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View Full Version : Krugman: We're in for a Year of 'Economic Hell'


Renegade
12-24-2008, 07:28 AM
By Paul Krugman, The New York Times. Posted December 23, 2008.

Whatever the new administration does, we're in for months, perhaps even a year, of economic hell. After that, things should get better, as President Obama's stimulus plan -- O.K., I'm told that the politically correct term is now "economic recovery plan" -- begins to gain traction. Late next year the economy should begin to stabilize, and I'm fairly optimistic about 2010.

But what comes after that? Right now everyone is talking about, say, two years of economic stimulus -- which makes sense as a planning horizon. Too much of the economic commentary I've been reading seems to assume, however, that that's really all we'll need -- that once a burst of deficit spending turns the economy around we can quickly go back to business as usual.

In fact, however, things can't just go back to the way they were before the current crisis. And I hope the Obama people understand that.

The prosperity of a few years ago, such as it was -- profits were terrific, wages not so much -- depended on a huge bubble in housing, which replaced an earlier huge bubble in stocks. And since the housing bubble isn't coming back, the spending that sustained the economy in the pre-crisis years isn't coming back either.

To be more specific: the severe housing slump we're experiencing now will end eventually, but the immense Bush-era housing boom won't be repeated. Consumers will eventually regain some of their confidence, but they won't spend the way they did in 2005-2007, when many people were using their houses as ATMs, and the savings rate dropped nearly to zero.

So what will support the economy if cautious consumers and humbled homebuilders aren't up to the job?

A few months ago a headline in the satirical newspaper The Onion, on point as always, offered one possible answer: "Recession-Plagued Nation Demands New Bubble to Invest In." Something new could come along to fuel private demand, perhaps by generating a boom in business investment.

But this boom would have to be enormous, raising business investment to a historically unprecedented percentage of G.D.P., to fill the hole left by the consumer and housing pullback. While that could happen, it doesn't seem like something to count on.

A more plausible route to sustained recovery would be a drastic reduction in the U.S. trade deficit, which soared at the same time the housing bubble was inflating. By selling more to other countries and spending more of our own income on U.S.-produced goods, we could get to full employment without a boom in either consumption or investment spending.

But it will probably be a long time before the trade deficit comes down enough to make up for the bursting of the housing bubble. For one thing, export growth, after several good years, has stalled, partly because nervous international investors, rushing into assets they still consider safe, have driven the dollar up against other currencies -- making U.S. production much less cost-competitive.

Furthermore, even if the dollar falls again, where will the capacity for a surge in exports and import-competing production come from? Despite rising trade in services, most world trade is still in goods, especially manufactured goods -- and the U.S. manufacturing sector, after years of neglect in favor of real estate and the financial industry, has a lot of catching up to do.

Anyway, the rest of the world may not be ready to handle a drastically smaller U.S. trade deficit. As my colleague Tom Friedman recently pointed out, much of China's economy in particular is built around exporting to America, and will have a hard time switching to other occupations.

In short, getting to the point where our economy can thrive without fiscal support may be a difficult, drawn-out process. And as I said, I hope the Obama team understands that.

Right now, with the economy in free fall and everyone terrified of Great Depression 2.0, opponents of a strong federal response are having a hard time finding support. John Boehner, the House Republican leader, has been reduced to using his Web site to seek "credentialed American economists" willing to add their names to a list of "stimulus spending skeptics."

But once the economy has perked up a bit, there will be a lot of pressure on the new administration to pull back, to throw away the economy's crutches. And if the administration gives in to that pressure too soon, the result could be a repeat of the mistake F.D.R. made in 1937 -- the year he slashed spending, raised taxes and helped plunge the United States into a serious recession.

The point is that it may take a lot longer than many people think before the U.S. economy is ready to live without bubbles. And until then, the economy is going to need a lot of government help.

http://www.alternet.org/story/114804/

BirdGuano
12-24-2008, 03:16 PM
A more plausible route to sustained recovery would be a drastic reduction in the U.S. trade deficit, which soared at the same time the housing bubble was inflating. By selling more to other countries and spending more of our own income on U.S.-produced goods, we could get to full employment without a boom in either consumption or investment spending.

