1 Boring Old Man

1938 in 2010
New York Times
By PAUL KRUGMAN
September 5, 2010

^{Here’s the situation: The U.S. economy has been crippled by a financial crisis. The president’s policies have limited the damage, but they were too cautious, and unemployment remains disastrously high. More action is clearly needed. Yet the public has soured on government activism, and seems poised to deal Democrats a severe defeat in the midterm elections. The president in question is Franklin Delano Roosevelt; the year is 1938. Within a few years, of course, the Great Depression was over. But it’s both instructive and discouraging to look at the state of America circa 1938 — instructive because the nature of the recovery that followed refutes the arguments dominating today’s public debate, discouraging because it’s hard to see anything like the miracle of the 1940s happening again.}

^{Now, we weren’t supposed to find ourselves replaying the late 1930s. President Obama’s economists promised not to repeat the mistakes of 1937, when F.D.R. pulled back fiscal stimulus too soon. But by making his program too small and too short-lived, Mr. Obama did just that: the stimulus raised growth while it lasted, but it made only a small dent in unemployment — and now it’s fading out. And just as some of us feared, the inadequacy of the administration’s initial economic plan has landed it — and the nation — in a political trap. More stimulus is desperately needed, but in the public’s eyes the failure of the initial program to deliver a convincing recovery has discredited government action to create jobs.}

^{In short, welcome to 1938.}

^{The story of 1937, of F.D.R.’s disastrous decision to heed those who said that it was time to slash the deficit, is well known. What’s less well known is the extent to which the public drew the wrong conclusions from the recession that followed: far from calling for a resumption of New Deal programs, voters lost faith in fiscal expansion. Consider Gallup polling from March 1938. Asked whether government spending should be increased to fight the slump, 63 percent of those polled said no. Asked whether it would be better to increase spending or to cut business taxes, only 15 percent favored spending; 63 percent favored tax cuts. And the 1938 election was a disaster for the Democrats, who lost 70 seats in the House and seven in the Senate.}

^{Then came the war.}

^{From an economic point of view World War II was, above all, a burst of deficit-financed government spending, on a scale that would never have been approved otherwise. Over the course of the war the federal government borrowed an amount equal to roughly twice the value of G.D.P. in 1940 — the equivalent of roughly $30 trillion today. Had anyone proposed spending even a fraction that much before the war, people would have said the same things they’re saying today. They would have warned about crushing debt and runaway inflation. They would also have said, rightly, that the Depression was in large part caused by excess debt — and then have declared that it was impossible to fix this problem by issuing even more debt.}

^{But guess what? Deficit spending created an economic boom — and the boom laid the foundation for long-run prosperity. Overall debt in the economy — public plus private — actually fell as a percentage of G.D.P., thanks to economic growth and, yes, some inflation, which reduced the real value of outstanding debts. And after the war, thanks to the improved financial position of the private sector, the economy was able to thrive without continuing deficits…}

^{But always remember: this slump can be cured. All it will take is a little bit of intellectual clarity, and a lot of political will. Here’s hoping we find those virtues in the not too distant future…}

The Obama Gap
New York Times
By PAUL KRUGMAN
January 8, 2009

^{“I don’t believe it’s too late to change course, but it will be if we don’t take dramatic action as soon as possible. If nothing is done, this recession could linger for years.” So declared President-elect Barack Obama on Thursday, explaining why the nation needs an extremely aggressive government response to the economic downturn. He’s right. This is the most dangerous economic crisis since the Great Depression, and it could all too easily turn into a prolonged slump.}

^{But Mr. Obama’s prescription doesn’t live up to his diagnosis. The economic plan he’s offering isn’t as strong as his language about the economic threat. In fact, it falls well short of what’s needed.The bottom line is that the Obama plan is unlikely to close more than half of the looming output gap, and could easily end up doing less than a third of the job…}

Economist Shiller Sees Potential for ‘Double Dip’ Recession
Wall Street Journal
By SIMON CONSTABLE
August 27, 2010

