Stability is Destabilizing
I do not think that Paul Krugman should apologize for recognizing the canary in the coal mine back in 1997-98. Hyman Minsky saw this coming as early as the late
1950s. To the extent that we really did have a “great moderation”, it would have fueled the longer-run transition toward fragility that had been developing over the entire post-war period. Indeed, 1996 saw for the first time ever persistent private sector deficit spending (taken as a whole, American firms and households were spending more than their incomes). This continued without let-up through to 2008
(with a brief respite during the depths of the Bush recession). So I do think there was something to the claims about a “great moderation”—in that there was an absence of fear that helped to generate debt-fueled bubble after debt-fueled bubble—although those promulgating these claims never understood the true ramifications. All of that was building toward what Minsky called “It” (as in “Can ‘It’ Happen Again?”, the title of an early 1980s book that collected his essays): a Fisher-type debt deflation process. Some have called this current crisis the “Minsky Moment”, but actually it is more accurate to recognize this as the culmination of the “Minsky Half-Century”.
Turning to the other side of the private sector deficits coin, we find the Clinton budget surpluses. Of course these were widely proclaimed as beneficial (supposedly enhancing our future ability to take care of retiring baby-boomers—particularly ironic as we now watch our pension funds disappear). Those familiar with macro accounting recognize that the nongovernment sector balance must be equal to the government sector balance (sign reversed). If the government runs a budget surplus, the nongovernment must run a deficit of the same size. The Clinton government surplus sucked income and net financial wealth out of the private sector—leading to the Bush recession. That is not something to be wildly celebrated and emulated as fiscally responsible policy. Thank goodness that “Rubinomics” will not be adopted by the new Obama team.
The nongovernment sector balance can be further broken down to a domestic (US) private sector deficit and a foreign sector surplus (in dollars, the rest of the world runs a budget surplus against the US, as we run a trade deficit). To conclude with this mildly technical discussion, our domestic private sector deficit spending was equal to the US government budget surplus plus the foreign sector surplus. Even when the
Clinton budget surpluses morphed to Bush budget deficits, they were too small to allow the domestic private sector to run balanced budgets. As a result, our private sector continued to run up deficits and go more deeply into debt. In spite of the Bush tax cuts, federal tax revenue was actually growing at a near-record pace until this finally took the steam out of the economy a year ago. With all this fiscal drag (plus a trade deficit drag), the only way for the economy to grow was through private deficits and exploding debt. We are now witnessing the unraveling of all of that debt, with snowballing defaults reducing its value. This is what Irving Fisher identified as a debt deflation process, which he believed had made the Great Depression so, well, “great”.
That (probably) won’t happen again. We’ve got the “big government and big bank” to constrain the natural market processes. The “big bank” (Fed) took far too long to recognize the scope of the problem as well as the solution: lend without limit. (Brad
DeLong has got it exactly right: lend to everyone, including the shadow banks--that is the way to resolve a “liquidity crisis”.) While it took a couple of trillion dollars,

Bernanke et.al. have just about accomplished that task. Yes, financial institutions still face solvency problems, but those do not have to be resolved immediately (the various
Paulson plans were unnecessary, and impotent in any case). What we need now is the
“big government” Treasury to ramp up spending, as Paul Krugman and others involved in this blog have already said. The federal budget deficit will grow toward a trillion dollars annually, allowing the private sector to strengthen its balance sheet by running budget surpluses. The (discretionary) fiscal stimulus package now appears to include $1 trillion of new spending and/or tax cuts; the “automatic stabilizers” already in place will add to that. A trillion here, a trillion there, and we will be able to avoid another “great” depression.
I must agree with Susan Feiner and disagree mildly with Paul Krugman: we do need a permanently larger fiscal presence that will provide good jobs and better infrastructure and needed public services. While I like what I hear coming from the
Obama team on infrastructure and “green” investments, Susan is right that such policies will leave women as well as many people of color behind. But we also need more public services in the areas of health, education, childcare, and eldercare—areas that can potentially employ millions of women. The early postwar period is often called America’s “golden age”—and it was for a lot of us, especially those of us who look a lot like me or Paul. America can do better than that.
Finally, I think there is a real danger in the belief that all we need is a big but shortlived fiscal stimulus. As I will summarize in a later post, what we really need is a
“ratchet”—more government spending in the “depression” to provide needed effective demand, and then continued fiscal stimulus in the recovery to ensure we can operate the new plant and equipment that will be put in place. The problem is that the
“supply side” effect of private (and public) investment (in terms of added capacity) is far greater than the “demand side” effect of that investment (the textbook “multiplier” impact). More on that later…..