Paul Krugman: Defining Prosperity Down

Bad policy is standing in the way of the return to full employment:

Paul Krugman: Defining Prosperity Down, by Paul Krugman, Commentary, NY Times: Friday’s employment report wasn’t bad. But given how depressed our economy remains, we really should be adding more than 300,000 jobs a month, not fewer than 200,000. ... Full recovery still looks a very long way off. And I’m beginning to worry that it may never happen. ...

What, exactly, will bring us back to full employment?

We certainly can’t count on fiscal policy. The austerity gang may have experienced a stunning defeat in the intellectual debate, but stimulus is still a dirty word...

Aggressive monetary action by the Federal Reserve, something like what the Bank of Japan is now trying, might do the trick. But far from becoming more aggressive, the Fed is talking about “tapering” its efforts. This talk has already done real damage...

Still, even if we don’t and won’t have a job-creation policy, can’t we count on the natural recuperative powers of the private sector? Maybe not.

It’s true that after a protracted slump, the private sector usually does find reasons to start spending again. ... But that healing process won’t go very far if policy makers stomp on it, in particular by raising interest rates. ...

And... Long-term interest rates ... shot up after Friday’s job report...

Why...? Part of the reason is that the Fed is constantly under pressure from monetary hawks... These hawks spent years warning that soaring inflation was just around the corner. They were wrong, of course, but ... it remains dangerously influential. ...

In short, there’s a real risk that bad policy will choke off our already inadequate recovery.

But won’t voters eventually demand more? Well, that’s where I get especially pessimistic.

You might think that a persistently poor economy ... would eventually spark public outrage. But the political science evidence ... is unambiguous: what matters is the rate of change, not the level.

Put it this way: If unemployment rises from 6 to 7 percent during an election year, the incumbent will probably lose. But if it stays flat at 8 percent..., he or she will probably be returned to power. And this means that there’s remarkably little political pressure to end our continuing, if low-grade, depression.

Someday, I suppose, something will turn up that finally gets us back to full employment. But I can’t help recalling that the last time we were in this kind of situation, the thing that eventually turned up was World War II.