The Great Recession? Or Third Depression?

The great mystery of the great depression of the 1930's was: how could the economy achieve apparent stability at low levels of use of economic resources?

Classical economic theory held that, unfettered by government interference, the market would naturally establish equilibrium at full employment. Periods of reduced economic activity were held to be unstable, leading to a return of stability at full employment.

But from 1929 on, the world economy was stubbornly stable at very low levels of activity. John Maynard Keynes researched the problem with a sense of urgency, publishing his magnum opus, the General Theory of Employment, Interest and Money, in 1936. He demonstrated that in times of massive unemployment and economic stagnation, only government spending could get the economy moving again. Under such circumstances, budget deficits were not important. Keynes was unimpressed with arguments that "in the long run" things would get better. "In the long run," he responded, "we'll all be dead." Over the following quarter century, his theories were adopted by nations all over the world, with great success.

Why would countries abandon a set of insights that worked so well? That is the question economist and New York Times columnist Paul Krugman examines in today's newspaper. Although he doesn't come out and say so, he seems to fear that once again (as in the 1930's) the world economy is in the hands of fools.

If we hope to avoid a third depression and put people back to work, it is not yet time for Congress to worry about deficits.