Krugman Sees Early Stages of Depression

Nobel-Prize-winning economist Paul Krugman has said in recent months that if more stimulus is not injected into the economy, the economic recovery very well may be derailed. Now, he sees more than a “derailing”.

“We are now, I fear, in the early stages of a third depression,” Krugman writes in his latest New York Times column, adding that the depression will likely be more like Long Depression that began in the 1870s than the 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,” he warns.

Krugman says the depression will be the result of bad 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,” he says.

The U.S. and Europe are both “well on their way toward Japan-style deflationary traps,” Krugman says. He says there is no evidence that taking austerity measures when an economy is depressed reassures investors. In fact, countries like Greece and Ireland — which have put into place harsh spending cuts — are seen as more risky than Spain, which hasn’t been as drastic, Krugman says.

Krugman says it seems markets understand what policymakers don’t: “that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.” Tens of millions of workers, many of whom will remain unemployed for years, will pay for policymakers’ failure to see that, he says.