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.