But it will probably be a long time before the trade deficit comes down enough to make up for the bursting of the housing bubble. For one thing, export growth, after several good years, has stalled, partly because nervous international investors, rushing into assets they still consider safe, have driven the dollar up against other currencies -- making U.S. production much less cost-competitive.

As I've said here.

I have seen plausible charts showing 24 months of hell, followed by a slow agonizing climb back up over 5 years, with the economy not getting to 2004 levels for a full decade.

I believe it's entirely feasible, given the fact that 40% of the 70% of the economy that consumers make up dropped off a cliff in October, and is not coming back anytime soon.

There is no interim bubble to make up the difference. Yet.

Susie
12-24-2008, 04:16 PM
What I'd like to know is just how hellish will the hell be?

Mountain Man
12-24-2008, 04:46 PM
The key constraints to recovery are the fact that to have a real recovery we need to spend money on things made in the USA.And we aren't making things here like we did many years ago.So recovery will be hard to achieve.I agree that just throwing money at the consumer will result in spending on bare essentials like groceries,electricity bills etc,no capital expenditures say for big ticket items.No way to throw that much money to consumers.
So the new economic reality may be consumer spending on USA made products to put more Americans to work.Otherwise we just shift our wealth overseas.Sort of like the Colonies did with England.They got our raw materials,we bought value added products they made out of the raw materials. Middle Eastern oil is a prime example of us transferring our wealth to the Middle East. We have to get our balance of trade in a more equitable state.
Sorry China.

Sysiphus
12-24-2008, 04:52 PM
because nervous international investors, rushing into assets they still consider safe, have driven the dollar up against other currencies

Very carefully, delicately chosen words. I bet Krugman is not long on the dollar based on this.

Coyote
12-24-2008, 05:59 PM
What I'd like to know is just how hellish will the hell be?
Don't worry Susie, it wont be all that hellish. More purgatoryish than hellish. And the purgatory will be occupied by the percentage of the work force that is unemployed.

Everything the governments are doing, bailout wise, is aimed at returning the economy to the same, unsustainable shenanigans of the past. Everyone loves bubble economics because it produces wealth without work but it is an illusion that doesn't last.

rb.
12-25-2008, 01:07 AM
Maybe the new bubble will be elder care, and health care in general. Think about it, it won't be housing. All the "greatest generation" and the boomers will be 10 years older in a decade. Their housing needs will likely shift from the family home, apartment or condo, to assisted living of some sort. Real estate will be cheap, as they vacate their homes, and there are fewer of us "young uns" to take up the population slack.

sandyd
12-25-2008, 01:29 AM
Susie, I can't even guess how it will affect France. You live where there are many social safety nets, like your heathcare system.

Could those nets be broken if the money is cut by half?

Coyote
12-25-2008, 08:51 AM
Maybe the new bubble will be elder care, and health care in general
I think you are right. Health care is already building a bubble. Costs are increasing at multiple rates of inflation. It's something everyone needs. Folks are fearful they wont have/can't afford enough. No one has control of the escalating costs. Money is being made hand over fist. Yep, sounds like a bubble to me.

I also expect to see another oil bubble as the economy improves.

Michael
12-25-2008, 10:50 AM
I think we need to take a good, long, hard look at our trickle out economy. We have outsourced factories and jobs to other countries, and the super rich are putting their money in offshore banks. We need to penalize offshore banking and outsourcing, and then we need to re industrialize America.

I am uncomfortable with any suggestion is all we need is another bubble. Stockbrokers are like a flock of wild geese when it comes to trading. You can stampede them this way or that way, but the result if a volatile market you cannot depend upon.

Fattail
12-31-2008, 11:32 AM
Maybe the new bubble will be elder care, and health care in general. Think about it, it won't be housing. All the "greatest generation" and the boomers will be 10 years older in a decade. Their housing needs will likely shift from the family home, apartment or condo, to assisted living of some sort. Real estate will be cheap, as they vacate their homes, and there are fewer of us "young uns" to take up the population slack.

