Friday, October 17, 2008

Where Do We Go From Here? Does Anyone Have a Map?

Up and down, up and down, that’s been the only news out of this manic-depressive stock market for what seems like weeks now. So, how and when will this level out? It seems pretty clear to everyone – well, everyone who has a functioning brain and is willing to look at the situation realistically – that rescuing the banks is just a first step. The next step is aid for the desperately needy nonfinancial economy.

According to Paul Krugman, we need to put some prejudices aside, forget about being politically fashionable and ranting against government spending and demanding fiscal responsibility. Like it or not, for now increased government spending is exactly what our country needs and we should put our concerns about the budget deficit on hold.

Retail sales have fallen off the cliff and so has industrial production. Unemployment claims are at steep-recession levels, manufacturing is falling at the fastest pace in almost 20 years. All these things point to a nasty and long economic slump. And just how nasty? The unemployment rate is already above 6 percent and it looks pretty certain that it will go above 7 percent, possibly 8 percent and this would make it the worst recession in a quarter-century. It looks as though it could be some time before we see any improvement.

The policy response to the last recession, which followed the bursting of the late-1990s technology bubble, on the surface looks like a success story in spite of there being a lot of fears that the US would experience a Japanese-style “lost decade”, but that didn’t happen – the Federal Reserve was able to engineer a recovery from that recession by cutting interest rates. But it was a slow recovery and came about only because the technology bubble was replaced by Alan Greenspan with the housing bubble.

And now that bubble has burst and we have another huge mess on our hands and right now it seems the initial results of the efforts to rescue the banking system and unfreeze the credit markets have had disappointing results. If there’s another bubble waiting to happen, it’s not obvious and it looks as though Fed will find it even harder to get traction this time.

So, what’s the answer? Krugman feels there’s a lot the federal government can do for the economy – well, McCain and a lot of Republicans won’t like the answer, but it sounds good to me. The federal government can provide extended benefits to the unemployed, which will help distressed families cope and put money in the hands likely to spend it. It can provide emergency aid to state and local governments, so that they aren’t forced into steep spending cuts that both degrade public services and destroy jobs. It can buy up mortgages and restructure the terms to help families stay in their homes.

And once again, and how many times have we heard this from many people lately, engage in some serious infrastructure spending. And why do we keep hearing this? The usual argument against public works as economic stimulus is that they take too long; by the time you get around to repairing that bridge and upgrading that rail line, the slump is over and the stimulus isn’t needed. Think again, the chances that this slump will be over anytime soon is all but nonexistent, so let’s get with it and get these types of projects rolling.

Right now we need government spending and that is most definitely not the road that John McCain will take. Barack Obama doesn’t have the same knee-jerk opposition to spending but he will have to deal with those who would tell him that he has to be responsible, that the big deficits the government will run next year if it does the right things are unacceptable.

Krugman’s answer for Obama is to ignore them – the responsible thing, right now, is to give the economy the help it needs and stop, at least for now, worrying about the deficit. Now that’s a map that makes sense to me – after all, Krugman is the guy who won the Nobel prize for economics, not those “inside-the-beltway” types.


Rain said...

I don't know and am glad I don't have to make the decision. To me you cannot ignore the debt forever as we have to borrow it from someone. It's $.22 of every tax dollar now just for interest. It will limit our ability to do anything but pay the mandated expenses if we keep having that debt go up. We also have to find someone willing to loan it. For now we apparently have such but China is having problems too and that might not last. Those countries acquiring our interest money are coming back here and buying property which might be okay as it gives them a stake in caring how we do but how much do we want own before we end up like a Banana Republic? That might be karma but not a desirable thing from our perspective. We probably have a little while to work this through. Whoever gets in next time is going to have a mess on their hands. And if it's McCain, hope he lives through his whole term as I don't see Palin remotely able to figure this out-- if McCain even can. He hasn't listened to the sharpest tool in the box in the past.

Darlene said...

Economics is not my forte, but I do trust Paul Krugman's judgment. I have followed his opinions for years and he has always been proven to be correct. I think what he is basically saying now is, "First things first." It's too late to do what should have been done a year ago so we have to do the next best thing.

If Paul Krugman was good enough to win the Nobel Prize that's good enough for me.

June Saville said...

G'day Sylvia
Our Prime Minister's mantra at the moment is 'decisive action' and that's probably what you're talking about - helping the real people.

Last night's news carried pictures of a queue of 6,000 people waiting for food handouts from a church in one of the poorer suburbs of Brisbane. Surely no-one could ignore that sort of thing!? And they haven't here.

This week Kevin Rudd announced immediate one-off payments of $1,400 for all pensioners, carers etc, plus payments to encourage first home buyers, training places, infrastructure spending and tax cuts for young families.

He's committed half our budget on these huge measures. The immediate payments will add up to one percent of the nation's GDP so could help get things moving around Christmas.

The other projects could create a bit of a confidence boost. However, real results of these are a bit down the track. In our (Australian) situation, confidence as elsewhere is all important.

I'm spending some of my payment on a bicycle. Hopefully less petrol bills. (And of course a block of chocolate.)

By the way Rudd is trying to get an international move going to stop huge payments to bankers and the next day invited 150 top business people to a sandwiches-and-coffee lunch. He told them 'we will get through this'. Talk about strike and stroke!

Good luck Syl.
June in Oz

TropiGal said...

Oh, dear. It's about all I have left in me to say.

K. said...

Paul Krugman is great! The blogosphere wingnuts are apoplectic over his Nobel Prize, even more than over Gore's!

Infrastructure infrastructure infrastructure. Whether or not the need for the stimulus is over before a given project, the need for the project doesn't go away. (I'm not talking about a bridge to nowhere, I'm talking about the bridge in Minneapolis that collapsed.) Our roads, streets, bridges, levees, rails, and airports are in tatters. And it's not like the money isn't there -- look how much we waste on defense spending, which doesn't employ anywhere near as many people as infrastructure upgrading would.