【正文】 The Return of Depression Economics — Paul Krugman reasonable to assume that the economy would always tend quickly back to full employment—not because of any automatic mechanism but because intelligent policymakers would use moary and fiscal policy to get it there. Like traditional European wine grapes that survived the great phylloxera epidemic by being grafted onto Americanroot stock, classical economic theory survived the Great Depression by being grafted onto the assumption that activist moary and fiscal policy would ensure more or less full employment. In the 1950s Paul Samuelson dubbed the resurrection of classical fullemployment economic theory the “neoclassical synthesis.” It remains to this day the position of those who appreciate but do not worship free markets. Here, for example, is what I wrote in Slate two years ago in an article entitled “Vulgar Keynesians”: Unit Six The Return of Depression Economics — Paul Krugman In reality the Federal Reserve Board actively manages interest rates, pushing them down when it thinks employment is too low and raising them when it thinks the economy is overheating. You may quarrel with the Fed chairman’s judgment—you may think that he should keep the economy on a looser rein—but you can hardly dispute his power. Indeed, if you want a simple model for predicting the unemployment rate in the United States over the next few years, here it is: It will be what Greenspan wants it to be, plus or minus a random error reflecting the fact that he is not quite God. But putting Greenspan (or his successor) into the picture restores much of the classical vision of the macroeconomy. Instead of an invisible hand pushing the economy toward full employment in some unspecified long run, we have the visible hand of the Fed pushing us toward its estimate of the noninflationary unemployment rate over the course of two or three years. Unit Six The Return of Depression Economics — Paul Krugman To an adherent of the neoclassical synthesis like myself, then, the really disturbing thing about the world’s current problems is not so much the possibility that they will spiral into a new Great Depression, which still remains unlikely and indeed seems to have receded in the last few months. Instead, the problem is that for the first time since the 1930s, we cannot be sure that governments can or will increase demand when we need it. The Unholy Trinity WHAT HAS gone wrong? On the face of it, there seem to be two quite separate issues: the problems of developing countries threatened with hot money flows and those of mature economies facing a “l(fā)iquidity trap.” Unit Six The Return of Depression Economics — Paul Krugman As the Bretton Woods system of fixed exchange rates that had governed postwar world moary affairs began to show signs of strain in the 1960s, a number of economists began to argue that there was a fundamental dilemma—or, more precisely, a “trilemma”—at the heart of international finance. Analysts such as the Canadian theorist Robert Mundell suggested that, as a fundamental matter of economic logic, countries could not get everything they want and that any exchange rate system involves sacrificing some important objectives to achieve others. Three conflicting objectives in particular, sometimes dubbed the “irreconcilable trinity,” have preoccupied wouldbe international financial architects. First, countries would like to retain scope for independent moary policy—that is, they would like to be able to cut interest rates to fight recessions and raise them to counter inflation. Unit Six The Return of Depression Economics — Paul Krugman more or less stable exchange rates because erratic fluctuations in the value of their currency create uncertainty for business and can sometimes cause severe disruptions to the financial system. Third, countries would like to maintain full convertibility—that is, they would like to assure businesses that money can be freely moved in or out of the country, if only to avoid the bureaucracy, paperwork, and opportunities for corruption inevitably associated with any attempt to limit capital movements. Alas, these objectives are indeed irreconcilable. The iron law of international finance is that countries can achieve at most two of the three. The