Friday, August 27, 2010

Krugman Dumps on Bernanke

Here's a bit from the latest Paul Krugman op-ed in the NY Times. Krugman isn't buying the "we are in a recovery" theme song that the Obama administration wants to sing, particularly Ben Bernanke of the Federal Reserve:
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.
From this, Krugman deduces the grim reality. I've bolded the key bit:
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.
That is tragic! Read the whole op-ed to get all the gory details.

Krugman list a number of things that need to be done. But then summarizes with this sad realization. Again I bolded the key bit:
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.
It is beyond tragic when "leaders" don't lead. It is pathetic, destructive, and will take generations to recover.

When George Bush was elected I told everyone "it will take a generation for America to recover from this mistake". Now, with Obama compounding the errors I am saying "it will take generations to recover from the last 10 years of mistake and bad policies. In fact, the US will probably never recover. Bush, and now Obama, have greased the skids for the US to plummet from world leadership to something slightly above third world status, i.e. burdened by huge debts, caught up in vicious political infighting, and with an upper class interested only in extracting as much as they can before they flee to other countries leaving a stinking cesspool behind.


thomas said...


First, I have really benefited from all of your latest posts which I read this morning, so thank you.

I read this one from Krugman this morning, too. I noticed it on my alerts and he gets priority reading.. I also read (for some reason) this one:
The Parent Model
Raise the economy the way you raise a child — instill good values and create a secure climate.

I would have agreed with you when Bush was elected and probably thought much the same thing if not worse about our choice for president.. I was dumbfounded when he was re-elected (I actually could not speak coherently about it). Now, we face more trouble because opportunities have been lost. Real change could have been effected, but they chose to cater to the extreme right instead. Fleeing to other countries seems like a good idea, but as you point out, it will be the rich that have that option.

I liked this part of the article:
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.

I think he has some good ideas for getting us out of this, but I don't see our leaders doing any of it.

RYviewpoint said...

Thomas: I enjoy David Brooks as much as anybody, but I've learned that he is a bit of a slippery fellow. He is deceptively pleasant, but keeps conveniently overlooking facts because he is on the right. In the case of the article "The Parent Model" he is ignoring the fact that German got a lot of mileage out of its small stimulus because the PIGS (Portugal, Ireland, Greece, Spain) debt crisis in Europe during the spring meant the Euro fell in value. Since Germany is an exporting nation, this was a real shot in the arm for their economy that cost them nothing. The US is suffering from the opposite effect. Every time there is panic in the world, people race to buy dollar assets and the value of the US dollar goes up which makes it hard for the US to export, so the bigger stimulus in the US isn't getting as much bang "per buck" as Germany is getting per Euro.

Brooks is right in pointing out that the Obama administration has been overly optimistic in its estimates of job creation.

I disagree with Brooks when he says "Stimulus size is not the key factor in determining how quickly a country emerges from recession." There are many factors, but the stimulus size is the biggest factor. Brooks quietly overlooks the big "hidden stimulus" that the drop in the Euro gave Germany.

Another reason why Europe, not just Germany, are handling the Great Recession better is that they have built-in Keynesian stimulants: they have social programs that automatically put money in the hands of people, e.g. bigger unemployment benefits, bigger welfare payments, bigger incentives for retraining, etc. These are a hidden "stimulus" that Brooks is ignoring.

I do enjoy David Brooks, I loved his book Bobos in Paradise. But you have to be careful when reading Brooks. He has a right wing perspective so he sees things tinged in a way that I don't see them. That's the interesting thing about an ideology: it is the framework of assumptions behind your thinking. It affects what "facts" you see. This is why arguing with somebody with a different ideology is so hard. The two perspectives can't agree because they aren't seeing the "same thing". This makes the world interesting. It makes it infuriating at times. But it would be boring if we all saw the same thing all the time!

If you've got Paul Krugman on some "alert", you should put Robert Reich's blog on an alert as well. I find he is really good at getting at the facts and being sympathetic to the average worker in America.

thomas said...

I read Robert Reich, and he is on my top sites gadget in the Safari Browser, but I often neglect to read his work for stretches and then have to catch up. His last 3 or 4 were caught up on last week and I really do appreciate and agree with what he wrote. I have not emailed him for a while, and I thought about emailing him but did not. The amazing thing is that he always replies to emails when I send them.. I do appreciate it when people like him or you respond or reply because I know how busy people are..

The news alert is from NYT alerts on the economy and his articles are usually included or featured on the side bar, so I am reminded to read his work.