If Paul Krugman is Right and it’s 1931, What Happens Next?

The New York Times columnist writes:

Suddenly normally calm economists are talking about 1931, the year everything fell apart. . . . And it’s happening again, both in Europe and in America. . . . None of this should be happening. As in 1931, Western nations have the resources they need to avoid catastrophe, and indeed to restore prosperity — and we have the added advantage of knowing much more than our great-grandparents did about how depressions happen and how to end them. But knowledge and resources do no good if those who possess them refuse to use them.

In some ways, things might even be worse now than in 1931, as there seem to be a lot of opinion-makers in the United States who are rooting for Europe to fall apart economically, as this would represent a discrediting of the social-democratic political system that holds in the leading countries of Western Europe. The attitude on the part of these Americans, I think, is better for Europeans to have the pain sooner than later.

What happens next?

A couple years ago I suggested that much of the 2008 election was held under the storyline that it was 1933 all over again—but actually it was 1930. Instead of Obama coming in like FDR and presiding over a substantial (if incomplete) economic recovery in his first term, he has been in the awkward position of Hooverishly wavering between stimulus and budget cutting.

So now let’s suppose that, as Krugman fears, it’s 1931 now. What will happen next? The economy will continue to slide and then bounce back. If things fall apart during the next several months, Obama loses. President Romney comes in and saves the day. As I’ve already written, I am skeptical of Krugman’s claim that Romney, if elected, would contract the economy. I think he’d expand the economy but in a way that conservatives could describe as contracting (for example, cutting taxes, selling off assets, increasing spending on the military, and shifting around various government accounts). The long-term message will be that Obama’s stimulus didn’t work while Romney’s conservative policies did. Krugman will argue that the economy recovered on its own and with the help of Romney’s expansionary policies, but he’ll be fighting a strong storyline in the other direction.

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