Krugman: Mission Not Accomplished

[Direckshun]

http://www.nytimes.com/2009/10/02/opinion/02krugman.html?_r=1&partner=rssnyt&emc=rss

Mission Not Accomplished
By PAUL KRUGMAN
Published: October 2, 2009

Stocks are up. Ben Bernanke says that the recession is over. And I sense a growing willingness among movers and shakers to declare “Mission Accomplished” when it comes to fighting the slump. It’s time, I keep hearing, to shift our focus from economic stimulus to the budget deficit.

No, it isn’t. And the complacency now setting in over the state of the economy is both foolish and dangerous.

Yes, the Federal Reserve and the Obama administration have pulled us “back from the brink” — the title of a new paper by Christina Romer, who leads the Council of Economic Advisers. She argues convincingly that expansionary policy saved us from a possible replay of the Great Depression.

But while not having another depression is a good thing, all indications are that unless the government does much more than is currently planned to help the economy recover, the job market — a market in which there are currently six times as many people seeking work as there are jobs on offer — will remain terrible for years to come.

Indeed, the administration’s own economic projection — a projection that takes into account the extra jobs the administration says its policies will create — is that the unemployment rate, which was below 5 percent just two years ago, will average 9.8 percent in 2010, 8.6 percent in 2011, and 7.7 percent in 2012.

This should not be considered an acceptable outlook. For one thing, it implies an enormous amount of suffering over the next few years. Moreover, unemployment that remains that high, that long, will cast long shadows over America’s future.

Anyone who thinks that we’re doing enough to create jobs should read a new report from John Irons of the Economic Policy Institute, which describes the “scarring” that’s likely to result from sustained high unemployment. Among other things, Mr. Irons points out that sustained unemployment on the scale now being predicted would lead to a huge rise in child poverty — and that there’s overwhelming evidence that children who grow up in poverty are alarmingly likely to lead blighted lives.

These human costs should be our main concern, but the dollars and cents implications are also dire. Projections by the Congressional Budget Office, for example, imply that over the period from 2010 to 2013 — that is, not counting the losses we’ve already suffered — the “output gap,” the difference between the amount the economy could have produced and the amount it actually produces, will be more than $2 trillion. That’s trillions of dollars of productive potential going to waste.

Wait. It gets worse. A new report from the International Monetary Fund shows that the kind of recession we’ve had, a recession caused by a financial crisis, often leads to long-term damage to a country’s growth prospects. “The path of output tends to be depressed substantially and persistently following banking crises.”

The same report, however, suggests that this isn’t inevitable: “We find that a stronger short-term fiscal policy response” — by which they mean a temporary increase in government spending — “is significantly associated with smaller medium-term output losses.”

So we should be doing much more than we are to promote economic recovery, not just because it would reduce our current pain, but also because it would improve our long-run prospects.

But can we afford to do more — to provide more aid to beleaguered state governments and the unemployed, to spend more on infrastructure, to provide tax credits to employers who create jobs? Yes, we can.

The conventional wisdom is that trying to help the economy now produces short-term gain at the expense of long-term pain. But as I’ve just pointed out, from the point of view of the nation as a whole that’s not at all how it works. The slump is doing long-term damage to our economy and society, and mitigating that slump will lead to a better future.

What is true is that spending more on recovery and reconstruction would worsen the government’s own fiscal position. But even there, conventional wisdom greatly overstates the case. The true fiscal costs of supporting the economy are surprisingly small.

You see, spending money now means a stronger economy, both in the short run and in the long run. And a stronger economy means more revenues, which offset a large fraction of the upfront cost. Back-of-the-envelope calculations suggest that the offset falls short of 100 percent, so that fiscal stimulus isn’t a complete free lunch. But it costs far less than you’d think from listening to what passes for informed discussion.

Look, I know more stimulus is a hard sell politically. But it’s urgently needed. The question shouldn’t be whether we can afford to do more to promote recovery. It should be whether we can afford not to. And the answer is no.

