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Friday, February 08, 2008

Paul Krugman: A Long Story

Paul Krugman says the economy is all Obama's fault. Okay, he didn't really say that. It is, of course, all Bush's fault. No, wait, that's not right either, well not completely right anyway. There is a problem with the administration and the stimulus package, but it's "a long story" and I'll let Krugman straighten it all out and explain why he thinks it's time for the government to consider making investments in infrastructure as a means of dealing with the potential slowdown in the economy. On the infrastructure spending point, I agree such investments are needed to strengthen our long-run growth prospects. I was calling for investment in infrastructure when times were good, and if making the investments now also helps to bolster the economy during its recovery period should there be a recession, so much the better. But I would hope that, to borrow a phrase from another debate, infrastructure spending is an 'add on and not a carve out' from more immediate stimulus measures that might have a large impact on the economy:

A Long Story, by Paul Krugman, Commentary, NY Times: The economic news has been fairly dire this week. ... It’s still not a certainty that we’re headed into recession, but the odds are growing greater.

And if past experience is any guide, the troubles will persist for a long time — say, into the middle of 2010.

The problems now facing the U.S. economy look a lot like the problems that caused the last two recessions — but this time in combination.

On one side, the bursting of the housing bubble is playing the role that the bursting of the dot-com bubble played in 2001. On the other, the subprime crisis is creating a credit crunch reminiscent of the crunch after the savings-and-loan crisis of the late 1980s, which led to recession in 1990.

Now, you may have heard that those recessions were short. And it’s true that the last two recessions both officially ended after only eight months.

But the official end dates for those recessions are deeply misleading, at least as far as most peoples’ experience is concerned. There’s a reason that the Bush administration ... always talks about jobs added since August 2003. It was only then — two and a half years after the recession began — that the U.S. economy began to experience anything that felt like a recovery. And the same thing happened a decade earlier ... in 1990...

Since the current problems of the U.S. economy look like a combination of 1990 and 2001, the shape of this episode of economic distress will probably be similar...

How severe will the distress be? The double-bubble nature of the underlying problem — a housing bubble and a credit bubble combined — suggests that it may well be worse than either 1990 or 2001. ...

Maybe we’ll be lucky... But what can be done to limit the damage? Since September, the Federal Reserve has slashed its target interest rate five times, and everyone expects it to cut further. But interest rates were cut dramatically during the last two slumps, too — yet the slumps went on for years anyway.

Meanwhile, Congress and the Bush administration have reached agreement on a much-hyped stimulus package. But the package, while probably better than nothing, is unlikely to make a noticeable dent in the problem — in part because the insistence of the administration and Senate Republicans on blocking precisely the measures, such as expanded unemployment insurance and food stamps, that are most likely to be effective.

Still, by January the White House will have a new occupant. If the slump is still going on, which is likely, this will offer a chance to consider other, more effective measures.

In particular, now would be a good time to think about ... stimulating the economy with some much-needed public investment — say, in repairing the country’s crumbling infrastructure.

The usual rap against public spending as a form of economic stimulus is that it takes too long to get going... But if this turns out to be a prolonged slump, which seems likely, that won’t be a problem.

But we won’t get any innovative action to help the economy unless the next president has a couple of key attributes.

First, he or she has to be free of the ideological blinders that make the current administration and its allies fiercely oppose the idea that the government can do anything positive aside from cutting taxes.

Second, he or she has to be knowledgeable about and interested in economic policy. Presidents don’t have to be their own chief economists, but they do need to know enough to take the right advice.

Will we have that kind of president? Stay tuned.

    Posted by on Friday, February 8, 2008 at 12:29 AM in Economics, Social Insurance | Permalink  TrackBack (0)  Comments (122)

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