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[Adventurer]

Op-Ed Columnist
That 1937 Feeling

By PAUL KRUGMAN
Published: January 3, 2010

Here�s what�s coming in economic news: The next employment report could show the economy adding jobs for the first time in two years. The next G.D.P. report is likely to show solid growth in late 2009. There will be lots of bullish commentary � and the calls we�re already hearing for an end to stimulus, for reversing the steps the government and the Federal Reserve took to prop up the economy, will grow even louder.


Fred R. Conrad/The New York Times
Paul Krugman

Go to Columnist Page � Blog: The Conscience of a Liberal

But if those calls are heeded, we�ll be repeating the great mistake of 1937, when the Fed and the Roosevelt administration decided that the Great Depression was over, that it was time for the economy to throw away its crutches. Spending was cut back, monetary policy was tightened � and the economy promptly plunged back into the depths.

This shouldn�t be happening. Both Ben Bernanke, the Fed chairman, and Christina Romer, who heads President Obama�s Council of Economic Advisers, are scholars of the Great Depression. Ms. Romer has warned explicitly against re-enacting the events of 1937. But those who remember the past sometimes repeat it anyway.

As you read the economic news, it will be important to remember, first of all, that blips � occasional good numbers, signifying nothing � are common even when the economy is, in fact, mired in a prolonged slump. In early 2002, for example, initial reports showed the economy growing at a 5.8 percent annual rate. But the unemployment rate kept rising for another year.

And in early 1996 preliminary reports showed the Japanese economy growing at an annual rate of more than 12 percent, leading to triumphant proclamations that �the economy has finally entered a phase of self-propelled recovery.� In fact, Japan was only halfway through its lost decade.

Such blips are often, in part, statistical illusions. But even more important, they�re usually caused by an �inventory bounce.� When the economy slumps, companies typically find themselves with large stocks of unsold goods. To work off their excess inventories, they slash production; once the excess has been disposed of, they raise production again, which shows up as a burst of growth in G.D.P. Unfortunately, growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand, such as consumer spending and long-term investment, pick up.

Which brings us to the still grim fundamentals of the economic situation.

During the good years of the last decade, such as they were, growth was driven by a housing boom and a consumer spending surge. Neither is coming back. There can�t be a new housing boom while the nation is still strewn with vacant houses and apartments left behind by the previous boom, and consumers � who are $11 trillion poorer than they were before the housing bust � are in no position to return to the buy-now-save-never habits of yore.

What�s left? A boom in business investment would be really helpful right now. But it�s hard to see where such a boom would come from: industry is awash in excess capacity, and commercial rents are plunging in the face of a huge oversupply of office space.

Can exports come to the rescue? For a while, a falling U.S. trade deficit helped cushion the economic slump. But the deficit is widening again, in part because China and other surplus countries are refusing to let their currencies adjust.

RESTOFARTICLE

[Pluto]

Paul Krugman on August 2, 2002 writing the NYT:

"A few months ago the vast majority of business economists mocked concerns about a ''double dip,'' a second leg to the downturn. But there were a few dogged iconoclasts out there, most notably Stephen Roach at Morgan Stanley. As I've repeatedly said in this column, the arguments of the double-dippers made a lot of sense. And their story now looks more plausible than ever.

The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Judging by Mr. Greenspan's remarkably cheerful recent testimony, he still thinks he can pull that off. But the Fed chairman's crystal ball has been cloudy lately; remember how he urged Congress to cut taxes to head off the risk of excessive budget surpluses? And a sober look at recent data is not encouraging."

No Adventurer, we don't need another housing bubble, we don't need any more stimuli and we certainly do not need any more debt. The fed needs to hike interest rates, debt needs to be serviced, malinvestment must be liquidated so markets can clear. Then we start over on better footing.

Other Krugman Classics.

[Rusty Shackleford]

Hilarious.

[mises]

[jhuntingtonus]

I'd like Krugman more if he had half a bipartisan bone in his body.