Economist and liberal Paul Krugman, who has been quite sour on the economy despite his sympathy for President Obama, wrote what I consider to be a rather remarkable column on Thursday.
Krugman asked: Is the economic “mess” Obama inherited “really getting cleaned up“? He wrote:
The answer, I would argue, is yes. The next four years are likely to be much better than the last four years — unless misguided policies create another mess.
That’s kind of shocking coming from him, since he believes Obama’s stimulus was much too small, and that his administration did not take seriously the need for widespread debt relief, which he has argued would have made the recovery much stronger.
But his reasoning for his latest cautious optimism goes like this:
On Inauguration Day 2009, the U.S. economy faced three main problems. First, and most pressing, there was a crisis in the financial system, with many of the crucial channels of credit frozen; we were, in effect, suffering the 21st-century version of the bank runs that brought on the Great Depression. Second, the economy was taking a major hit from the collapse of a gigantic housing bubble. Third, consumer spending was being held down by high levels of household debt, much of which had been run up during the Bush-era bubble.
He pointed out that the financial system crisis was resolved “quite quickly” but by itself did not “produce a robust recovery.” And then he writes something that all of us who care about this stuff should understand:
Fast recoveries are almost always led by a housing boom — and given the excess home construction that took place during the bubble, that just wasn’t going to happen. Meanwhile, households were trying (or being forced by creditors) to pay down debt, which meant depressed demand. So the economy’s free fall ended, but recovery remained sluggish.
The “good news” Krugman says (man, that sounds funny coming from him) is that,
The forces that have been holding the economy back seem likely to fade away in the years ahead. Housing starts have been at extremely low levels for years, so the overhang of excess construction from the bubble years is long past — and it looks as if a housing recovery has already begun. Household debt is still high by historical standards, but the ratio of debt to G.D.P.* is way down from its peak, setting the stage for stronger consumer demand looking forward.
And what about business investment? It has actually been recovering rapidly since late 2009, and there’s every reason to expect it to keep rising as businesses see rising demand for their products.
So, as I said, the odds are that barring major mistakes, the next four years will be much better than the past four years.
We can only hope that the next four years are not Romney’s first term as president, in which case Krugman will have to go back to his old pessimistic self.
* Keep in mind he is talking about the ratio of “household debt” to GDP, not government debt.