Krugman: Deep Hole Economics

[ProSense]

Deep Hole Economics

By PAUL KRUGMAN

<...>

So, about that good news: various economic indicators, ranging from relatively good holiday sales to new claims for unemployment insurance (which have finally fallen below 400,000 a week), suggest that the great post-bubble retrenchment may finally be ending.

We’re not talking Morning in America here. Construction shows no sign of returning to bubble-era levels, nor are there any indications that debt-burdened families are going back to their old habits of spending all they earned. But all we needed for a modest economic rebound was for construction to stop falling and saving to stop rising — and that seems to be happening. Forecasters have been marking up their predictions; growth as high as 4 percent this year now looks possible.

<...>

Now do the math. Suppose that the U.S. economy were to grow at 4 percent a year, starting now and continuing for the next several years. Most people would regard this as excellent performance, even as an economic boom; it’s certainly higher than almost all the forecasts I’ve seen.

Yet the math says that even with that kind of growth the unemployment rate would be close to 9 percent at the end of this year, and still above 8 percent at the end of 2012. We wouldn’t get to anything resembling full employment until late in Sarah Palin’s first presidential term.

more

Hey, I'll take it, and whatever else can be done to further stimulate the economy.

[phantom power]

1. Construction *shouldn't* return to bubble-era levels.

Similarly, consumers *shouldn't* return to bubble-era spending rates. It was a bubble.

[ProSense]

2. One of the best things happening is consumers relying less on credit.

Austan Goolsbee said something interesting yesterday on This Week:

<...>

WHEN ASKED HOW TO GIVE THE ECONOMY A PUSH IN THE RIGHT DIRECTION, GOOLSBEE SAID: "I think the focus has got to be on investment, on exports, and on innovation. And that's...rather than on excessive consumption and housing investment, as it was in the last boom. And I think the president's firmly in that...planted in that camp, and we're going to grow our way out of this."

<...>

Consumption drives the economy, but the excesses of the past contributed to the current crisis.

On another point, Krugman and many economist are concerned about too much optimism.

It's definitely a concern. Everyone should welcome positive news, but the crisis, specifically the underlying causes, need to be addressed if the recovery is going to be solid and lasting.

[DCBob]

3. Exactly. Why would someone as smart as Krugman make such a stupid statement??

We do not want to go back to bubble economics. That is what got us in this mess in the first place.

At least Krugman has stopped the imminent depression nonsense.

[Marsala]

4. Krugman's gone completely pessimistic

Another blogger, either Yglesias or Klein, pointed out that Reagan won a landslide victory with unemployment still at 7%. The direction of the economy matters more than its actual state.