Certainly sounds like a good bet. The only cavaet would be gov't's role in it. Once that is defined by the new administration then you would understand your risks a lot better.

dyrt
12-31-2008, 12:30 PM
Every doomer soothsayer will eventually be right because of the cyclical nature of the economy:



"[R]ight now it looks as if the economy is stalling..." — Paul Krugman, September 2002

"We have a sluggish economy, which is, for all practical purposes, in recession..." — Paul Krugman, May 2003

"An oil-driven recession does not look at all far-fetched." — Paul Krugman, May 2004

"[A] mild form of stagflation - rising inflation in an economy still well short of full employment - has already arrived." — Paul Krugman, April 2005

"If housing prices actually started falling, we'd be looking at [an economy pushed] right back into recession. That's why it's so ominous to see signs that America's housing market ... is approaching the final, feverish stages of a speculative bubble." — Paul Krugman, May 2005

"In fact, a growing number of economists are using the "R" word [i.e., "recession"] for 2006." - Paul Krugman, August 2005

"But based on what we know now, there’s an economic slowdown coming." - Paul Krugman, August 2006

"this kind of confusion about what’s going on is what typically happens when the economy is at a turning point, when an economic expansion is about to turn into a recession" - Paul Krugman, December 2006

"Right now, statistical models ... give roughly even odds that we’re about to experience a formal recession. ... [T]he odds are very good — maybe 2 to 1 — that 2007 will be a very tough year." - Paul Krugman, December 2006

from http://www.qando.net/details.aspx?entry=7625

BirdGuano
12-31-2008, 01:10 PM
I am uncomfortable with any suggestion is all we need is another bubble. Stockbrokers are like a flock of wild geese when it comes to trading. You can stampede them this way or that way, but the result if a volatile market you cannot depend upon.

But another bubble is exactly what you will get.

The players may change (slightly) but the song remains
the same.

Ben and company are academics testing theories.

Bubbles worked before, so the reinflation bubble is what you'll get this time around.

Problem is they tend to overshoot in either direction with their manipulation, which may have unintended consequences.

Fiddlerdave
12-31-2008, 02:09 PM
Quote:
Originally Posted by rb.
Maybe the new bubble will be elder care, and health care in general. Think about it, it won't be housing. All the "greatest generation" and the boomers will be 10 years older in a decade. Their housing needs will likely shift from the family home, apartment or condo, to assisted living of some sort. Real estate will be cheap, as they vacate their homes, and there are fewer of us "young uns" to take up the population slack.

Certainly sounds like a good bet. The only cavaet would be gov't's role in it. Once that is defined by the new administration then you would understand your risks a lot better. What will finance the elder care bubble? Why the housing bubble worked is we had the illusion of more wealth because the increased "value" of the houses for sale translated to increased "value" for ALL homes, providing temporarily free money for all. Further the home loans were leveraged 15 to 50 times their face amounts into "income producing investments". While it did turn out ALL of these were transitory illusions, in the bubble it all looked quite good.

Putting grandma into a nursing home is nothing but a money sinkhole, and as you say, further depresses housing values as well as population density increases as their homes go on the market. There is no futures, leverage, or money to be made off them, other than the facilities finding ever more creative ways to cut back on the quality of their feeding and care to increase their profits.

The elder care industry is actually going to contract because many of the people in it only had the money from the sale of their homes. With housing values down and in some cases nonexistant because they can't even sell their homes, entrants will reduce considerably.

I cannot see any bubbles that will benefit most citizens. All we have is the government giveaway bubbles that are supporting the wealthy, and they have already set us up for a near term (5 years) economic failure in their insatiable greed.

BirdGuano
12-31-2008, 02:33 PM
What will finance the elder care bubble?

The reverse mortgage bubble.

The next bubble will be the "green" bubble with the
carbon offset BS and all that will involve.

flourbug
12-31-2008, 02:40 PM
Bubbles never benefit most citizens, FD. They are a haven for wealth, and as soon as they reach their peak they are abandoned in favor of another commodity that appears to be on it's way up.

I think the next bubble will be gold.

BirdGuano
12-31-2008, 02:44 PM
I think the next bubble will be gold.

It already is on ETF's and paper.

:D

jane333
12-31-2008, 03:13 PM
I think we need to take a good, long, hard look at our trickle out economy. We have outsourced factories and jobs to other countries,.. .

So, we rebuild the factories. Put investment dollars back into small communities that make one or two products. Sounds good to me.

BirdGuano
12-31-2008, 05:14 PM
So, we rebuild the factories. Put investment dollars back into small communities that make one or two products. Sounds good to me.

Certainly beats the proposed "rebuild the bridges to nowhere" capital spending plan.