Paul Krugman's August 4, 2012 column, The Wrong Worries, warns us that the dominant political discussion continues to fall short of the mark, and that we are worrying about the wrong things. We should be trying to stimulate jobs, and the economy, not balance the budget during an downturn.
Krugman suggests yesterday's 500 point drop in the Dow Jones should dispel any fantasies that our economy is on the "road to recovery." He say we should be beyond discussion of "a double dip recession," and now acknowledge that we have never really recovered from the last one.
Yes, officially the recession ended two years ago, and the economy did indeed pull out of a terrifying tailspin. But at no point has growth looked remotely adequate given the depth of the initial plunge. In particular, when employment falls as much as it did from 2007 to 2009, you need a lot of job growth to make up the lost ground. And that just hasn’t happened.
While today's employment report is more encouraging than some expected, our, long-term, US unemployment expectations are increasingly troubling. Few economists see objective hopes for improvement. MSNBC just quoted one economist, whose name I didn't catch, predicts that unemployment will be over 8.5% during the next election. Citing declining ratio of employment to population, that MB also discusses a few days ago, Krugman says:
These may sound like dry statistics, but they reflect a truly terrible reality. Not only are vast numbers of Americans unemployed or underemployed, for the first time since the Great Depression many American workers are facing the prospect of very-long-term — maybe permanent — unemployment
Consumers, still burdened by the debt that they ran up during the housing bubble, aren’t ready to spend. Businesses see no reason to expand given the lack of consumer demand. And thanks to that deficit obsession, government, which could and should be supporting the economy in its time of need, has been pulling back.
So what is the best way forward?
The point is that it’s now time — long past time — to get serious about the real crisis the economy faces. The Fed needs to stop making excuses, while the president needs to come up with real job-creation proposals. And if Republicans block those proposals, he needs to make a Harry Truman-style campaign against the do-nothing G.O.P.
We need a Keynesian style stimulus focused on areas of the economy that have large economic multiplier effects.
For example, John Kerry, has been on MSNBC today, pushing for an "infrastructure bank." I think we ought to pull the stops on much needed, and productive infrastructure repair, upgrading our electrical grid to better support new, and growing, alternative energy production, and extend, and create incentives to accelerate investment in solar, wind, and other alternative energy, that reduce our imports of oil, trade deficits, and CO2 emissions.
Also, spending on social programs has one of the highest economic multiplier parameters of 1.5, due to the fact that recipients immediately spend this money, in the US. So extensions of unemployment benefits are not just compassionate, but economically, stimulating as well.
Although, not mentioned by Krugman, I believe we could also benefit from Quantatative Easing, which might already be going on in secret, despite controversy, on the Federal Reserve Board, over it's risk of inflation, and the reduced income effects for savers of reduced interest rates.
Krugman's article helps focus our attention in this direction, and is worth a read. It is time for us to pull the stops on our advocacy for good old fashion Keynesian stimulation.