By Paul Krugman

When a fire breaks out in a single-family home, firefighters know what they have to do. Fires in private houses are all pretty much alike. But when a fire breaks out in a warehouse, the firefighters make an effort to find out what is inside before they go to work, lest they do more harm than good. For example, if the warehouse is filled with highly flammable chemicals, dousing the building with water may spread the fire. In the end, the fire department must act regardless, but it is important to act on as much information as one can get about the nature of the problem.

I offer this homily because Ethan B. Kapstein uses an analogy with firefighting to claim that the West, faced with the economic difficulties of inequality and unemployment, has been paralyzed by too much debate over causes ("Workers and the World Economy," May/June 1996). He seems to believe that economic crises are like house fires, all pretty much the same. In particular, he seems to believe that the economic woes of advanced nations in the 1990s are basically similar to the problems of the 1930s. Deficit spending was the answer then and it is the answer now. Money should, therefore, be spent like water.

Economic crises, however, are not all the same, and the problems of the 1990s look very little like those of the 1930s. The good news is that while there is considerable dispute about the relative importance of some factors, economists have reached enough of a workable consensus about the nature of the problem to accommodate helpful policies. The bad news is that much, although not all, of what Kapstein has to say ignores this consensus, and that some of his policy recommendations are mischievous. They would either create the risk of renewed inflation and worsen the already shaky finances of Western governments, or they would contribute to the very policy paralysis Kapstein decries.


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