Commentary Magazine


Krugman Is Right To Be Nervous

Paul Krugman is nervous about the recovery, or lack thereof. The stimulus wasn’t big enough. The toxic asset purchase plan is a get-rich-quick scheme for a few, and it comes at considerable cost to the taxpayer. Now one might attribute his lack of enthusiasm for the “glimmer of hope” rhetoric as a bit of sour grapesgiven that his advice hasn’t been followed. But his reasoning is relatively sound, even if you think his favored prescriptions are faulty. Aside from his nagging sense that improving bank numbers are cooked and “something” else could go wrong, he has two very compelling reasons to think we’re not nearly out of the woods.


Things are still getting worse. Industrial production just hit a 10-year low. Housing starts remain incredibly weak. Foreclosures, which dipped as mortgage companies waited for details of the Obama administration’s housing plans, are surging again.

The most you can say is that there are scattered signs that things are getting worse more slowly — that the economy isn’t plunging quite as fast as it was. And I do mean scattered: the latest edition of the Beige Book, the Fed’s periodic survey of business conditions, reports that “five of the twelve Districts noted a moderation in the pace of decline.” Whoopee.

And even more troubling:

The 2001 recession officially lasted only eight months, ending in November of that year. But unemployment kept rising for another year and a half. The same thing happened after the 1990-91 recession. And there’s every reason to believe that it will happen this time too. Don’t be surprised if unemployment keeps rising right through 2010.

Why? “V-shaped” recoveries, in which employment comes roaring back, take place only when there’s a lot of pent-up demand. In 1982, for example, housing was crushed by high interest rates, so when the Fed eased up, home sales surged. That’s not what’s going on this time: today, the economy is depressed, loosely speaking, because we ran up too much debt and built too many shopping malls, and nobody is in the mood for a new burst of spending.

Well, what could we do? For starters, we could go back to some of the ideas the president blithely ignored on the stimulus bill, such as a payroll tax deduction or corporate or capital gains cuts or holidays. If people are nervous about losing their jobs and therefore slowing their purchases, it makes sense to increase the chances (by lightening the load on employers) that they will keep their jobs. Second, don’t junk all those defense programs quite yet. A halt in the F-22s, to take just one program, means 95,000 direct and indirect jobs will be lost. Is now the time to do this? And finally, so long as businesses see an agenda looming with healthcare mandates, cap-and-trade, and some “compromise” on card check, they are going to be reluctant to hire and invest. If the president insists on “pillars” of new obligations for businesses, they in turn will understandably be reluctant to staff up.

But it is unlikely, barring a great flash of insight, that the president will abandon his liberal wish list, or proposed defense cuts, or suddenly alleviate rather than add to the private sector’s burdens. So what then, of Krugman’s concerns? Unless Congress decides to change the course we are on, it seems we will be in for a longer recession with fewer jobs than many might have imagined.