A Chronic Depression . . .
While you and I were on vacation, Professor Paul Krugman was making the rounds of TV studios, flogging his book End This Depression Now. He defines the current “depression” as a “chronic condition of subnormal activity for a considerable period without any marked tendency either towards recovery or towards collapse.” This condition results in high unemployment that is blighting the lives of millions of Americans.
. . . Requires Aggressive Policies . . .
But this pain is avoidable, Krugman tells us, if Washington would just pursue tried-and-true Keynesian economic policies. He wants Washington to help under-water homeowners refinance their mortgage. To avoid more layoffs of teachers and policemen he recommends new “stimulus” spending of $300 billion annually. More radically, Krugman wants the Fed to double its inflation target from 2% to 4% in order to shrink the value of outstanding debt.
Without a doubt, these policies would be risky. With the U.S. already running a huge budget deficit, America’s creditors could be spooked by even more stimulus spending, a shift toward higher inflation, and a resulting weaker dollar. Treasury refundings could become white-knuckle affairs, like those in Spain and Italy. And higher inflation would depress real wages while shrinking the savings of Americans invested in money market funds and bank CDs.
. . . Never Mind
But as summer turns to autumn, the days get shorter, football season begins, and Professor Krugman’s book royalties roll in, we are relieved to learn that it was all a big misunderstanding. America does not, after all, need to take risky new measures to end a debilitating depression. Far from being a “chronic” condition, the depression Krugman warned about in June and July is ending in September! Or so we are informed in his September 7 New York Times column, which states “the forces that have been holding the economy back seem likely to fade away in the years ahead.” Specifically:
- The housing market is recovering.
- Consumers have deleveraged; “the ratio of debt to GDP is way down from its peak, setting the stage for stronger consumer demand looking forward.”
- Business investment “has been recovering rapidly since late 2009, and there’s every reason to expect it to keep rising as businesses see rising demand for their products.”
Consequently “the odds are that barring major mistakes, the next four years will be much better than the last four years.” So we can all ignore the supposedly rigorous economic analysis in the book Krugman was hawking two months ago and reelect Barack Obama President. Who knew that Mr. Krugman was a VCP (Very Commercial Person) and a VFE (Very Flexible Economist)?