Paul Krugman: Averting the Worst

[Note: The actual column, "Averting the Worst" by Paul Krugman, is here.]

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I heard you say that we aren’t going to have a second Great Depression. What saved us?

The answer, basically, is Big Government.

So the government fixed things? Does everyone go back to work tomorrow?

Just to be clear: the economic situation remains terrible. 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.

We're still skidding towards the cliff, but we'll stop in time? I'll feel better when we're actually stopped, or better yet, headed in the other direction.

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.

So what was so special about the way government reacted?

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.

Okay, then what didn't the government do that was so special?

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.

This means that budget deficits — which are a bad thing in normal times — are actually a good thing right now.

I can buy that the government had an “automatic” stabilizing effect through its normal expenditures and by supporting increased demand for programs such as unemployment insurance, food stamps, those sorts of things. I can also see how running a deficit is the only way to support these programs. But the financial bailout, surely you aren't going to tell me that was helpful too? Look how it was handled!

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.

The point is that this time, unlike in the 1930s, the government didn’t take a hands-off attitude while much of the banking system collapsed. And that’s another reason we’re not living through Great Depression II.

So what you are telling me is that the bailout worked, and was necessary, but we could have bailed out the system in a way that cost taxpayers less and the people responsible for the problems more? You're right about it being possible to be dissatisfied even though it worked. Anyway, since we're talking about poorly structured programs, above when you talked about automatic stabilizers, you didn't mention the stimulus package. Is that because it hasn't helped much yet?

From the beginning, I argued that the American Recovery and Reinvestment Act, a k a the Obama stimulus plan, was too small. Nonetheless, reasonable estimates suggest that around a million more Americans are working now than would have been employed without that plan — a number that will grow over time — and that the stimulus has played a significant role in pulling the economy out of its free fall.

So automatic stabilizers, an imperfect but effective enough financial bailout, and an imperfect but at least helpful stimulus package are all working together to overcome the problems in the economy?

Ronald Reagan was wrong: sometimes the private sector is the problem, and government is the solution.

That's not the only thing he was wrong about.

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

Speaking of which, how do you think things would have been different if McCain had won the election?

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.

Yeah, Republicans aren't exactly fans of the stimulus package. They'd reverse it right now if they could.

I’m not just talking about opposition to the stimulus. Leading Republicans want to do away with automatic stabilizers, too. Back in March, John Boehner, the House minority leader, declared that since families were suffering, "it’s time for government to tighten their belts and show the American people that we ‘get’ it." Fortunately, his advice was ignored.

Ignoring Boehner's advice is a good idea in general. Ignoring him saved the day.

I’m still very worried about the economy.

Why?

There’s still, I fear, a substantial chance that unemployment will remain high for a very long time. But we appear to have averted the worst: utter catastrophe no longer seems likely.

And Big Government, run by people who understand its virtues, is the reason why.