Wednesday, May 26, 2010

Krugman's Growing Pessimism

The only economist that I trust, Paul Krugman, is growing more despairing that policy makers will get off their duffs and do the right thing. They are falling into the old shibboleths, the same ones that made the Great Depression drag on for more than a decade (and kept Japan in a Great Recession for two decades).

Here is the posting from his NY Times blog:
Reasons To Despair

For some reason today’s papers made me feel especially grim about the prospects for economic recovery — not the economic news so much as what one sees about the mindset of policy makers.

Here’s where we are: growing GDP, but mass unemployment still the law of the land, with only tiny progress so far. What can be done?

Well, we could have more fiscal stimulus — but Congress is balking even at the idea of extending aid for the ever-growing ranks of the long-term unemployed. Fiscal responsibility, you see — hey, and let’s make sure estate taxes stay low!

We could get tough with China, which continues its currency manipulation and, in the face of a world of grossly inadequate demand, is actually tightening monetary policy to avoid an overheating economy — when basic textbook economics says that it should be appreciating its currency instead, which would not only rebalance China’s economy but help the rest of the world. So given China’s outrageous behavior, Geithner went to China, got nothing .. and pronounced himself very pleased.

We could do more through monetary policy. Macro theory suggests that the theoretically right answer, if you can do it, is to get central banks to commit to a higher inflation target. But the Fed and the Bank of Japan say no, because … well, that’s not what central bankers do.

It’s depressing: shibboleths and conventional wisdom are blocking all routes out of this slump. And I worry that policy makers will just sit there, for years and years, all the while congratulating themselves on the soundness of their policies.
I remain optimistic, but I'm probably a fool whistling by the graveyard. Krugman has the knowledge and the data to make judgements I can't fool myself into believing I can honesty make. So this is indeed bad news.

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