Sweet Orange

Yesterday, we took a look at Hunter Lewis’ view of  the causes of our economic problems. Today, some contrary views from economist Paul Krugman:

In 1999, when the first version of “The Return of Depression Economics” was published, the title seemed provocative and its thesis was cavalierly dismissed by conservative economists. But today, fear rules the markets, John Maynard Keynes is back in fashion, and the stars of Milton Friedman and Alan Greenspan are fading.
–Andrew Leonard, Salon

In a Forbes.com video, Pulitzer-price-winning economist and NY Times commenter Paul Krugman says forgetting Keynes statement that interest rates can be too low was one reason for our current economic problems.

Krugman also says that the more important cause of our current problems is that we forgot the need for the safeguards and regulations–such as the regulations put in place after the Great Depression of the 1930s and which, according to Krugman, allowed us to avoid “Depression Economics” for about 60 years.

For more on this, see Krugman’s book, The Return of Depression Economics and the Crisis of 2008.

Tomorrow: political commenter Kevin Phillips with a viewpoint that the Reagan era was not all that some say it was

This week we’ll have a little survey of various opinions on the cause of our economic difficulties. Up first author and financial advisor Hunter Lewis. Lewis has also held many positions on various charitable organizations.

In a Forbes.com video, author Hunter Lewis says that former Fed Chief Alan Greenspan’s return to Keynesian economics is what lead to current economic problems. He also said the that the quite different actions by former Fed Chief Paul Volker during the 1980s brought about the Reagan prosperity era.

Lewis also say that “recessions are necessary,” and debt is what caused our problems.  He continues to say that this debt came from the housing problem, and the housing problem came from the dot.com problem. For more on this, see Lewis’ book, Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles, and Busts.

Tomorrow: some views from economist Paul Krugman

Wednesday: political commenter Kevin Phillips with a viwpoint that the Reagan era was not all that some say it was

Part Three of a three-part series: A Little Story About Our Economy
Part One: The Depression, Keynes, and Manipulating the Money Supply
Part Two: More on Manipulating the Money Supply
Part Three: Solutions?

In yesterday’s post, we saw that standard methods of both the right and left for dealing with an economic crisis have their limits. So what is the answer to our current economic difficulties?

Sticking with the money supply manipulation model and hoping that it will eventually work? Many say: Been there, done that. Didn’t work. These critics also say that the Fed’s attempt to control the money supply leads to economic bubbles and inflation.

Maybe the answer is a return to Keynes, as some say that the current stimulus plan is. However, many criticize this spend-your-way-out-of-the-problem approach as leading to inflation and a huge debt for future generations.

This group that is critical of the Keynes model often calls for tax cuts as the way out. However, criticism of this tactic also exists. For example, the critics of the tax cut model state that George W. Bush cut taxes, but we still had an economic tsunami under his watch.

So what is the answer to our current economic difficulties? As award-winning author and New York Times columnist Tom Friedman suggests, is something entirely new needed?

Let’s today step out of the normal boundaries of analysis of our economic crisis and ask a radical question: What if the crisis of 2008 represents something much more fundamental than a deep recession? What if it’s telling us that the whole growth model we created over the last 50 years is simply unsustainable economically and ecologically and that 2008 was when we hit the wall - when Mother Nature and the market both said: “No more.”—Tom Friedman, “The Inflection Is Near?“

Questions to ponder, posts to write at another time.

Once upon a time, in the 1930s (and part of the 1940s to be more exact), we had a depression. In fact, it was so bad that it wasn’t just called a depression; it was called “The Depression.” Along came this guy named Keynes who said I can fix that: Just have the government spend a lot of money; this will create jobs. With more jobs, people will once again have money to spend. The economy will recover.

Then enters President Franklin Roosevelt who said something along the line: Sounds good to me. So the government spent lots of money, but not as much as Keynes had thought was enough to solve the problem. Then along comes World War II, and the US government spent even more money. And, in fact, The Depression was no more. The Keynes spend-your-way-out-of-the-problem solution seemed to work!

So some thought this is a handy tool for preventing ups and downs in the market. When times are bad we can just spend a bit to tweak the economy back up. When times are good, we can cut back on spending (easier said than done).

This worked more or less until the 1970s when this thing called stagflation happened. Usually when employment is high, inflation is high and vice-versa. Not so with stagflation where we get the worst of both worlds. In the 1970s, the government spent, but unemployment and inflation both keep going up—an unusual and unpleasant combination.

The Keynesian model for handling a down economy didn’t seem to work anymore. This decades-old, preferred model for handling economic downturns became passé, and a  model that involves manipulating the money supply emerged. This model, in a modified form, came into full bloom during the Reagan administration and was the new preferred economic model for about three decades.

Tomorrow: more on manipulation of the money supply

This is Part One of a three-part series: A Little Story about our Economy
Part One: The Depression, Keynes, and Manipulating the Money Supply
Part Two: More on Manipulating the Money Supply
Part Three: Solutions?