The Great Recession Revisited

It’s early fall, with a weak jobs report just out, and we’re approaching the five-year anniversary of the collapse of Lehman Brothers, which kicked an ongoing recession into full-blown crisis.

New York Times columnist Paul Krugman observes the landscape and says (not for the first time) that policymakers should have listened to Paul Krugman. “If the U.S. government had actually been able and willing to do what textbook macroeconomics says it should have done—namely, make a big enough push for job creation to offset the effects of the financial crunch and the housing bust, postponing fiscal austerity and tax increases until the private sector was ready to take up the slack,” Krugman writes, it would have put in place a stimulus package “about three times as big as the stimulus we actually got, and would have been much more focused on spending rather than tax cuts.”

Unfortunately, he continues, many economists fueled “exaggerated fears of inflation and debt” and contributed to U.S. economic policy that “has been an astonishing, horrifying failure.”

Peter Drucker’s views on economic policy were never simple.  He would have shared Krugman’s view that long-term unemployment is both demoralizing and dangerous. “Modern industrial society simply cannot stand the social wreckage of prolonged unemployment and stagnation,” Drucker wrote in Concept of the Corporation. “Every industrial country must therefore adopt a policy of positive action and intervention in case of depression.” In his opinion, public-works projects were one of the least-disagreeable ways to create employment during hard times.

Image source: Federal Reserve Bank of St. Louis

But Drucker was skeptical of anyone expressing certitudes about “textbook macroeconomics”—especially anyone with elaborate mathematical formulas for curing an ailing economy.

While a great admirer of John Maynard Keynes, Drucker wrote in The Ecological Vision that “Keynesian ‘policies,’ in spite—or perhaps because—of their elaborate apparatus of mathematical formulae and statistical tables, are spells.”

In later years, Drucker was impressed by all the new knowledge gained in the field of economics. But he still considered it to be in a very early phase of enlightenment. It was terribly dangerous, Drucker wrote in The Age of Discontinuity, for economists to believe they have “the answer and truly the economic theory, which—as a kind of economic philosopher’s stone—enables us to prevent, or at least to cure, serious economic ailments such as depressions or stagnation.”

What, if anything, should the United States have done differently in terms of its economic policies to battle the Great Recession?