21st Century Depression

As long ago as 2005 I was predicting that the UK ( and the USA ) were heading for meltdown due to the irresponsible consumer debt fuelled bubble economy artificially pumped up by banks. Craven euphemisms like "credit squeeze" or "downturn" were used when the bubblegum economy snapped.

Now Noble Prize winning Economist Paul Krugman calls it a Depression. The reason is set out here but it's one more nail in the coffin of the neoliberal model taken to extremity by ideologues in bith the British and New Labour Parties.

Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as "depressions" at the time: the years of deflation and instability that followed the Panic of 1873; and the years of mass unemployment that followed the financial crisis of 1929-31.

Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of non-stop decline – on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost to the world economy and, above all, the millions of lives blighted by the absence of jobs will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world – most recently at the weekend's deeply discouraging G20 meeting – governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

In 2008 and 2009 it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike past governments that tried to balance budgets in the face of a plunging economy, today's governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.

But future historians will tell us that this wasn't the end of the third depression, just as the business upturn that began in 1933 wasn't the end of the Great Depression.

After all, unemployment – especially long-term unemployment – remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the US and Europe are well on their way towards Japan-style deflationary traps.

In the face of this grim picture, you might have expected policymakers to realise that they haven't yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

The rest of Krugman's brilliant article can be read here in The Guardian ( Monday 28 June 2010 ).