PAUL KRUGMAN: Depression Economics Returns

[RedEarth]

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.

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

[GliderGuider]

1. Krugman doesn't get it.

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=102&topic_id=3600742&mesg_id=3600770

[wryter2000]

2. What do all the years he mentions as bad have in common?

1982, 2001, 1990-1991.

And Repukes keep insisting they're good for the economy.

[JohnWxy]

3. Krugman correctly points out Obama will need to employ a large stimulus package but what he doesn't

mention is, even if Obama does propose such a stimulus package WILL THE REPUBLICANS LET HIM HAVE IT?

Republicans like depressions. It makes the 'little' people appreciate having a job more and leads to less "labor uppity-ness". Republicans love to see real wages go DOWN - it's their preferred means of improving productivity and that improves profitability of companies - leading to beter stock prices (at least so goes their thinking)!