Paul Krugman in February 2009 on the Inadequacy of Stimulative Policy
"The croaking of a Cassandra who could never influence the course of events of time." I would not, however, say "never"--I would say "sometimes, and we all hope more in the future than in the past":
Paul Krugman:
Who’ll Stop the Pain? (February 20, 2009): Earlier this week, the Federal Reserve released the minutes of the most recent meeting of its open market committee… [M]y eye was caught by the following chilling passage….
All participants anticipated that unemployment would remain substantially above its longer-run sustainable rate at the end of 2011, even absent further economic shocks; a few indicated that more than five to six years would be needed for the economy to converge to a longer-run path characterized by sustainable rates of output growth and unemployment and by an appropriate rate of inflation.
So people at the Fed are troubled by the same question I’ve been obsessing on lately: What’s supposed to end this slump?… [T]his isn’t your father’s recession. It’s your grandfather’s, or maybe even (as I’ll explain) your great-great-grandfather’s…. 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. 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?…
[T]he Obama administration is… 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.
What, then, will actually end the slump?…
[D]urable goods [will wear out and need to be replaced]… 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.
You can see, then, why some Fed officials are so pessimistic.
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?
