Paul Krugman: This Is Not a Recovery

[TampaYankee]

Op-Ed Columnist, New York Times

This Is Not a Recovery By PAUL KRUGMAN

Published: August 26, 2010

What will Ben Bernanke, the Fed chairman, say in his big speech Friday in Jackson Hole, Wyo.? Will he hint at new steps to boost the economy? Stay tuned.

But we can safely predict what he and other officials will say about where we are right now: that the economy is continuing to recover, albeit more slowly than they would like. Unfortunately, that’s not true: this isn’t a recovery, in any sense that matters. And policy makers should be doing everything they can to change that fact.

The small sliver of truth in claims of continuing recovery is the fact that G.D.P. is still rising: we’re not in a classic recession, in which everything goes down. But so what?

The important question is whether growth is fast enough to bring down sky-high unemployment. We need about 2.5 percent growth just to keep unemployment from rising, and much faster growth to bring it significantly down. Yet growth is currently running somewhere between 1 and 2 percent, with a good chance that it will slow even further in the months ahead. Will the economy actually enter a double dip, with G.D.P. shrinking? Who cares? If unemployment rises for the rest of this year, which seems likely, it won’t matter whether the G.D.P. numbers are slightly positive or slightly negative.

All of this is obvious. Yet policy makers are in denial.

After its last monetary policy meeting, the Fed released a statement declaring that it “anticipates a gradual return to higher levels of resource utilization” — Fedspeak for falling unemployment. Nothing in the data supports that kind of optimism. Meanwhile, Tim Geithner, the Treasury secretary, says that “we’re on the road to recovery.” No, we aren’t.

Why are people who know better sugar-coating economic reality? The answer, I’m sorry to say, is that it’s all about evading responsibility.

In the case of the Fed, admitting that the economy isn’t recovering would put the institution under pressure to do more. And so far, at least, the Fed seems more afraid of the possible loss of face if it tries to help the economy and fails than it is of the costs to the American people if it does nothing, and settles for a recovery that isn’t.

In the case of the Obama administration, officials seem loath to admit that the original stimulus was too small. True, it was enough to limit the depth of the slump — a recent analysis by the Congressional Budget Office says unemployment would probably be well into double digits now without the stimulus — but it wasn’t big enough to bring unemployment down significantly.

Now, it’s arguable that even in early 2009, when President Obama was at the peak of his popularity, he couldn’t have gotten a bigger plan through the Senate. And he certainly couldn’t pass a supplemental stimulus now. So officials could, with considerable justification, place the onus for the non-recovery on Republican obstructionism. But they’ve chosen, instead, to draw smiley faces on a grim picture, convincing nobody. And the likely result in November — big gains for the obstructionists — will paralyze policy for years to come.

So what should officials be doing, aside from telling the truth about the economy?

The Fed has a number of options. It can buy more long-term and private debt; it can push down long-term interest rates by announcing its intention to keep short-term rates low; it can raise its medium-term target for inflation, making it less attractive for businesses to simply sit on their cash. Nobody can be sure how well these measures would work, but it’s better to try something that might not work than to make excuses while workers suffer.

The administration has less freedom of action, since it can’t get legislation past the Republican blockade. But it still has options. It can revamp its deeply unsuccessful attempt to aid troubled homeowners. It can use Fannie Mae and Freddie Mac, the government-sponsored lenders, to engineer mortgage refinancing that puts money in the hands of American families — yes, Republicans will howl, but they’re doing that anyway. It can finally get serious about confronting China over its currency manipulation: how many times do the Chinese have to promise to change their policies, then renege, before the administration decides that it’s time to act?

Which of these options should policy makers pursue? If I had my way, all of them.

I know what some players both at the Fed and in the administration will say: they’ll warn about the risks of doing anything unconventional. But we’ve already seen the consequences of playing it safe, and waiting for recovery to happen all by itself: it’s landed us in what looks increasingly like a permanent state of stagnation and high unemployment. It’s time to admit that what we have now isn’t a recovery, and do whatever we can to change that situation.

http://www.nytimes.com/2010/08/27/opinion/27krugman.html?_r=2&partner=rssnyt&emc=rss

[Guest glutes]

And he is absolutley correct.

Ya better hang-on!

[MsGuy]

When the mainspring's broken the clock won't tick. The Fed can wind the key for all it's worth but the clock ain't gonna tick.

The mainspring of the American economy is consumer spending. For prudent, entirely rational reasons (& for the first time in my adult life), consumers collectily seem to be seriously bent on reducing personal leverage. That means spending less, saving more and paying off debt. In an economy with a low "level of resource utilization" that's a powerful deflationary force.

What remedies does Krugman propose?

1) Lower interest rates. The Federal Reserve discount rate has been at 1/4 of one percent for quite a while. Lower it to zero? Big whoop.

2) Print more money. Having the Fed purchase "more long term and private debt" is nothing more (or less) than the modern method of running the printing presses overtime. Yeah, that injects more cash into consumers's hands. Problem is that until consumers have reduced leverage to a level that they're confortable with, they just absorb the cash and use it to reduce debt and increase savings. On top of the trillion dollar budget stimulus the Fed has already printed well in excess of a trillion dollars worth of cash and dumped it into the economy. Might not hurt but don't expect miracles.

3) Have Freddie Mae & Freddie Mac "engineer mortage refinancing" to put more money into consumer hands. And exactly how do we go about pursuading debt adverse consumers to borrow more money? Just silly.

4) Force China to revalue its currency. How? Get into a trade war with China? Yeah, that's the ticket! Just what we need to reflate the economy.

5) Tell the truth. Well, that's always good advice to Washington, but what if the truth is that this ain't your father's recession? What if the truth is the world's governments basically shot their wad last year with budget stimulis and that cupboard is now bare.

In my lifetime recessions were one of two types: High interest rate recessions engineered by the Fed to clamp down on inflation; recessions occasioned by an inability of consumers to borrow enough to finance their inclination to spend. If the current inclination of consumers is to save rather than spend, the conventional tools the Gov. uses to perk things up won't work that well.

It's all well and good to shout "DO SOMETHING!" The question is what to do. I don't know & I'm worried. And, of course, that makes me part of the problem cause I'm trying to build up my savings a little more.