Economy worse than great depression: Krugman

obama wrong krugman

Paul Robin Krugman (born February 28, 1953) is an American economist, liberal columnist and author. He is Professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs, Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times.

He offered a few comments about the U.S. economy and also some questions and answers. Here are the comments first:

  1. Based on GDP, “the recession is over, we’re back to a world of growth”
  2. But, “the jobs picture is continuing to deteriorate. The recession may be over, but the bad times are nowhere near over.”
  3. “This could be bad. Financial crises tend to produce prolonged hits to growth…and this is the mother of all synchronized financial crises so we almost certainly have a long, long slog before we’re fully recovered.”

Then, he turned to the topic of world trade. And the picture he painted was not a pretty one.

“When it comes to international trade, actually it’s not the Great Depression, it’s worse,” he said, presenting charts showing the decline in global trade activity falling much more steeply in the current downturn than during the Depression.

You can find the original work at WSJ Blog

Questions and Answers

Signs of recovery

Question: What does a recovered U.S. economy look like? Obviously many of the activities we did in the past such as home construction and real-estate related businesses and all sorts of things based on credit driven consumer spending will no longer work. Related to this, shouldn’t stimulus money be used to build a different sort of economy?— Jeremy Hickeson

Answer: The recovered economy will surely involve more manufacturing – in fact, before the world economy collapsed we were seeing a boom in manufactured exports, with shortages of machinists and other skilled workers. It will probably include a lot of green employment in the broad sense – not just people building and running wind farms, but people busily improving insulation and installing white roofs.

As for the stimulus: a lot of what we should be doing isn’t so much building the future as avoiding collateral damage from the crisis. We should be giving much more aid to state and local governments, so that education and basic services aren’t crippled by the slump. We should be investing in basic infrastructure, which we need regardless of the shape of the economy. It’s not clear that the stimulus has to be very much influenced by likely change in direction – although trying to prop up the housing industry is a mistake.

End of recession

Question: Can you explain why it’s meaningful to say that the “recession is over in a technical” sense, when every meaningful number is looking bleak? — AwK

Answer: The official definition of a recession in the United States is that it’s a recession if the recession-dating committee of the National Bureau of Economic Research says it is. But the committee, loosely speaking, says that a recession is a period when everything is going down. And that’s not true anymore. Industrial production is rising; GDP is almost certainly rising. So the economy has stopped shrinking.

Economic Indicators

Question: How can consumer spending be rising at a time when more and more people are out of work? Doesn’t the money that fuels consumer spending usually come from employment? Doesn’t this contradict the economic maxim that expenditures are equal to income? — Tim

Answer: That “economic maxim” is deeply misleading. Consumers can and do spend either more or less than their income. And even for the economy as a whole, in the short run income adjusts to match spending, not the other way around.

That said, some of the recent bump in consumer spending probably is unsustainable. In particular, there were a lot of one-time purchases due to “cash for clunkers”, which won’t persist and will actually probably be offset with lower purchases going forward.

You can find the original Q & A Session at Krugman’s blog

One last bit of information is that Krugman actually was calling for a big housing market crash back in the year 2002.

To fight this recession the Fed needs…soaring household spending to offset moribund business investment. [So] Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble. — Krugman. 2002. Calling for a housing bubble.

What’s more, by explicitly calling for a new bubble to replace the recently burst one, he anticipated by 6 years the Onion‘s hilarious “report” that “demand for a new investment bubble began months ago, when the subprime mortgage bubble burst and left the business world without a suitable source of pretend income.” Except Krugman was being serious.

The quote caught on in the blogosphere, to such an extent that Krugman actually responded in his New York Times blog Wednesday morning:

Guys, read it again. It wasn’t a piece of policy advocacy, it was just economic analysis. What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened.

So with a deft little two-step, Krugman paints himself as a doctor who gave an excellent diagnostic, and not a disastrous prescription. One of his ditto-heads posted on his blog that saying Krugman advocated or caused the housing bubble was “Like saying Nostradamus caused the rise of European fascism.”  Last few quotations and pieces from Mises.Org

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