Review: The Return of Depression Economics and the Crisis of 2008

It’s comforting to know that even in these economic times, some people are still managing to turn a profit. One of these lucky few is Paul Krugman: Princeton professor, Nobel laureate and economic guru-in-residence at the New York Times. The recent financial crisis gave Krugman an opportunity to dust off his 1999 book “The Return of Depression Economics,” add a couple tidbits about subprime mortgages, and rechristen it “The Return of Depression Economics and the Crisis of 2008.” That, and a chance to add an extra $10 to the price tag.

Krugman’s book is a cautionary tale about how bad things can happen even when smart people do smart things. In fact, he argues that bad things often happen because of said smart people doing said smart things. Ever since the economic revolutions of Keynesianism and, later on, monetarism, we’ve gotten cocky. We think we’ve got all the answers. Writes Krugman in his new preface: “The kind of economic trouble that Asia experienced a decade ago, and that we’re all experiencing now, is precisely the sort of thing we thought we had learned to prevent.”

In theory, the recession of 2009 should have been easy to prevent. But the difference between in theory and in reality is as wide as the gap between going to California and going to the California Pizza Kitchen. One of the book’s recurring themes is that theory won’t always save us. If there existed a manual on “How to End a Depression,” and if you followed its instructions to the letter—increase spending, print more money, and so on—there would be no guarantee of success.

One might ask, then: if smart people can make such dumb mistakes, why should we trust Paul Krugman, the very epitome of the hyper-educated brainiacs who got us into this mess? First of all, the man has a Nobel Prize, and his book reminds us of that fact. Repeatedly. It’s mentioned on the front cover, the back cover, the dust jacket, the author’s biography—I expected the dedication to read “to my wife, my kids, and my lovely Nobel Prize.”

But there’s more to Krugman’s book than his shiny new medal. It overflows with fascinating stories of how booms lead to bubbles and how bubbles, inevitably, go bust. You think the housing market was the first time it happened? Krugman takes us on a world tour of economic crises, from the “Tequila crisis” that struck Latin America in 1994 to Japan’s “liquidity trap,” which devastated the island nation’s economy throughout much of the 1990s.

The book is more economic history than policy checklist; Krugman-the-professor pushes aside Krugman-the-pundit. But a final chapter, “The Return of Depression economics,” proposes a couple solutions. “What the world needs right now,” Krugman says, “is a rescue operation.” We need a jumbo-sized stimulus to jumpstart the economy; we also need a fresh approach to globalization. Very vague ideas, true, but give the man a break. It’s hard to solve a world crisis in just 191 pages. Even if you do happen to have a Nobel Prize.