits by half. But is it really time for this? Paul Krugman thinks not:
Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

From the New York Times (h/t flintlock at iTulip). Despite the dismissive attitude taken by flintlock and other iTulipers in that thread, I don't think Krugman's warnings should be ignored.