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Monday, January 23, 2012

Paul Krugman: Is Our Economy Healing?

The economy is looking a bit better, but that could change if policymakers make the wrong decisions:

Is Our Economy Healing?, by Paul Krugman, Commentary, NY Times: How goes the state of the union? Well, the state of the economy remains terrible. ... But there are reasons to think that we’re finally on the (slow) road to better times. And we wouldn’t be on that road if Mr. Obama had given in to Republican demands that he slash spending, or the Federal Reserve had given in to Republican demands that it tighten money.
Why am I letting a bit of optimism break through the clouds? Recent economic data have been a bit better... More important, there’s evidence that the two great problems at the root of our slump — the housing bust and excessive private debt — are finally easing. ...
There are, of course, still big risks — above all, the risk that trouble in Europe could derail our own incipient recovery. And thereby hangs a tale — a tale told by a recent report from the McKinsey Global Institute.
The report tracks progress on “deleveraging,” the process of bringing down excessive debt levels. It documents substantial progress in the United States, which it contrasts with failure to make progress in Europe. And while the report doesn’t say this explicitly, it’s pretty clear why Europe is doing worse than we are: it’s because European policy makers have been afraid of the wrong things.
In particular, the European Central Bank has been worrying about inflation ... rather than worrying about how to sustain economic recovery. And fiscal austerity ... has depressed the economy, making it impossible to achieve urgently needed reductions in private debt. The end result is that for all their moralizing about the evils of borrowing, the Europeans aren’t making any progress against excessive debt — whereas we are.
Back to the U.S. situation: my guarded optimism should not be taken as a statement that all is well. We have already suffered enormous, unnecessary damage because of an inadequate response to the slump. We have failed to provide significant mortgage relief, which could have moved us much more quickly to lower debt. And ... it will be years before we get to anything resembling full employment.
But things could have been worse; they would have been worse if we had followed the policies demanded by Mr. Obama’s opponents. For as I said at the beginning, Republicans have been demanding that the Fed stop trying to bring down interest rates and that federal spending be slashed immediately — which amounts to demanding that we emulate Europe’s failure.
And if this year’s election brings the wrong ideology to power, America’s nascent recovery might well be snuffed out.

    Posted by on Monday, January 23, 2012 at 12:30 AM in Economics | Permalink  Comments (44)


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