Paul Krugman on the Stimulus Trap
links for 2009-07-11

The Changing Nature of the American Business Cycle

Macroeconomic Advisers writes:

Please find "Q2-2009... GDP Tracking 0.2 percent", which has been updated. Exports were stronger than expected, and imports were much weaker than expected, suggesting a large upward revision to our estimate of second quarter net exports. Therefore, we raised our tracking estimate of [the annual] GDP growth [rate] in the second quarter by 1.8 percentage points to +0.2% [growth in GDP per year].

With labor input falling at a rate of 6% per year in the second quarter, that suggests a productivity growth rate in the economy as a whole of some 6.2%--which is really weird. It used to be the case that businesses hoarded labor in recessions because they did not want their skilled workers to wander off and to have to train new ones....

Now it is really beginning to look as though businesses take recessions as opportunities to greatly slim down their workforces without making the workers they retain too angry and depressed. We saw this in 2002-2003. We saw it before in 1992-1993. The fact that productivity is no longer strongly procyclical countercyclical in recessions is good news in the long run--it means that our average long-run rate of productivity growth is higher than we used to think. But it also means that there is more headroom for expansionary policy, and more need.

Thus statements like this one from the very sharp Allan Sinai:

Phil Izzo reports:: "The mother of all jobless recoveries is coming down the pike," said Allen Sinai of Decision Economics. But he doesn't favor more stimulus now, saying "lags in monetary and fiscal policy actions" should be allowed to "work through the system..."

make me pound my head against the wall. If as the policies we have now in train to support the economy work their way through the system we find that we still have "the mother of all jobless recoveries," then we should be acting now to provide additional government support. A jobless recovery is not a good thing. And we should avoid it if we can figure out how in time.