Krugman Says the “D” Word

[Update 3:30 p.m.: “Downtowner” at the Progressive Fox brings it home to Illinois.]

From the NYT‘s Paul Krugman: “The Third Depression”. Krugman’s lately been comparing the US situation with Japan’s “lost decade.”

Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

Thoughts?

5 thoughts on “Krugman Says the “D” Word”

  1. I believe Krugman is correct about a depression but dead wrong on how to fix it. We cannot fix this by invoking the ghost of FDR. When the previous generations went through the Great Depression of the 1930s, there were few to no safety nets for people, no Social Security, no Medicare, no Medicaid, and no bunch of other programs. People then needed those programs because unemployment rose to around 25%, there were starving people in the United States, and there was an extended period of crop failures. Fast forward to today, not only do we have Social Security, Medicare, Medicaid, and a bunch of other programs, they are not being run as efficiently as possible. Also, unlike generations of the past, people today have no idea how to be self sufficient, and only a tiny portion of the population lives on a farm. In less polite terms, people today think safety net programs are entitlement programs and not temporary safety nets.

    I think Krugman is out of his mind if he thinks that more spending will get us out of this mess. One case in point was last year’s Route 38 road repairs. While it was convenient for drivers for the majority of that work to occur overnight, doing road work at night made that project around twice more as expensive as it could have been. Instead of spreading money to more people or fixing more sections of the road, a few road crews got paid a lot more money for working at night plus the added energy expense of running those lights all night long.

    Secondly, Krugman is not stupid by any means so how could he ignore what happened in Greece? I know world leaders saw the events in Greece, I believe people in other countries saw that as a wake up call, and I think those leaders do not want that to happen to their countries next.

    Lastly, while I believe someone needs to babysit large corporations so they do not run amok like Enron, AIG, WorldCom, a host of banks and Wall Street investment houses, etc., etc., great wealth does not come from the government or government programs (except maybe CEOs of defense contracting companies). No, great wealth comes from the private sector, like the Bill Gates of the world. I believe government should be watching like a referee, not playing quarterback, not blocking like a defensive lineman, and not being the owner of the team.

  2. I think Krugman is out of his mind if he thinks that more spending will get us out of this mess. One case in point was last year’s Route 38 road repairs. While it was convenient for drivers for the majority of that work to occur overnight, doing road work at night made that project around twice more as expensive as it could have been. Instead of spreading money to more people or fixing more sections of the road, a few road crews got paid a lot more money for working at night plus the added energy expense of running those lights all night long.

    So, if I’m reading you correctly, you are against more spending because we have a long way to go to be doing better/smart spending.

    What Krugman’s against are severe austerity measures right now. Reason being, interest rates are so close to zero that cutting them to stimulate economic activity is not an option.

    [D]on’t we need to worry about government debt? Yes — but slashing spending while the economy is still deeply depressed is both an extremely costly and quite ineffective way to reduce future debt. Costly, because it depresses the economy further; ineffective, because by depressing the economy, fiscal contraction now reduces tax receipts. A rough estimate right now is that cutting spending by 1 percent of GDP raises the unemployment rate by .75 percent compared with what it would otherwise be, yet reduces future debt by less than 0.5 percent of GDP.

    The right thing, overwhelmingly, is to do things that will reduce spending and/or raise revenue after the economy has recovered — specifically, wait until after the economy is strong enough that monetary policy can offset the contractionary effects of fiscal austerity. But no: the deficit hawks want their cuts while unemployment rates are still at near-record highs and monetary policy is still hard up against the zero bound.

    But what about Greece and all that? Look, right now sovereign debt problems are taking place in countries with a very specific problem: they’re part of the euro zone, AND they’re badly overvalued thanks to huge capital inflows in the good years; as a result they’re facing years of grinding deflation. Countries not in that situation are not facing any pressure from the markets for immediate cuts[.]

    That’s from here.

    The more I get into this, the more distinctions I make between federal, state and local spending, mostly because of the incredible instability at the local level. We HAVE to do austerity at the local level because we simply can’t afford to try to make up for failing revenues. IWO my state and federal income taxes don’t scare me and won’t break me, but the combinations of local tax, fee and rate hikes theoretically could if the locals continue this strategy.

    I’ll stop here for now.

  3. Yes, I believe the bumper stickers that say, “Don’t steal, the government hates competition” are close to being on target.

    Somewhere, somehow, we still have $400 screwdrivers and five-figured toilet seats. No doubt the demand for road lines paint will drive up the costs of those government projects.

    We need more William Proxmires, at least 450 of them in the House and 95 in the Senate.

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