Krugman: It will probably be a long, painful slump

[johan helge]

Krugman (http://www.nytimes.com/2009/02/16/opinion/16krugman.html?_r=1):

(..)

Are policy makers ready to do what it takes to break this vicious circle? In principle, yes. Government officials understand the issue: we need to “contain what is a very damaging and potentially deflationary spiral,” says Lawrence Summers, a top Obama economic adviser.

In practice, however, the policies currently on offer don’t look adequate to the challenge. The fiscal stimulus plan, while it will certainly help, probably won’t do more than mitigate the economic side effects of debt deflation. And the much-awaited announcement of the bank rescue plan left everyone confused rather than reassured.

There’s hope that the bank rescue will eventually turn into something stronger. It has been interesting to watch the idea of temporary bank nationalization move from the fringe to mainstream acceptance, with even Republicans like Senator Lindsey Graham conceding that it may be necessary. But even if we eventually do what’s needed on the bank front, that will solve only part of the problem.

If you want to see what it really takes to boot the economy out of a debt trap, look at the large public works program, otherwise known as World War II, that ended the Great Depression. The war didn’t just lead to full employment. It also led to rapidly rising incomes and substantial inflation, all with virtually no borrowing by the private sector. By 1945 the government’s debt had soared, but the ratio of private-sector debt to G.D.P. was only half what it had been in 1940. And this low level of private debt helped set the stage for the great postwar boom.

Since nothing like that is on the table, or seems likely to get on the table any time soon, it will take years for families and firms to work off the debt they ran up so blithely. The odds are that the legacy of our time of illusion (..) will be a long, painful slump.

[grantcart]

1. This seems to be a more measured Krugman

Maybe we should start a war with Mars!!!

[vaberella]

9. You might be on to something there and I think they plan on doing it...

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=102x3740699

By the way it's nice to see your posts grantcart.

[FrenchieCat]

2. If he gets anymore optimistic,

the White Coats will have to come and take him away!

We are involved in two wars, and that hasn't seem to help. :shrug:

[amandabeech]

10. Spending in Iraq and Afghanistan sure doesn't feel like much, though.

If you recall, in World War II, the U.S. was making almost nothing but war materials, and factories were working three shifts. We weren't importing nearly as many supplies as we do now, either.

Even in Vietnam, it was guns and butter. I'm from Michigan and old enough to remember the plants going full blast making tanks, trucks and bullets.

Not now.

And we don't even need a draft!

Iraq and Afghanistan are are chump change in many ways compared to WWII and Vietnam.

Sorry, I'm working sick, so I don't have the energy to get you some cites and sites. I'm just an old history major with a long memory.

[Kurt_and_Hunter]

3. Add more assumption of risk to spending

The government's ability to assume risk is as useful a tool right now as its ability to create money.

The government can refinance private debt at rates that take on more risk than private lending can or will. At very low rates people would be able to pay off a lot of private debt.

If risk was an absolute $$$ figure then government assumption of risk in the form of offering money "below market" would merely be a circuitous subsidy but the government, and only the government, can change the equation to make the $$$ value of that risk lower.

If the economy gets better then all projections of debt default are too pessimistic. So by gobbling up that unknown risk the government can make it less risky.

The only downside I see is political... people, being wing-nuts at heart, would resent sending little checks to the government more than they resent sending big checks to credit-issuing banks.

[BeyondGeography]

4. It was going to take years anyway

Personal debt is, what, 140% of GDP? At least this President is using government's capacity to borrow (public debt is only 80% of GDP) to make some strategic investments that will make us more competitive in the long run. Wish it wasn't so hard for Murkans to understand the need to do this, but there it is.

Still, government debt, if we're lucky, will rise close to where personal debt levels stand currently, meaning the spigots will have to be turned to the low position, eventually. Hopefully, by then, we are rolling to the point where consumers can power the economy again, this time with more cash and less credit. But, yes, it will take years.

[johan helge]

5. The world needs a

stimulus (http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=103x425819).

Countries that are net creditors should do more. The net debtor US is already doing more than its share for the "world stimulus" (http://www.imf.org/external/pubs/ft/weo/2008/02/c1/fig1_14.pdf).

[AtomicKitten]

6. No shit, Sherlock. n/t

[firedupdem]

7. Took the words right out of my mouth. n/t

[HiFructosePronSyrup]

8. I'm glad to see Krugman's pitching in.

Long, painful slumps, and all.