^{With the U.S. economic recovery losing steam, the chances of a second phase of a slowdown are increasing, according to a leading economist. Speaking in The Wall Street Journal’s The Big Interview show, Robert Shiller, professor of economics at Yale University, said he thought the second dip down of a so-called double-dip recession "may be imminent." Earlier this month, he told the Wall Street Journal he thought the chance of a double-dip recession, which he noted is a rare event, was greater than 50%…}

^{Mr. Shiller now suspects that when the National Bureau of Economic Research eventually looks back at the data, the third quarter of 2010 might mark the beginning of the second dip of the recession. In another indication of a faltering economy, the government estimate of second-quarter growth in gross domestic product was revised downward Friday. Mr. Shiller also said he thinks the U.S. economy is "teetering on the brink of deflation." Deflation occurs when the general level of consumer prices falls, as was the case in the Great Depression. He said the U.S. is ill-prepared for such an event because of the lack of "indexing" in contracts. Deflation is generally considered to be a worse problem for an economy than moderate inflation. The Federal Reserve has been adopting measures to add liquidity into the economy and stave off the danger of deflation…}

^{Mr. Shiller said the biggest problem for the economy and the national psyche currently is unemployment, and he called on the federal government and local government to create jobs. Specifically, he suggested that schools employ an additional person in each class room as a teacher’s aide. Not only would it employ millions, he said, but it would be good for the children. He said students would enjoy the extra attention of another person…}

Stiglitz Says European Economy at Risk of Double-Dip Recession
Bloomberg
Simone Meier and Dara Doyle
Aug 24, 2010

^{Nobel Prize-winning economist Joseph Stiglitz said the European economy is at risk of sliding back into a recession as governments cut spending to reduce their budget deficits. “Cutting back willy-nilly on high-return investments just to make the picture of the deficit look better is really foolish,” Stiglitz, a Columbia University professor, told Dublin-based RTE Radio in an interview broadcast today.}

^{Euro-area governments stepped up efforts to cut their deficits to below the European Union limit of 3 percent of gross domestic product after the Greek crisis earlier this year eroded investor confidence in the 16-member currency union. While the economy expanded at the fastest pace in four years in the second quarter, the recovery is showing signs of weakening.}

^{“Because so many in Europe are focusing on the 3 percent artificial number, which has no reality and is just looking at one side of a balance sheet, Europe is at risk of going into a double-dip,” Stiglitz said.}

^{Growth in Europe’s services and manufacturing industries slowed more than economists forecast in August and German investor confidence slumped to the lowest in 16 months. Moody’s Investors Service said yesterday that “risks to economic growth are clearly to the downside” in the euro-region economy…}

Romer Calls for More Stimulus
Wall Street Journal
By Jared Favole
September 1, 2010

^{U.S. Council of Economic Advisers Chairman Christina Romer, in her final speech before stepping down, called on the country to stomach new stimulus measures to lift the lackluster economy, even in the face of growing fears about the nation’s deficit. “Concern about the deficit cannot be an excuse for leaving unemployed workers to suffer,” she will say at the National Press Club on Wednesday, according to a copy of her prepared remarks. She will add, “We have tools that would bring unemployment down without worsening our long-run fiscal outlook, if we can only find the will and the wisdom to use them.”}

^{Her scheduled speech comes a day after President Barack Obama, in addressing the nation on the end of combat missions in Iraq, pledged a renewed focus to lift the economy. Obama has said his economic team, which includes Romer, is hunkered down trying to determine new measures to spur growth. It’s unclear what new ideas the administration is considering, but The Wall Street Journal reported the administration is considering tax cuts and a new nationwide infrastructure program.}

^{Romer will defend the administration’s economic policies in the face of what she will characterize as an unprecedented, “terrifying” and “difficult-to-cure” recession. While other recessions, she will say, were caused by deliberate monetary policy actions this one began with low interest rates. She blamed the recession on a mix of regulatory failures, unsound practices and the mortgage crisis. She said the administration had to act swiftly. “Had the Federal Reserve not responded as rapidly and creatively as it did, the crisis would have been catastrophic,” she will say.}

^{Her speech is titled “Not My Father’s Recession: The Extraordinary Challenges and Policy Responses of the First Twenty Months of the Obama Administration.” She will say the recession destroyed $13 trillion of wealth in 2008. Romer is leaving the administration this week to return to a teaching post at the University of California at Berkeley…}