Paul Krugman may be a permabear, but you've got to hand it to him for prescience. When I read the first edition of The Return of Depression Economics, I didn't really get it. Now, of course, his suggestion that liquidity traps could be the future looks a lot smarter, and he's fully justified in rewriting the book as The Return of Depression Economics and the Crisis of 2008. Despite appearances it is not the original book with an epilogue, but is in fact well worth the read even for those bought the first edition. Free-wheeling global finance destabilizes the world economy and opens up the prospect of depressions, rather than recessions, when things go wrong.
Economists like Krugman are having a great time pummeling those who believed in sillinesses like the 'Goldilocks economy', the 'Maradona rule' of monetary policy, the sustainability of the housing boom, and so on. But what are the politics of it?
Here, I have to admit I'm worried. For a while it looked like politics had shifted radically, with power ebbing away from neoliberals, plutocrats and speculators, whose stories about how to prosper had been simply ripped apart by events. Obama's victory pointed in that direction - and indeed, that is a very real gain for sensible progressive politics. But in Europe, things don't look so good. The left is in retreat everywhere, the radical racist right is making hay, and even the more successful parties of the moderate centre-right are drawing on superficial populism (Sarkozy), beggar-thy-neighbour fiscal conservatism (Merkel) or simple self-delusion (Berlusconi). If this is depression politics, then there really isn't much left to be optimistic about.
Why do people rush into the arms of the right precisely at the moment right-wing policies have proved their uselessness? Well, the collapse of neoliberalism (for want of a better word) may make people worried and upset, but it doesn't make them socialists. Why should it? Indeed, the solidaristic and cooperative instincts which underpin leftist thinking are in some ways harder to achieve in a crisis than in normal times. If the pie is shrinking, why would we expect people to find it easier to share the pie equitably amongst themselves? Instead in times of fear, self-preservation takes hold. In desperate times, we may long for a helping hand or a sense of shared suffering and a collective search for solutions, but if the institutions and movements needed to create them are not there, then scrabbling for survival is the only other option.
The success of the neoliberal project has been to undermine precisely those institutions which facilitated collectivist and solidaristic political action in response to social threats and problems. Take away the trade unions, left-wing political parties, and cooperative regulations that underpin collective action, and free-riding starts to look like an attractive option for fearful individuals. Then along comes a man telling you he know who is to blame, and he will sort them out for you (Jews, Muslims, Roma).
OK, maybe I'm over-anxious. But Polanyi shows in The Great Transformation that removing protective social institutions (as the neoliberal project set out to do) provokes a reaction, and that reaction can be benign (the Factory Acts in 19th century Britain, for example), and it can be Germany in the 1930s. I don't think it can happen again, but the best way to make sure is to fight to protect and improve the workings of welfare capitalism, and that requires left parties with coherent discourses and a real connection with voters.