Here's his take on all the gloom and doom about the latest financial blow to the US economy. From his latest post on his Beat the Press blog:
The NYT told readers that a second recession could be even worse than the first. The reason is that people will have less of a cushion going in and that we are supposedly out of policy tools to get us out. There is some serious confusion here that is worth addressing.There's more. Go read the whole post.
First, it is true that most families have little left in reserve to deal with another layoff, so the NYT is absolutely right that a second downturn would really whack people that are already hurting. But there are two important points to make on this.
First, precisely because the economy is still badly depressed in many ways it is much less likely that we will see a recession. Remember a recession means two quarters of negative growth. To have negative growth there have to be sectors of the economy that are shrinking. Typically this would be construction and car purchases.
As it stands, construction (both residential and non-residential) are seriously depressed. It is difficult to imagine that either sector could fall much more than it already has. This means any negative impact that they have on the economy will be very limited. The auto sector is also still well-below pre-recession levels of sales. If it were to dip by another 10-15 percent (a very large dip), it would not have that much impact on the economy.
Consumption more generally is growing, albeit slowly. This is 70 percent of output, and even modest growth in consumption is likely to keep the economy growing. The government sector is shrinking, but only at around a 2 percent annual rate. So, we have to offset a sector that is about 20 percent of GDP shrinking at a 2 percent rate to stay in positive territory.
That is a pretty low bar. I think the double-dip crowd has not done their homework.
Finally, it is 100 percent nonsense to say that the government is out of policy options. We can do more stimulus. The financial markets are yelling at the government at the top of their lungs saying "borrow more money." That's what 2.6 percent interest rate on 10-year Treasury bonds means. There are balanced-budget worshipping politicians who say that the government can't do anything, but this is not true and the NYT has no business repeating it.
The Fed could also do more. For some reason the article does not mention policies that Ben Bernanke has himself suggested: targeting a long-term interest rate (e.g. a 1.0 percent 5-year Treasury rate) or a higher rate of inflation (e.g. 3-4 percent). The former was mentioned by Bernanke at his Jackson Hole speech last summer; the latter in a paper that he wrote while still a professor at Princeton. Both could help to boost demand and create jobs.
The government could also try to create jobs by taking steps to lower the value of the dollar.
In short, there is much that the government can do to create jobs. It is understandable that incumbent politicians would want to push the "nothing we can do line" to justify their own failings, however news outlets have no business passing along these excuses which are not true.
So the news is less bad than the prophets of "doom-and-gloom" are touting. It is not good, but it isn't the end of the world. The US will recover from this. The best way out of the mess is for the US electorate to come out in force in 2012 and throw the Republican fanatics out of office!