So why is this slump, like most slumps following financial crises, so protracted? Because the usual tools for pumping up demand have reached their limits. Normally we respond to demand-side slumps by cutting short-term nominal interest rates, which the Fed can move through open-market operations. But we now have severely depressed private demand thanks to the housing bust and the overhang of consumer debt, so even a zero rate isn’t low enough.I blame Obama. They guy didn't enter Dodge City like FDR with guns blazing saying that he was elected to clean up to crime and corruption. Instead, Obama has quietly entered town and "negotiated" with the Republicans on every issue, and every negotiation has been mostly a capitulation to Republican demands. FDR said "the only thing to fear is fear itself" and he tried every idea his team could come up with whether the idea was good or bad. He wanted action. He wanted to get America moving again. Obama pretended that his stimulus was "adequate" and hasn't had the guts to admit he made a mistake and demanded more. Obama has wimped out.
So what’s the right response? Should we just throw up our hands, and say that having 12 million or so adults who should be working out of work, and roughly $1 trillion per year of output we should be producing not getting produced, is just a fact of life? Or should we be using unconventional policies to deal with an abnormal situation?
The answer seems obvious. We should be using fiscal stimulus; we should be using unconventional monetary policy, including raising the inflation target; we should be pursuing aggressive measures to reduce mortgage debt. Not doing these things means accepting huge waste and hardship.
But, say the serious people, there are risks to doing any of these things. Well, life is full of risks. But it’s simply crazy to put a higher weight on the possibility that the invisible bond vigilantes might manifest themselves, or the inflation monster emerge from its secret cave, over the continuing reality of enormous human and economic damage from doing nothing.
The truth is that we have nothing to fear but fear itself — fear and complacency — the two things we have to fear are — amongst our fears ….
Anyway, seriously, the fatalism that has overtaken economic debate is a terrible thing. It is, indeed, the main enemy of prosperity.
Sunday, June 5, 2011
The Enemy of Prosperity
Paul Krugman nails it with this bit from a post in his NY Times blog: