“Good News” For A Change From Paul Krugman

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.

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* Keep in mind he is talking about the ratio of “household debt” to GDP, not government debt.

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3 Comments

  1. ansonburlingame

     /  September 8, 2012

    Astounding, simply astounding!

    First, look just at the NOW progressive “causes” of the GR. Banking collapse (I agree), housing collapse (I agree) and household debt (first time I have heard that one!!)

    Yet years ago when conservatives, myself included said the housing collapse was the cause primarily, we (I) was told we were crazy. It was the “fat cats on Wall Street” that the President lowered the boom on was it not?

    Now corrective actions? The banking “near collapse” was corrected by TARP and by Jan 20, 2009 we saw that “recovery” start to proceed.

    What has been done to “fix” the lowering value (low prices) of home sales, the principle cause of the housing collapse? NOTHING from the federal government that I can see. In fact Dems call for the reverse “fix”. Any begining economics student learns in the first 3 weeks of a course that the way to increase demand for anything is to RAISE income.

    So what do Dems, right out of the gate proposed to do. Why RAISE taxes on income, thus reducing spendable income!!!!. Want to raise the supply of homes for sale? Do the same, RAISE income to build the damn things. Dems call for RAISING taxes instead do they not?

    Now for household debt. I agree that large private debt will cause a recession. But the magnitude of increase (as a percentage) of household debt PALES in significance of the increase in public debt, the federal debt. But THAT is not mentioned by Krugman. WHY??

    The “normal” way to control debt increase is to RAISE interest rates. But what have we done for 4 years plus? Keep interest rates at historic lows by printing more money, a 300% or so increase in the money supply over those years. That is called monetary policy and has NOTHING to do with federal government action. It is done by the FED alone with no Congressional or Executive action required.

    You guys need to get your stories (causes and effects) straight. Then and only then, once you get your causes right, can you start to look at corrective actions to fix those specific causes. For a recession RAISING private income is historically the solution to let the private economy, at least 75% or higher of our GDP stimulate growth to get out of a recession.

    but every step of the way the Dem solution has been to RAISE GOVERNMENT income, which comes right out of the pockets of taxpayers, siphons off an “overhead percentage” to fund bureaucrats and then plows that money back into “shovel ready” holes.

    OMG!!

    Anson

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  2. @ Duane,

    This indeed is an interesting ray of optimism relative to consumers. Another possible item on such a list would be that businesses are sitting on an enormous amount of capital, afraid to invest it in hiring because of uncertainty about future consumer demand as influenced by the political gridlock in Washington. What is a mystery to me is just how any given political outcome in November will affect the economy. What will business decide on November 7 if:

    a. Obama wins. O
    b. Romney wins. R
    c. The Senate goes Republican. SR
    d. The Senate stays Democrat SD
    d. Any combination of the above – there are four possibilities:

    O SR; O SD; R SR; R SD

    However, in any of the four cases there will then be less uncertainty I suppose. Of course, there is the unknowable mind of the real Mitt Romney, he of RomneyCare and Etch-a-sketch notoriety. If elected, would Romney really push the Ryan VoucherCare plan through under R SR? Seems to me that would raise uncertainty, not lower it. If we get R SD, then what? Some hybrid version? I’m not sanguine about this, and it seems neither was the Economist when it wrote:

    Clearly some policies, such as Mr Obama’s health-care reform, generate uncertainty independent of economic developments. But at least Obamacare comes with benefits as well as risks; that cannot be said for the current political brinkmanship. As the fiscal cliff draws nearer, argues Ethan Harris, Bank of America’s economist for North America, the incentive to defer hiring and investment will grow, putting pressure on the economy. “The process is as important as the outcome,” he says, “and the process is a disaster.”

    I for one remain convinced that the greatest threat to America’s fiscal health remains the GOP’s Tea Party Grover-Norquist mentality. That will still be in play on November 7 regardless of the election outcome.

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  3. ansonburlingame

     /  September 10, 2012

    Fill out an array per Jim’s metrics above and we can argue until the cows come home over the ultimate results.

    But line that array up with an all Dem win and we will be broke before we stop arguing over the array. Then try to fix anything!

    Anson

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