Learning from Mistakes? Not So’s You’d Notice

Paul Krugman sees economic policy makers on the verge of losing their nerve, just like they did in the 1930s:

The debate over economic policy has taken a predictable yet ominous turn: the crisis seems to be easing, and a chorus of critics is already demanding that the Federal Reserve and the Obama administration abandon their rescue efforts. For those who know their history, it’s déjà vu all over again — literally.

For this is the third time in history that a major economy has found itself in a liquidity trap, a situation in which interest-rate cuts, the conventional way to perk up the economy, have reached their limit. When this happens, unconventional measures are the only way to fight recession.

Yet such unconventional measures make the conventionally minded uncomfortable, and they keep pushing for a return to normalcy. In previous liquidity-trap episodes, policy makers gave in to these pressures far too soon, plunging the economy back into crisis. And if the critics have their way, we’ll do the same thing this time.

The first example of policy in a liquidity trap comes from the 1930s. The U.S. economy grew rapidly from 1933 to 1937, helped along by New Deal policies. America, however, remained well short of full employment.

Yet policy makers stopped worrying about depression and started worrying about inflation. The Federal Reserve tightened monetary policy, while F.D.R. tried to balance the federal budget. Sure enough, the economy slumped again, and full recovery had to wait for World War II.

3 Responses to “Learning from Mistakes? Not So’s You’d Notice”

  1. JohnHolmes says:

    Krugman is smart, but he’s a Liberal first … economist second. Therefore Krugman can’t understand how FDR’s policy didn’t work … just built up debt via temporary government jobs. Some of this building effort was indeed worthwhile, but it took WW2 and a boost of sustainable jobs in the private sector to truly get us out of a huge recession. Obama didn’t learn this lesson, he is forcing a failed method and we will all pay for it ..

    They didn’t lose their nerve as Krugman says, the policy failed … will Krugman Learn from Mistakes? no.

    Anyway, did you know that 40% of people call themselves “Conservative” while only 20% “Liberal” …. sure makes me feel good, people don’t identify with Liberal ideas …. because they suck. Hopefully the next election will reflect this.

  2. Chief says:

    It doesn’t really make any diff whether folks call themselves a “lib” or a “Con.” When the policies of the folks in office fail miserably, they vote for someone else to implement policies that work.

    And JH, I’m wondering “but it took WW2 and a boost of sustainable jobs in the private sector” who do you think was paying all the wages for these jobs? I assume that you are talking about the jobs that were created to support the WW2 war effort. War bonds, which was borrowing money from the citizens of the country.

  3. JohnHolmes says:

    Chief: Yes, of course WW2 was funded by the Gov’t … and the economy was still in recession at the start of WW2. So that’s like 12 years waiting for FDR’s policy to work.

    … and yea, unfortunately it’s the “moderates” who decide elections .. just glad to see there ain’t really many Libs out there (20%) … ha!! what a joke .. cause the Libs are running the country right now.

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