Paul Krugman is a liberal, an advocate of what I call
neo-Keynesian economics, who has argued that the Obama
administration's deficit "stimulus" spending program should be
even bigger than it already is. With all caveats, then,
consider what Krugman says about our current economic
situation:
The risk of a full, all-out Great Depression - utter collapse of
everything - has receded a lot in the past few months. But this
first year of crisis has been far worse than anything that
happened in Japan during the last decade. . . . The risk for long
stagnation is really high.
The thing about Japan, as with all of these cases, is how much
people claim to know what happened, without having any evidence.
What we do know is that recessions normally end everywhere
because the monetary authority cuts interest rates a lot, and
that gets things moving. And what we know in Japan was that
eventually they cut their interest rates to zero and that wasn't
enough. And, so far, although we made the cuts faster than they
did and cut them all the way to zero, it isn't enough. We've hit
that lower bound the same as they did. Now, everything after that
is more or less speculation. . . . The size of the shock to our
systems is going to be much bigger than what happened to Japan in
the 1990s. They never had a freefall in their economy - a period
when GDP declined by 3%, 4%. It is by no means clear that the
underlying differences in the structure of the situation are
significant. What we do know is that the zero bound is real. We
know that there are situations in which ordinary monetary policy
loses all traction. And we know that we're in one now.
That's from
an interview with the British Observer. At least on
this one point, Krugman is exactly right. If the secret to ending
a recession is for central banks to lower interest rates, what do
you do after you've already cut the rate to zero and
there's still no recovery?
The problems confronting Treasury Secretary Timothy Geithner and
Fed Chairman Ben Bernanke may be unprecedented, but
they have long been anticipated by critics of
monterarism.
If all you've got is a hammer, every problem looks like a nail,
and for a central banker, every economic problem looks like a
currency problem. Of course, to a neo-Keynesian like Krugman,
every problem looks like an argument for more economic
intervention by the federal government.
At some point, however, advocates of different
government policies must confront economic
reality. There exists a real economy with real problems that
cannot easily be remedied by government policy changes. And if
Krugman's gloomy forecast is on-target, perhaps it's because he
has finally realized that
the fundamentals suck.
