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Monday, November 18, 2013

Paul Krugman: A Permanent Slump?

How long will "depression rules" be in effect?

A Permanent Slump?, by Paul Krugman, Commentary, NY Times: Spend any time around monetary officials and one word you’ll hear a lot is “normalization.” ...
But what if the world we’ve been living in for the past five years is the new normal? What if depression-like conditions are on track to persist, not for another year or two, but for decades?
You might imagine that speculations along these lines are the province of a radical fringe. ... In fact,... the person making that case was none other than Larry Summers. ...
And if Mr. Summers is right, everything respectable people have been saying about economic policy is wrong, and will keep being wrong for a long time. ...
We have, he suggested, an economy whose normal condition is one of inadequate demand — of at least mild depression — and which only gets anywhere close to full employment when it is being buoyed by bubbles. ...
Why might this be happening? One answer could be slowing population growth. A growing population creates a demand for new houses, new office buildings, and so on; when growth slows, that demand drops off. ...
Another important factor may be persistent trade deficits, which emerged in the 1980s and since then have fluctuated but never gone away.
Why does all of this matter? One answer is that central bankers need to stop talking about “exit strategies.” Easy money should, and probably will, be with us for a very long time. This, in turn, means we can forget all those scare stories about government debt, which run along the lines of “It may not be a problem now, but just wait until interest rates rise.”
More broadly, if our economy has a persistent tendency toward depression, we’re going to be living under the looking-glass rules of depression economics — in which ... attempts to save more (including attempts to reduce budget deficits) make everyone worse off — for a long time.
I know that many people just hate this kind of talk. It offends their sense of rightness, indeed their sense of morality. Economics is supposed to be about making hard choices (at other people’s expense, naturally). It’s not supposed to be about persuading people to spend more.
But as Mr. Summers said, the crisis “is not over until it is over” — and economic reality is what it is. And what that reality appears to be right now is one in which depression rules will apply for a very long time.

    Posted by on Monday, November 18, 2013 at 12:24 AM in Economics | Permalink  Comments (144)


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