Paul R. Krugman

I believe in a relatively equal society, supported by institutions that limit extremes of wealth and poverty. I believe in democracy, civil liberties, and the rule of law. That makes me a liberal, and I’m proud of it.

It is important to realize that even now Fed officials are not quite sure how they pulled this rescue off. At the height of the crisis it seemed entirely possible that cutting interest rates would be entirely ineffectual—after all, if nobody can borrow, what difference does it make what the price would be if they could? And if everyone had believed that the world was coming to an end, their panic might—as in so many other countries—have ended up being a self-fulfilling prophecy. In retrospect Greenspan seemed to have been like a general who rides out in front of his demoralized army waves his sword and shouts encouragement, and somehow turns the tide of battle: well done, but not something you would want to count on working next time.

I would summarize the Keynesian view in terms of four points:1. Economies sometimes produce much less than they could, and employ many fewer workers than they should, because there just isn’t enough spending. Such episodes can happen for a variety of reasons; the question is how to respond.

2. There are normally forces that tend to push the economy back toward full employment. But they work slowly; a hands-off policy toward depressed economies means accepting a long, unnecessary period of pain.

3. It is often possible to drastically shorten this period of pain and greatly reduce the human and financial losses by “printing money”, using the central bank’s power of currency creation to push interest rates down.

4. Sometimes, however, monetary policy loses its effectiveness, especially when rates are close to zero. In that case temporary deficit spending can provide a useful boost. And conversely, fiscal austerity in a depressed economy imposes large economic losses.

Most economists, to the extent that they think about the subject at all, regard the Great Depression of the 1930s as a gratuitous, unnecessary tragedy.

Were the Asian economies more vulnerable to financial panic in 1997 than they had been, say, five or ten years before? Yes, surely—but not because of crony capitalism, or indeed what would usually be considered bad government policies. Rather, they had become more vulnerable partly because they had opened up their financial markets—because they had, in fact, become better free-market economies, not worse. And they had also grown vulnerable because they had taken advantage of their new popularity with international lenders to run up substantial debts to the outside world. These debts intensified the feedback from loss of confidence to financial collapse and back again, making the vicious circle of crisis more intense. It wasn’t that the money was badly spent; some of it was, some of it wasn’t. It was that the new debts, unlike the old ones, were in dollars—and that turned out to be the economies’ undoing.

Will the tax cut destroy America’s prosperity? Probably not. As Adam Smith observed, there’s a deal of ruin in a nation. We have a huge, resilient economy that can survive and recover from even quite bad government policies.

Yet while the tax cut may not be a matter of economic life or death, it is a very serious issue. For one thing, like it or not, the tax cut has become the central political issue in the United States right now. Conservatives who want to reshape America view passage of a large tax cut as a first step toward realizing their vision. For that reason, those who do not share this vision feel, rightly, that they must oppose the plan.

We will not achieve the understanding we need, however, unless we are willing to think clearly about our problems and to follow those thoughts wherever they lead. Some people say that our economic problems are structural, with no quick cure available; but I believe that the only important structural obstacles to world prosperity are the obsolete doctrines that clutter the minds of men.

Here’s what the IMF did: In Asia (as opposed to Brazil, which as I said was a sort of caricature of the Asian programs) it did not tell countries to defend the values of their currencies at all cost. But it did tell them to raise interest rates, initially to very high levels, in an attempt to persuade investors to keep their money in place. Some vociferous critics of the IMF—most notably Harvard’s Jeffrey Sachs—said that this was very much the wrong thing to do. Sachs believed, in effect, that Asian countries could and should have behaved like Australia, simply letting their currencies decline until they started to look cheap to investors, and that if they had done so, the great slump would never have happened.

What the IMF said in response is that Asia is not Australia: that to let the currencies fall unchecked would have led to “hyperdevaluations,” and that the result would have been both massive financial distress (because so many businesses had debt denominated in dollars) and soaring inflation. The trouble with this rationale is, of course, that the massive financial distress happened anyway, thanks to high interest rates and the recession they helped cause. So the IMF at best avoided one vicious circle only by starting another.

It has been obvious for quite a while that Sanders — not just his supporters, not even just his surrogates, but the candidate himself — has a problem both in facing reality and in admitting mistakes.

In retrospect it is also clear that we gave far too much credit to “Washington,” to the IMF and the Treasury. It was true that they had acted courageously and decisively, and that the results had been a vindication. But on close examination the omens were not all that good for a repeat performance. For one thing, the mobilization of money was achieved through what amounted to a legal sleight of hand, justified mainly by the special significance of Mexico to U.S. interests. Money would not come as quickly or as easily in later crises. The Mexican rescue was also made less complicated by the cooperation of the Mexican government: Zedillo’s people had no pride to swallow—not with Mexico’s history—and were in complete agreement with Washington about what needed to be done. Dealing with Asian countries that had been accustomed to negotiating from a position of strength, and with Asian leaders accustomed to having things their own way, would be very different.

Perhaps most of all, we failed to understand the extent to which both Mexico and Washington simply got lucky. The rescue wasn’t really a well-considered plan that addressed the essence of the crisis: it was an emergency injection of cash to a beleaguered government, which did its part by adopting painful measures less because they were clearly related to the economic problems than because by demonstrating the government’s seriousness they might restore market confidence. They succeeded, albeit only after the economy had been punished severely, but there was no good reason to suppose that such a strategy would work the next time.

What does Alexandria Ocasio-Cortez know about tax policy? A lot.

So let's start telling the truth: competitiveness is a meaningless word when applied to national economies. And the obsession with competitiveness is both wrong and dangerous.