Babies With Candy II

As much as I have been hoping to hate on him, in Friday's column, Paul Krugman (mostly) sensibly extends and refines arguments from his previous column. That said, its still easy to see Krugman-the-partisan-columnist censoring Krugman-the-nobel-winning-economist.

...people at the Fed are troubled by the same question I’ve been obsessing on lately: What’s supposed to end this slump? No doubt this, too, shall pass — but how, and when?

To appreciate the problem, you need to know that this isn’t your father’s recession. It’s your grandfather’s, or maybe even (as I’ll explain) your great-great-grandfather’s.

Your father’s recession was something like the severe downturn of 1981-1982. That recession was, in effect, a deliberate creation of the Federal Reserve, which raised interest rates to as much as 17 percent in an effort to control runaway inflation. Once the Fed decided that we had suffered enough, it relented, and the economy quickly bounced back.

Your grandfather’s recession, on the other hand, was something like the Great Depression, which happened in spite of the Fed’s efforts, not because of them. When a stock market bubble and a credit boom collapsed, bringing down much of the banking system with them, the Fed tried to revive the economy with low interest rates — but even rates barely above zero weren’t low enough to end a prolonged era of high unemployment.

Its obviously not quite accurate to summarily characterize that the post-war recessions as because of the Fed's efforts. I rather believe that a meaningful understanding of the structural problems that brought us, almost inevitably, into the current mess requires a detailed understanding of progression (which is not quite the right term) of our economy from the late sixties on. Be that as it may, Krugman is, I suppose, entitled to a bit of creative license.

More interestingly, I seem to remember that during the Great Depression, in addition to the rough zero-interest-rate-policy Krugman mentions, the Government tried to revive the economy with some other set of programs that weren't enough to end that prolonged era of high unemployment. What was it called?

Oh yes: The "New Deal". Odd Krugman neglecting to mention it.

Now we’re in the midst of a crisis that bears an eerie, troubling resemblance to the onset of the Depression; interest rates are already near zero, and still the economy plunges. How and when will it all end?

To be sure, the Obama administration is taking action to help the economy, but it’s trying to mitigate the slump, not end it. The stimulus bill, on the administration’s own estimates, will limit the rise in unemployment but fall far short of restoring full employment. The housing plan announced this week looks good in the sense that it will help many homeowners, but it won’t spur a new housing boom.

Its not clear to me that Obama's rhetoric in selling the stimulus bill well-matches Krugman's lowered expectations. It is, in any case, not difficult to see in the above paragraph the conflict between Krugman-the-economist, who understands the stimulus bill to be minimally effective, and Krugman-the-partisan-columnist who is obliged to cheer his party's policy.

What, then, will actually end the slump?

Well, the Great Depression did eventually come to an end, but that was thanks to an enormous war, something we’d rather not emulate...

This is an improvement from his last column when he seemed to imply we should be considering policy to parallel WWII.

So will our slump go on forever? No. In fact, the seeds of eventual recovery are already being planted.

Consider housing starts, which have fallen to their lowest level in 50 years. That’s bad news for the near term. It means that spending on construction will fall even more. But it also means that the supply of houses is lagging behind population growth, which will eventually prompt a housing revival...

The same story can be told for durable goods and assets throughout the economy: given time, the current slump will end itself, the way slumps did in the 19th century. As I said, this may be your great-great-grandfather’s recession. But recovery may be a long time coming.

The closest 19th-century parallel I can find to the current slump is the recession that followed the Panic of 1873. That recession did eventually end without any government intervention, but it lasted more than five years, and another prolonged recession followed just three years later...

Its almost as if Krugman read my post on his last column!

Its worth noting that five years is a long time, but that the Great Depression did last longer. Its obviously not an apples to apples comparison, but superficially it would appear that the more active Government policies of the 1930s did not serve to shorten, or substantially mitigate, that downturn.

Krugman-the-economist, more or less, directly disagrees with the President who argued that "the federal government is the only entity left with the resources to jolt our economy back into life." But Krugman-the-partisan-columnist is always at the ready:

Let’s be clear: the Obama administration’s policy initiatives will help in this difficult period — especially if the administration bites the bullet and takes over weak banks. But still I wonder: Who’ll stop the pain?

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