PAUL KRUGMAN: Depression Economics Returns

[babylonsister]

Depression Economics Returns

By PAUL KRUGMAN
Published: November 14, 2008


The economic news, in case you haven’t noticed, keeps getting worse. Bad as it is, however, I don’t expect another Great Depression. In fact, we probably won’t see the unemployment rate match its post-Depression peak of 10.7 percent, reached in 1982 (although I wish I was sure about that).

We are already, however, well into the realm of what I call depression economics. By that I mean a state of affairs like that of the 1930s in which the usual tools of economic policy — above all, the Federal Reserve’s ability to pump up the economy by cutting interest rates — have lost all traction. When depression economics prevails, the usual rules of economic policy no longer apply: virtue becomes vice, caution is risky and prudence is folly.

To see what I’m talking about, consider the implications of the latest piece of terrible economic news: Thursday’s report on new claims for unemployment insurance, which have now passed the half-million mark. Bad as this report was, viewed in isolation it might not seem catastrophic. After all, it was in the same ballpark as numbers reached during the 2001 recession and the 1990-1991 recession, both of which ended up being relatively mild by historical standards (although in each case it took a long time before the job market recovered).

But on both of these earlier occasions the standard policy response to a weak economy — a cut in the federal funds rate, the interest rate most directly affected by Fed policy — was still available. Today, it isn’t: the effective federal funds rate (as opposed to the official target, which for technical reasons has become meaningless) has averaged less than 0.3 percent in recent days. Basically, there’s nothing left to cut.

And with no possibility of further interest rate cuts, there’s nothing to stop the economy’s downward momentum. Rising unemployment will lead to further cuts in consumer spending, which Best Buy warned this week has already suffered a “seismic” decline. Weak consumer spending will lead to cutbacks in business investment plans. And the weakening economy will lead to more job cuts, provoking a further cycle of contraction.

more...

http://www.nytimes.com/2008/11/14/opinion/14krugman.html?_r=1&oref=slogin

[johan helge]

1. I think Krugman is perfectly right but

I also have some questions.

Deficits pay off in elections, because deficits create jobs. Will the federal debt ever be paid? Perhaps the Fed can just print some money, and give it to Congress to pay off debt? If they do that too much, the result will be inflation. But perhaps this is a better way to put money into the economy, than via low interest rates?

[teknomanzer]

2. This is the perfect time to recreate our infrastructure...

Fix the rail system, improve public transportation, eliminate urban sprawl with revitalizing city planning, and create a green infrastructure with alternative energy sources. Let us not wait any longer we should move on this today - put people to work on this now! It will boost the economy and move us ahead globally - this is the new vision for America. Yes we can!

[northernlights]

3. Robert Reich agrees...

and so do I!

[teknomanzer]

4. I like Reich...

He is the one Clinton throwback I would like to see more of. I happy to hear Obama has him as an adviser and I am eager to see what position he will get in the administration.