Business, Politics & Society

Economic Solutions to Crises

Paul Krugman

Lesson time 9:02 min

Paul details monetary solutions vs. fiscal solutions, how to rethink deficit spending, and what to do to brace for the next crisis.

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Paul Krugman
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Nobel Prize-winning economist Paul Krugman teaches you the economic theories that drive history, policy, and help explain the world around you.
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The fact that Ben Bernanke printed lots of money and it just sat there was a problem. It's sobering. The Fed is our-- it is our first responder to economic emergencies. It's the over-the-counter medicine we take when we catch an economic cold. If they have lost traction, if they no longer have that power, if the economy has fallen too deep into the liquidity trap for the Fed to be able to pull us out, someone and something else has to step in. And that someone and something else pretty much has to be fiscal policy. Has to be government spending, maybe tax cuts. But certainly, the government is going to have to step in. The government proper. The executive branch and Congress are going to have to step in. And then you've opened a whole can of worms, because rescuing the economy is being put on the shoulders of elected politicians, many of whom are beholden to rigid economic ideologies, many of whom are answering to donors who believe stuff, many of whom are-- so I'm saying all those commentators on Fox and CNBC who are predicting hyperinflation. And so it gets much, much harder. You're now in a situation where in order to do what the economy needs or to do what has to be done, you have to win over people who maybe don't get it. If you are going to spend government money, there's going to be a fight over, spend it on what? Who gets it? Which district? What project? All of those things get in the way. So it was a really bad thing to find ourselves in a situation where good economic policy required something that went well beyond the normal sort of technocratic twiddling the dial thing that the Fed does. [MUSIC PLAYING] Terrible as it was, the crisis of 2008 and aftermath wasn't as bad as the Great Depression. But the funny thing is, it started out just as bad. First six months, the plunge in the world economy in 2008 was every bit as bad as it had been in 1929. The downturn and everything. Stock prices, trade, industrial production was tracking right along the Great Depression. Then turned around, leveled off, started to come back up this time. So we did not revisit the full horrors of the 1930s. And if you ask what did that, the answer was, well, we learned something. In 1929, 1930 for the most part, the Federal Reserve and its counterparts basically said, this is natural. We should let the economy go through this. It'll purge. Didn't work out too well. And this time around, Ben Bernanke and Mervyn King in England and others went out there and printed money. Obama had his stimulus plan. Also, we allowed budget deficits to grow temporarily, all of which were actually very important ways of cushioning it. So that what we had was bad, but it was a bad cold, and not a deadly fever that struck the world economy. [MUSIC PLAYING] When we talk about deficits, it's probably a really good idea to ask why they're a bad thing. It's one of those things where people just take it for granted they must be a bad thing. ...


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For Nobel Prize-winner Paul Krugman, economics is not a set of answers—it’s a way of understanding the world. In his economics MasterClass, Paul teaches you the principles that shape political and social issues, including access to health care, the tax debate, globalization, and political polarization. Heighten your ability to read between the lines and decipher the underlying economics at play.



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Comments

RJane @.

*debts (MasterClass needs an option to edit a comment so people can edit typos.)

RJane @.

The federal government does not need to print more money. It needs to lower the interest rates of loans, credit cards and other debs and increase taxes of those who make $100,000 or more.

Pisko

the root of the crises is so obvious that no one has identified it yet n yet we r all part of it, every day since we started working in a company or created one. I´ll state it as a question 4 Paul when I finish the class (april) in the Q&A on the "office hours" section. Please comment on this post if u r interested on Paul answering when I post this hypothesis

Pureum K.

One thing for sure is that you cannot borrow forever- Some time- may be 20-30 year, the ____ hits the fan and it won't be pretty- I pray that the world stops borrowing and starts saving- Also, really time to cut costs and increase innovation before things go really bad-

Sebastien

Concerning the article by Brookings, Keynes advocated deficit in bad time that get paid back in good times, but America, Japan and Europe seem addicted to deficit in good times too for political reasons. Saying that debt will be reduced in good time conforms to Keynes original view but not to reality. Asset purchases also were nowhere in the Keynes story and thus are called non standard policy. We need an analysis that better integrates the last decades of economic history.

