Book Review

Krugman makes a timely 'Return'

By Ross Kerber
Globe Staff / December 17, 2008
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Columnist and academic Paul Krugman is God of All Economic Thought in some Democratic literary and political circles. This midsize volume shows why. Krugman's facility both with arcane details and with vast unified explanations boils down complexity so much that the reader often wonders: Why didn't I see it that way myself?

Krugman's influence as a star New York Times columnist and Princeton professor was well established even before he won the Nobel Prize in economics in October. The award was recognition of his earlier work on imports and exports.

Krugman's appeal, in this and the rest of his canon, lies in his gift at poking holes in economic cant and ideological explanations that don't fit real-world developments. Even though Krugman has been among the Bush administration's toughest critics in his column, little of his latest volume is concerned with how the administration handled the economy during the past decade.

Instead, much of this updated book is a retread of his 1999 work "The Return of Depression Economics," a review of the lessons learned from the surprise crises that struck developing economies in the 1990s. Krugman has updated many of these pages and added three new chapters and a conclusion. But all focus on a central theme: that in their policy responses, officials (including in Washington) often got through by getting lucky.

Surprisingly it is the redone older chapters that seem freshest - perhaps because the recent rush of events make the new pages seem like today's conventional wisdom.

The first new chapter is a review of the tenure of Federal Reserve chairman Alan Greenspan from 1987 to 2006. Though he won wide plaudits during his time, Krugman calls Greenspan's reign overrated and accuses him of coasting on the unpopular but necessary decisions of his predecessor, Paul Volcker, to raise interest rates that finally beat inflation. Greenspan didn't act quickly enough to stem the asset bubbles that formed first in technology stocks and then in housing prices, Krugman argues.

The bigger cause of the current situation is described in the next new chapter, on the rise of what he describes as a shadow banking system that grew up outside the institutions regulated by the Federal Reserve and other agencies. Instruments like auction-rate securities grew popular for paying higher interest rates than customers could get at standard banks, only to freeze up when new investors lost confidence in the system. Toward the end he takes a poke at George W. Bush's administration for its pride in attacking banking regulations precisely when they were most needed. Here's a moment where Krugman may be oversimplifying. Despite holding Congress since 2006, Democrats haven't pressed as hard as some hoped for stricter oversights.

Last comes an account of the worldwide crash that began in 2007, as the global financial interconnections originally seen as promoting stability had the opposite effect of spreading problems around. Whereas in the recessions of 1981, 1990, and 2001 Fed officials seemed to have leverage over the US economy, today's weaknesses come from the ground up, the lack of demand from consumers and businesses.

What is to be done now? Krugman concludes by proposing heavy spending such as on public works projects to restimulate the economy, ideas already popular in Democratic circles and backed by the incoming Barack Obama administration. Krugman was tough on Obama during the Democratic primaries over his health-care policies. Now his test will be to hold the incoming administration to the same standards of economic clarity that he applied to Team Bush.

In the end, this book's best contribution may be Krugman's bottom line that just as smaller economies found their way back, there are specific technical steps - better regulation, more spending - that could still turn the US economy around.

Ross Kerber is a Globe business reporter.


By Paul Krugman

Norton, 224 pp., $24.95

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