[Donger]

Look, I know more stimulus is a hard sell politically. But it’s urgently needed. The question shouldn’t be whether we can afford to do more to promote recovery. It should be whether we can afford not to. And the answer is no.

Horseshit. Leave the economy alone. We are f*cking broke. Do people who write such crap even know that we now have ~$11 trillion in debt? That interest payments alone on that debt are going to be in $600 billion/year range?

[Direckshun]

Blech. The econ team at NYT devised this chart:

http://voices.washingtonpost.com/ezra-klein/joblosses.jpg

[Fat Elvis]

Horseshit. Leave the economy alone. We are f*cking broke. Do people who write such crap even know that we now have ~$11 trillion in debt? That interest payments alone on that debt are going to be in $600 billion/year range?


You do know that Krugman is a Nobel prize winning economist, don't you? He is also considered a political outsider because he is critical of policy decisions by both parties.

[KILLER_CLOWN]

LMAO LMAO

[KILLER_CLOWN]

Friday, October 2, 2009
Stiglitz: "Deflation is Definitely a Threat Right Now"


On September 22, I wrote a lengthy summary of arguments for deflation. 5 weeks later, there's a lot to add.

Nobel prize winning economist Joseph Stiglitz says:

Deflation is definitely a threat right now.

Alan Greenspan said on September 30th:

We are still, by any measure, in a disinflationary environment.

And the President of the Chicago Federal Reserve Bank, Charles Evans, said on September 9th:

Disinflationary winds are blowing with gale-force effect.

Flattening Yield Curve Points Toward Deflation

PIMCO's Bill Gross said:

There has been significant flattening on the long end of the curve,” Gross said in an interview from Newport Beach, California, with Bloomberg Radio. “This reflects the re- emergence of deflationary fears. The U.S. is at the center of de-levering as opposed to accelerating growth.

Gluskin Sheff's David Rosenberg, Tyler Durden and Mish also believe that a flattening yield curve indicates deflation.

Bloomberg notes:

The difference in yield between nominal and inflation-protected Treasury securities maturing in one year is negative 0.4 percent, suggesting investors expect deflation during the next 12 months.

Unemployment

Job losses are accelerating.

JPMorgan Chase’s Chief Economist Bruce Kasman told Bloomberg:

[We've had a] permanent destruction of hundreds of thousands of jobs in industries from housing to finance.

A new report from Advance Realty and Rutgers - America’s New Post-Recession Employment Arithmetic - argues that we will not have a full recovery in unemployment until until 2017, and that:

• The Great 2007–2009 recession is the worst employment setback in the United States since the Great Depression.

• In the twenty months from December 2007 (the start of the recession) to August 2009 (the last month of available data as of this analysis), the nation lost more than 7.0 million private-sector jobs.

• The recession followed a very much-below-normal economic expansion (November 2001–December 2007) that was characterized by relatively weak private-sector employment growth of approximately 1 million jobs per year.

• This was less than one-half of the job-growth gains of the two preceding expansions (1982–1990 and 1991–2001), when average annual private-sector employment grew by 2.4 million jobs per year and 2.2 million jobs per year, respectively.

• In the preceding two expansions combined, private-sector employment growth per year was approximately 435,000 jobs higher than the annual growth in the number of people in the labor force.employment deficit.

• The weak economic expansion sandwiched between two recessions (2001, and 2007–2009) produced a lost employment decade.

• As of August 2009, the nation had 1.3 million (1,256,000) fewer private- sector jobs than in December 1999. This is the first time since the Great Depression of the 1930s that America will have an absolute loss of jobs over the course of a decade.

• From 1980-2000, the US gained a 35.5 million private-sector jobs. During the current decade, America has lost more than 1.7 million private-sector jobs.

• Total “employment deficit” could approach 9.4 million private-sector jobs by December 2009.

New jobs aren't being created.

Even Larry Summers says unemployment will remain 'unacceptably high' for years.

The New York Times points out that U.S. job seekers exceed openings by record ratio.

2 out of 5 Californians out of work.
Almost half of 16-24 year olds are unemployed.

