Monday night at Haverford College, a standing room crowd packed Founders Great Hall to hear one of the most ardent pessimists in a field aptly referred to as "the dismal science" explain how, exactly, things got so terrible.
"I should be saying something inspiring and upbeat," began Paul Krugman, "but folks, this is economics."
Krugman, the scruffy New York Times columnist and 2008 Nobel winner in economics (Krugman was also the 2004 recipient of a honorary degree from Haverford), joked that the state of the economy is, though not quite Great Depression 2.0, maybe Great Depression 1.3.
Either way, he said, it's in worse shape than most realize.
Krugman said that while the unemployment rate is 9 percent, if you include people who have stopped looking for work, the number rises to over 16 percent. And the young, he said to a crowd comprised largely of that demographic, are especially afflicted.
"Recent graduates of college are finding employment prospects extremely bad ... the share that are employed has dropped from the mid-80s to somewhere around 70 percent," Krugman said.
This is a situation, he added, that one imagines would create a sense of great urgency.
"[But] we're not doing anything," an exasperated Krugman said. "The entire issue of job creation has fallen off the table."
The severity of our economic problems and our failure to offer an adequate response duly emphasized, Krugman then pulled back to sketch out their roots.
He said that after Depression 1.0, the problem of the business cycle, i.e. the cyclical ups and downs of the economy and the consequences thereof, was thought to be solved. The Federal Reserve could soften the impact of these peaks and valleys by adjusting interest rates, which would be sufficient to keep us out of any real trouble.
Krugman said this confidence in our ability to maintain equilibrium wasn't just misguided, but actually enabled the crash that came three years ago. Emboldened by this false confidence, investors took financial risks they may not have otherwise and government failed to take steps to mitigate or discourage these risks.
Another contributing factor was household debt, he said, purposefully drawing a distinction between it and its corporate or government cousins. Such debt doubled between 1980 and 2007 and eventually led to what he called a "Wile E. Coyote" moment.
"People said, 'Wait a second, maybe we've gone a little too far here ...' Wile E. Coyote runs five steps off the end of the cliff and only when he looks down does he realize it," said Krugman.
Wile E. Coyote's metaphoric tumble led to a huge fall in spending, which is what, on the most fundamental level, is responsible for our intransigent economic slump.
"We had a world-wide crash in spending," Krugman said.
Krugman then explained why the Fed, our main bulwark against such a downturn, was largely impotent in a managing this one.
While we usually reduce interest rates during a downturn to free up money and narrow the spending gap — "That is what we did in 1991 ... It's what we did in 2001," said Krugman — such measures didn't work this time.
"You can cut interest rates, but you can only cut them to zero," Krugman explained, meaning that interest rates were so low already, further slashing of them had little stimulative effect. "So that wasn't remotely enough."
"Furthermore," Krugman said, "the way in which interest rates stimulate demand is largely through housing, and there is no way you were going to get a housing boom through lowering interest rates when we were just coming off a monstrous housing bubble."
The real problem, Krugman said — and this is where his signature pessimism shone through — is that once the Fed's measures failed, despite having the know-how, the intellectual "framework," to address the slump, our government didn't take the necessary steps.
More specifically, he said, we saw what it took to end the Great Depression — large government fiscal spending (i.e. World War II) — but rather than implementing such spending, we quibbled over ideology instead.
"We required a real vigorous response ... but it didn't happen," Krugman said. "(Our response) was never whole hearted, never done with conviction."
Krugman said, post-downturn, there was a two to three trillion dollar gap between what the economy was capable of spending and the level of spending we would need to maintain anything resembling full employment. Former Obama economic adviser Christine Romer recommended a $1.2 trillion stimulus package, but Krugman said her recommendation was never even presented.
What we got instead was a $787 billion package that Krugman said, while better than nothing, was woefully inadequate to the task of propping up spending sufficiently to keep the economy moving.
"The people who understood the problem lacked all conviction, but people who didn't understand a thing were full of intensity," he said, explaining the package's origins.
He said he's further disheartened by the recent focus on the deficit, and the imagined imperative government has to cut its spending. Now, he says, isn't the time for that. Nor were, contrary to prevailing sentiment, large government deficits even a contributor to the recession.
Outside of Greece, Krugman said the affected countries weren't running big deficits when their economies slumped. Furthermore, he said the sheer size of the United States government, and its consequent ability to keep sending Social Security checks and making Medicare payments, contained rather than exacerbated the damage the recession caused.
Going forward, Krugman thinks that, despite our apparent unwillingness to take necessary action, he's come to think the economy will heal itself.
"It will meet a natural end," he said, maybe within ten years time. His thinking is that we are slowly but surely shrinking household debt, the fundamental cause of the slump, and once that process is complete, spending will return to normal levels and normal employment will be restored.
The likelihood of an eventual recovery doesn't excuse inaction though, he emphasized. Ten years is a long time to be out of a job.
"[It will have] done enormous damage in the process though.. millions of lives will have been blighted," he said.
When it does finally end though, lessons, he hopes, will have been learned. Some have been learned already.
For one, he said, it seems inflationary targets should be raised so the Fed will have more leeway to lower interest rates and combat future slumps.
The most salient lesson though is specific to his field: he said economists need to spend less time researching, and more time teaching. It's ultimately public ignorance of the nature of the recession that enabled the inaction that allowed it to flourish.
In the near term though, Krugman admitted there are not many options for even the educated segments of the public to coalesce behind.
"In the immediate policy fight, we are not going to have good policies. They could be bad, or they could be very bad."
"And I'll be fighting for bad policies," he promised.