Lindsay M.

Link to a PDF of the Martin Feldstein article: http://www.nber.org/feldstein/projectsyndicate_fiscalstimulus.pdf

charles S.

Shame you need to be a subscriber to follow the link to Martin Feldstein’s case for stimulus on project-syndicate.org . That would have been interesting.

Jeffrey N.

In an economy with high debt levels 150-200% of GDP, the economy is quite susceptible to calamity if there is revolutionary change. For instance, let’s say Climate Change really causes major modifications in consumer behavior and world GDP decreases by 50% over three years. Then, all of the sudden this economy could find its currency imploding and the governments failing. The USA is the most productive economy in the world, and while its in its “good times” it should actually be saving some for the rainy days. The current Fed balance sheet should have been from reserves saved during the good times, rather than money creation, in my opinion. The dollar’s value is being diluted over and over to stay generally flat, rather than getting stronger and stronger as it could have been with say a 4-5% expansion of the money supply annually.. Senior citizens are getting screwed along with this dilution, methinks.

Mia S.

"Japan has debt that's 200% of GDP. It's twice what we have now. Lots of people keep on betting that Japan's going to have a crisis, that interest rates are going to go soaring. People have been betting that for about 15 years now, and they keep losing money on it. Japanese interest rates stay low. So it looks like if Japan can have debt that's 200% of GDP without a crisis, yeah, we can too. Country like us - big, advanced, effective bureaucracy, (at least we used to think) non-crazy leaders - we have a lot of latitude. It's not a good idea - you really should be trying to run to pay down your debt during good times so you have a reserve to deal with bad stuff. But on my list of things to worry about, US debt is way down the list. It's probably not in the top 10. When the financial crisis struck, famously, the Queen of England asked, 'Why did nobody see this coming?' And that actually wasn't a very good question. The mere perception that such a thing was likely would probably have been a self-denying prophecy; it just wouldn't have happened. What you can predict is that crises will happen now and then, and what you try to do is build a system that has enough shock absorbers of one sort or another that it won't be too bad. You try to ensure that banks have adequate reserves and that there is a safety net in place. In a crisis, you're going to end up having to bail out some institutions just because of the ramifications that they're allowed to fail. So you should set up a system that tries to prepare you for those bailouts, tries to make sure that you're not having to improvise on the fly. You can't predict crises, really - you probably can't prevent them, but mostly you can just make them much less serious, so that when you hit a bump in the road, it's still going to jar the system a bit, but it's not going to cause a fatal crash."

Mia S.

"When talking about deficits, it's probably a really good idea to ask why they're a bad thing. It's one of those things where people just take it for granted that it must be a bad thing. There are actually two reasons why deficits could be a bad thing: One of them is that if the government is borrowing money, it's competing with the private sector; so it might be diverting savings from what would otherwise be productive investments. That applies in normal times, but in a depressed economy, that is not a problem; the problem we have is that the private sector doesn't want to invest. In fact, the problem is that the amount that people want to save is basically more than the amount business is willing to invest and the economy is awash in - it's got all these savings that are all dressed up with no place to go. So actually, running a deficit is a good thing, it gives those savings a productive outlet. The other thing is, you worry about governments having trouble actually paying the debts, and this constrains their resources. And that's real - that can be an issue. It's a lot less acute an issue than most people imagine. So you think to yourself, 'How big a deficit, how big a debt - because deficits lead to debt - how big a debt is unsustainable, unable - beyond something you can pay?' Governments that have their act together, that are able to raise taxes - they can carry quite a lot of debt and not have trouble raising enough revenue to pay the interest on the debt. In fact, you don't have to pay all the interest on the debt because the economy is growing, prices are rising... as long as the debt isn't growing faster than the economy, that's OK. So if you can pay a sufficient amount to stabilize and gradually maybe reduce the debt in normal times, that's OK. If the debt is big enough, it really could become an insupportable burden. But history tells us that vast countries that borrow in their own currency that have stable governments can carry really pretty high levels of debt. The US came out of WWII with a debt that was more than 100% of GDP, and which seemed like a big number, but it was never a problem. We never paid off the debt from WWII, we just grew to the point where that debt no longer seemed like a big deal."