Credit Still Constrained

US credit has shrunk at Great Depression rate prompting fears of double-dip recession:

Professor Tim Congdon from International Monetary Research said US bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147bn to $6,886bn).

"There has been nothing like this in the USA since the 1930s," he said. "The rapid destruction of money balances is madness."

The M3 "broad" money supply, watched as an early warning signal for the economy a year or so later, has been falling at a 5pc annual rate.
Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an "epic" 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc...

US banks are cutting lending by around 1pc a month. A similar process is occurring in the eurozone, where private sector credit has been contracting and M3 has been flat for almost a year.

The Independent notes:

A second credit squeeze and a £200bn national "funding gap" threatens to sabotage the recovery in the British economy, the IMF warned yesterday.

In its latest Global Financial Stability Report, the fund said that a combination of a soaring government deficit and the borrowing needs of British companies and consumers – coupled with a still broken banking system – would leave the UK with a national "funding gap" of 15 per cent of GDP, or around £200bn next year, much higher than in either the US or the euro area.

Housing

Moody's forecasts that housing won't return to pre-bust levels until 2020, "Florida and California will only regain their pre-bust peak in the early 2030s"

Treasury says millions more foreclosures are coming.

Fannie Mae's serious delinquency rate is skyrocketing.

Half of all borrower who are getting help with loan modifications end up redefaulting.

And apartment rental prices are falling world-wide.
Business

The creation of small businesses is way down.

Experts are projecting unprecedented corporate defaults.

Ghost fleets of unused ships lie rusting in port.

States

State tax revenues have plunged 17%.

More Signs of Deflation

Bloomberg writes:

The U.S. faces the possibility of deflation for the first time since the Eisenhower administration...

Consumer prices are experiencing deflation, with the consumer price index sliding for six straight months from year- earlier levels, the longest stretch of declines since a 12-month drop from September 1954 to August 1955, according to the Labor Department...

While the economy contracted 2.7 percent during the 1953 recession, it shrank 3.8 percent in the current recession, the most since the 1930s. Economists at New York-based JPMorgan Chase & Co. and Goldman Sachs Group Inc., the second- and fifth- biggest U.S. banks by assets, say there’s so much deflationary excess labor and plant capacity in the economy that the Fed won’t raise interest rates until at least 2011.

Paul Krugman writes:

A new report from the International Monetary Fund shows that the kind of recession we’ve had, a recession caused by a financial crisis, often leads to long-term damage to a country’s growth prospects. “The path of output tends to be depressed substantially and persistently following banking crises.”

The U.S. Census Bureau reports that 40 million Americans are living in poverty.

Albert Edwards makes the case for balance sheet-based deflation, arguing that - even as the government tries to inflate its way out of all its problems and printing trillion in new treasuries - it is unable to catch up with the non-governmental balance sheet collapse:

The US Federal Reserve recently published their comprehensive flow of funds data for the US. This showed that the household sector continued to pay down debt for the fourth consecutive quarter. Corporates also started to pay down debt sharply in Q2 at a similar $200bn pace. The non-financial private sector paid down debt at a $435bn pace in Q2. This compares to a $2,116bn pace of expansion in 2007 (see chart below). Add to that the financial sector unwind and the total private sector is unwinding debt faster than the government is able to pile it up (hence the red line is still negative)! The lesson from the balance sheet recession in Japan is that the massive private sector headwind to growth has a long, long way to run.

http://www.zerohedge.com/sites/default/files/images/AE%2010.1%20-1_0.jpg

If that is the case, we can expect, just like Japan, frequent relapses back into recession. The market now understands how an end of inventory de-stocking can boost GDP, i.e. it is the change in the change that matters. Similarly as Dylan Grice points out - link, it is the change in the fiscal deficit that is a net stimulus or drag to GDP. A massive 6pp stimulus last year is likely to turn into a 2pp drag on growth next year (see chart below). With continued private sector de-leveraging likely next year and beyond, how can one seriously not expect the global economy to relapse back into recession next year taking nominal GDP deep into an abyss?

http://www.zerohedge.com/sites/default/files/images/AE%2010.1%20-2_0.jpg

AP writes:

As in the 1980s, much of that shift will be driven by baby boomers. For the 78 million people born from 1946 through 1964, the Great Recession hit at a particularly inopportune time – during peak years of earning and saving before retirement. Boomers range from 44 to 63 today – the youngest is nearly 10 years older than the oldest was in 1982. They are running out of time and are most likely to remain cautious spenders and become aggressive savers even as the economy improves.

