But what the heck “postmodern” means. From a definition: Postmodernism is a philosophical movement… it holds realities to be plural and relative, and dependent on who the interested parties are and what their interests consist of.
Why is this happening, and why do policy makers keep being surprised?
My main answer — Brad DeLong has also written on this — is that 2007-2009 was a postmodern recession brought on by private-sector overreach, very different from pre-1990 recessions that were brought on by tight money. This has two consequences. First, it’s much harder to engineer recovery from a recession that wasn’t created by the Fed; in 1982 all the Fed had to do was loosen the reins, now somebody has to persuade someone to spend more than normal. Second, forecasting models tend to be based on all postwar recessions, not just the 1990 and later postmodern recessions, so they tend to predict a much faster recovery than was ever likely.
We should also note that fiscal policy is now very much acting in reverse, as the stimulus fades out and state and local governments keep on laying more people off. So that too is preventing recovery.
The description was illustrated with the figure below, showing that after the 1990/91 and 2001 recessions, while excess capacity fell with the end of the recession, unemployment continued to rise for more than one year.
Note that this time around, though, the reversal in unemployment happened after just 4 months!
The yellow bar indicates the period (mid 1997 to mid 1999) when the two series diverged. This was due to the effects of the Asia crisis, when imports boomed and exports dropped.
What´s really different this time around is that the Fed monetary policy mistakes allowed a “normal” recession to turn into a “Great” one, which Rogoff is dubbing the “Second Great Contraction”.
The panel below describes the “route to nominal spending stability” over the last 40 years. The last figure in the panel indicates that the Bernanke Fed lost it when it let nominal spending (over which it has great control) tank.
The next picture well describes the magnitude of the tumble. And note, when Lehman came along half of the drop in spending had already happened, with MP errors making a bad situation much worse!
By calling this a “postmodern” recession, Krugman is likely saying that the only way-out is through fiscal policy. But that has been tried (according to Krugman the dosage was not big enough) and the collateral effects have been pretty damning.
What all this discussion does is to allow the Fed to stay on the sidelines. After all, it had not much to do with anything that´s been happening. It´s “Postmodern”!