Remember the '80s, when Sex was sexy? How long ago, how quaint that seems. Today Sex is as cold and flat as yesterday's flapjack. Today what gets us hot is Cash. Newspapers, magazines, TV, and the Web vie to serve us up the latest in econodish and tickerporn. Everybody's rich, or if not yet rich on the verge of getting rich as soon as the merger is approved or the IPO gets issued or the lucky number comes up in the lottery. Last time we dropped by the old folks' home Gramps said something like how the last time he'd seen a party like this was back in the 1920s. We were just going to ask him why the party ever ended when the nurse came in with his medication. . . . The Return of Depression Economics
by Paul Krugman (W.W. Norton, $23.95) MIT economics professor Paul Krugman owes his celebrity and a substantial portion of his income to the Great Boom Market of the '90s, thanks to his two monthly columns (for Fortune and Slate) and a flood of popular books, articles, and op-eds since his The Age of Diminished Expectations appeared 10 years ago. But unlike many commentators on the fizzy goings-on playing out daily in markets round the world, Krugman has made significant contributions to contemporary economic theory, particularly in the area of international finance and trade. When he speaks on the future course of the world economy, he may be wrong, but he's less likely to be wrong than pretty much anyone else. In his latest book, Krugman makes it clear that he's uneasy about what he sees—even scared. Well, to paraphrase Pete Seeger: If Krugman's scared, I'm scared. The Return of Depression Economics is no tome. At fewer than 170 pages, it's confessedly a monograph, written and published in haste, but no less valuable. John Maynard Keynes' pervasive influence on world politics and economics after World War II was due far more to his popular essays and journalism than his 1936 General Theory of Interest, Employment and Money, one of the most influential, least-read books of all time. In a modest way, Krugman's monograph continues and even expands upon the central question explored in Keynes' analytical masterpiece: Why do depressions happen? Why, when there are idle hands willing to work, idle factories and offices they could be working in, idle money sitting under mattresses that could be profitably invested, do the productive resources of the economy remain underutilized—to the common disadvantage of all? Plenty of people think that Keynes and his followers answered that question so exhaustively that there's no point in even asking it again. To that, Krugman responds: Oh, yeah? If we know so well how to fine-tune interest rates, taxes, and money supplies that depressions, like smallpox, are a plague of the past, why has Japan, once the world's economic poster child, been lumping ever farther into recession for the better part of 10 years? If globalization has made the world's economies more transparent, rational, and interdependent, why did the devaluation of a minor currency like the Thai bhat push half a dozen strong national economies toward meltdown? Why should a loan default by perennial bad-actor Russia throw markets in goody-two-shoes Brazil into panic? Krugman's book begins on July 1, 1997, with the Chinese flag rising over Hong Kong, traces the "Asian flu" that swept through Thailand, Indonesia, Singapore, and Korea immediately thereafter, flashes back to Mexico and South America in the mid-'90s in search of the bug that started the infection, and ends in January 1999 with Wall Street still picking up the pieces from the multi-billion-dollar collapse of the hedge fund Long Term Capital Management. At the end, you may well feel like someone who's just gotten off the Earthquake! ride at Universal City, having experienced a lot of near misses in a very short time. In this case, however, the explosions, falling timbers, and gouts of flame were all real. Anyone who still believes after reading The Return of Depression Economics that the United States is immune from such shocks or that the Dow is unerringly headed for 12,000 just wasn't paying attention. Krugman has never been shy about prescribing economic medicine when he was sure he knew what the patient required: Recently he's earned the ire of conservative economists and Japanese bureaucrats alike by insisting that all Japan needs to break out of its debilitating "liquidity trap" is a healthy dose of good old-fashioned government-induced inflation. That makes his refusal to offer blanket solutions for an international monetary and financial system running out of control somehow all the more convincing. Krugman concludes his little book by approving a remark made by Keynes in 1930, as the true dimensions of the world economic crash were just becoming apparent: "We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the workings of which we do not understand." As a stylist, Krugman isn't in Keynes' class, but he finds his own way to hammer home the message. He has the popular-prof gift of keeping his audience alert with a steady stream of examples, citations, jokes, and asides, all the while planting one essential idea in the listener's mind to take root and grow after the arm-waving's long forgotten. And long after this particular book is forgotten, you'll probably find the world economy easier to understand, thanks to Krugman's lighthearted comparison of its booms and crashes to the frustrations once experienced by a yuppie baby-sitting co-op. Watching over Krugman's shoulder as he delicately pokes his way through the innards of one ailing economy after another, you realize that we have learned a great deal about what makes our world system go since Keynes. But Krugman also makes you appreciate that we still don't know anywhere near enough to be confident that we're in control of the machine. Indeed, confidence may be our greatest enemy: "The only important structural obstacles to world prosperity," the author concludes, "are the obsolete doctrines that clutter the minds of men."