The housing bubble mistakenly led boomers and millions of others to believe their home was their retirement nest egg. If they left their home equity alone during the boom, they've taken a hit the last couple years but are still ahead. But many treated their home like a personal bank and spent the gains by tapping a home equity line of credit.

Alix Partners finds:

While American industry is struggling to get through what could become the worst recession since the Great Depression, Americans say that even after the recession ends, their spending will return to just 86% of pre-recession levels, which would take a trillion dollars per year out of the U.S. economy for years to come. According to this in-depth survey of more than 5,000 people, Americans plan to save (and therefore not spend) an astounding 14% of their total earnings post-recession, with the replenishment of their 401(k) and other retirement savings leading the way among their biggest long-term concern.

As Huffington Post notes:

"There will be a fundamental shift in the kind of cars we buy, a fundamental shift in the homes we buy, and a fundamental shift in consumption generally," says Matt Murray, an economist at the University of Tennessee. "And that is not something that took place in the 1980s."

http://www.washingtonsblog.com/2009/10/stiglitz-deflation-is-definitely-threat.html

[banyon]

We don't need another porkbarrel stimulus speed-through like we got last time, or one like "Bush's, let's just hand our money directly to the bankers".

[Mr. Kotter]

We don't need another porkbarrel stimulus speed-through like we got last time, or one like "Bush's, let's just hand our money directly to the bankers".

Your partisan-panty colors are showing, again.... :rolleyes:

Great "change" we've seen in the last 8 months, eh?

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[banyon]

Your partisan-panty colors are showing, again.... :rolleyes:

Great "change" we've seen in the last 8 months, eh?

What are you talking about? I criticized both stimulus bills.

[Mr. Kotter]

What are you talking about? I criticized both stimulus bills.

There's more, "valid," criticism...beyond the stimulus bills....to be had...to be consistent, that is... :shrug:

[HonestChieffan]

Krug is an asshat.

[googlegoogle]

Drop all taxes on business.

Drop the stupid income tax for a year.

[JohnnyV13]

One of the more interesting things I read here....why is it BAD that americans intend to increase their savings????

That means they intend to either 1) put money in the bank, 2) buy stocks 3) buy bonds. They aren't puttnig their money in a black hole. All of those things provide capital to others to develop businesses or make large ticket purchases.

[BucEyedPea]

One of the more interesting things I read here....why is it BAD that americans intend to increase their savings????

That means they intend to either 1) put money in the bank, 2) buy stocks 3) buy bonds. They aren't puttnig their money in a black hole. All of those things provide capital to others to develop businesses or make large ticket purchases.

I actually agree with you. How Austrian of you.

[BucEyedPea]

Direckshun Krugman is a socialist whacko who's ideas will wreck this country....kinda what I think he wants...so there can be a total govt takeover.

[googlegoogle]

Credit is still a problem for businesses.

[banyon]

There's more, "valid," criticism...beyond the stimulus bills....to be had...to be consistent, that is... :shrug:

Uh, of course, but we were referring to the stimulus in the thread, so I wasn't aware I needed some kind of encyclopedic review to qualify for your bipartisanship gold medal.

[Saul Good]

Interesting take by Krugman. Very bold. The economy isn't fixed? This guy deserves another Nobel Prize.

[BucEyedPea]

Interesting take by Krugman. Very bold. The economy isn't fixed? This guy deserves another Nobel Prize.

War is Peace. Slavery is Freedom. Debt is Recovery! ROFL