Paul Krugman Cautions Against Collective Pessimism

Could a fixation on the language of depression economics actually precipitate a worse economic slump? The Times speculates that a eye toward past downturns could increase our complacency with the current one.

This was exactly the thinking during the 1930’s. Economists repeatedly cited slumps in the late-19th century and drew connections to the circumstances post-Black Tuesday. Upon hearing such news the bread lines only got longer.

True, the ingredients are all there for us make a link in our public consciousness to the Great Depression. There’s a mammoth banking crisis, a stock market that refuses to rise, and consumer spending at record lows. History may be repeating itself—if that’s our expectation.

In a fine interview with Paul Krugman in today’s Barron’s evaluating where the United States is headed financially, the Nobel Prize-winning economist observed, “Once prices start falling, and people start to expect continuing deflation, the balance sheet problems will become much worse than they already are.” Krugman describes an unholy marriage in which our fears translate into inaction.

But the comparisons to times past are really not what’s important. How to emerge from the slump is. Assuming there is some relationship, however oblique, between our expectations and reality, the question for any society that wishes good for itself would be how to trump the pessimism and let an eye toward the future triumph. For that we turn back to Paul Krugman whose “Krugman plan” at Harvard Business Publishing could stimulate a great deal of positive thinking.